NuVasive Annual Report 2013

Plain-text annual report

Table of ContentsUNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549Form 10-K(Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2013OR ¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from toCommission file number: 000-50744NUVASIVE, INC.(Exact name of registrant as specified in its charter)Delaware 33-0768598(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification No.) 7475 Lusk Boulevard, 92121San Diego, California(Address of principal executive offices) (Zip Code)Registrant’s telephone number, including area code:(858) 909-1800Securities registered pursuant to Section 12(b) of the ActTitle of Each Class: Name of Each Exchange on which Registered:Common Stock, par value $0.001 per share The NASDAQ Stock Market LLC(NASDAQ Global Select Market)Securities 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 of 1933, as amended. YES  NO ¨Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934, asamended. YES ¨ NO Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period than the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past90 days. YES  NO ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submittedand posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). YES  NO ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not becontained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K. ¨Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of“large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer  Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨ (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $1.1 billion as of the last business day ofthe registrant’s most recently completed second fiscal quarter (i.e. June 30, 2013), based upon the closing sale price for the registrant’s common stock on that day as reported bythe NASDAQ Global Select Market. Shares of common stock held by each officer and director have been excluded in that such persons may be deemed to be affiliates.As of February 24, 2014, there were 45,926,605 shares of the registrant’s common stock issued and outstanding.DOCUMENTS INCORPORATED BY REFERENCEPart III of this Form 10-K incorporates information by reference to the registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held onMay 14, 2014.Table of ContentsNuVasive, Inc.Form 10-K for the Fiscal Year ended December 31, 2013 PART IItem 1.Business2Item 1A.Risk Factors14Item 1B.Unresolved Staff Comments30Item 2.Properties31Item 3.Legal Proceedings31Item 4.Mine Safety Disclosures33 PART IIItem 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities33Item 6.Selected Financial Data35Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations36Item 7A.Quantitative and Qualitative Disclosures About Market Risk51Item 8.Financial Statements and Supplementary Data52Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure52Item 9A.Controls and Procedures52Item 9B.Other Information55 PART IIIItem 10.Directors, Executive Officers and Corporate Governance55Item 11.Executive Compensation55Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters55Item 13.Certain Relationships and Related Transactions, and Director Independence55Item 14.Principal Accountant Fees and Services55 PART IVItem 15.Exhibits and Financial Schedules55SIGNATURES61Index to Consolidated Financial Statements631Table of ContentsPART IThis Annual Report on Form 10-K, particularly in Item 1. “Business” and Item 7. “Management’s Discussion and Analysis of FinancialCondition and Results of Operations,” and the documents incorporated by reference, include forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other thanstatements of historical fact, are statements that could be deemed forward-looking statements, including, but not limited to, statements regarding ourfuture financial position, business strategy and plans and objectives of management for future operations. When used in this Annual Report, the words“believe,” “may,” “could,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” and similar expressions are intended to identifyforward-looking statements.We have based these forward-looking statements largely on our current expectations and projections about future events and financial trendsthat we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations andobjectives, and financial needs. These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results todiffer materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are notlimited to, those discussed in this report, and in particular, the risks discussed under the heading “Risk Factors” and those discussed in otherdocuments we file with the Securities and Exchange Commission. Except as required by law, we do not intend to update these forward-lookingstatements publicly or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even ifnew information becomes available in the future.In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report and in thedocuments incorporated in this report may not occur and actual results could differ materially and adversely from those anticipated or implied in theforward-looking statements. Accordingly, readers are cautioned not to place undue reliance on such forward-looking statements.Item 1.BusinessOverviewWe are a medical device company focused on developing minimally disruptive surgical products and procedurally integrated solutions for the spine. Ourcurrently-marketed product portfolio is focused on applications for spine fusion surgery, including biologics, a combined market estimated to exceed $8.7billion globally in 2014. Our principal product offering includes a minimally disruptive surgical platform called Maximum Access Surgery, or MAS®. TheMAS platform combines three categories of solutions that collectively minimize soft tissue disruption during spine fusion surgery, provide maximumvisualization and are designed to enable safe and reproducible outcomes for the surgeon and the patient. The platform includes our proprietary software-drivennerve detection and avoidance systems, NVM5 and NVJJB, and Intra-Operative Monitoring (IOM) support; MaXcess®, an integrated split-blade retractorsystem; and a wide variety of specialized implants. The individual components of our MAS platform, and many of our products, can also be used in open ortraditional spine surgery. Our spine surgery product line offerings, which include products for the thoracolumbar and the cervical spine, are primarily used toenable access to the spine and to perform restorative and fusion procedures in a minimally disruptive fashion. Our biologic product line offerings used to aidthe spinal fusion process or bone healing include allograft (donated human tissue), Osteocel Plus®, an allograft cellular matrix containing viable mesenchymalstem cells, or MSCs, FormaGraft®, a collagen synthetic product, and AttraX®, a synthetic bone graft material, currently available commercially only in selectmarkets outside of the U.S. Our subsidiary, Impulse Monitoring, Inc. (Impulse Monitoring) provides IOM services for insight into the nervous system duringspine and other surgeries. We continue to focus significant research and development efforts to expand our MAS product platform and advance theapplications of our unique technology into procedurally integrated surgical solutions. We have dedicated and continue to dedicate significant resources towardtraining spine surgeons who are new to our MAS product platform as well as surgeons previously trained on our MAS product platform who are attendingadvanced training courses.We believe our MAS platform, and its related offerings, provides a unique and comprehensive solution for the safe and reproducible minimallydisruptive surgical treatment of spine disorders by enabling surgeons to access the spine in a manner that affords both direct visualization and detection andavoidance of critical nerves. The fundamental difference between our MAS platform and what has been previously called MIS, or minimally invasive surgery,is the ability to customize safe and reproducible access to the spine while allowing surgeons to continue to use instruments that are familiar to them.Accordingly, the MAS platform does not force surgeons to reinvent or learn new approaches that add complexity and undermine safety, ease of use andefficacy. An important ongoing objective of ours has been to maintain a leading position in access and nerve avoidance, as well as to pioneer and remain theongoing leader in minimally invasive spine surgery. Our MAS platform, with the unique advantages provided by our nerve monitoring systems, enables aninnovative lateral procedure known as eXtreme Lateral Interbody Fusion, or XLIF®, in2Table of Contentswhich surgeons access the spine for a fusion procedure from the side of the patient’s body, rather than from the front or back. Our MaXcess instrumentsprovide access to the spine in a manner that affords direct visualization and our nerve monitoring systems assist surgeons in the detection and avoidance ofcritical nerves. It has been demonstrated clinically that the procedures facilitated by our MAS platform may decrease trauma and blood loss, and may lead tofaster overall patient recovery times compared to open spine surgery.In recent years, we have significantly expanded our product offerings relating to procedures in the cervical spine. Our cervical product offering nowprovides a full set of solutions for cervical fusion surgery, including both allograft and CoRoent® implants, as well as cervical plating and posterior fixationproducts. In the fourth quarter of 2012, we received U.S. Food and Drug Administration (the FDA) approval of the PCM® device, a motion preserving totaldisc replacement device, which further strengthened our cervical product offering and enables us to continue our trend of increasing our market share.Our corporate headquarters is located in San Diego, California. We lease approximately 208,000 square feet in San Diego. Our headquarters has a six-suite state-of-the-art cadaver operating theatre designed to accommodate the training of spine surgeons. We also maintain a secondary training facility inParamus, New Jersey with a five-suite operating theatre for surgeon training. Our subsidiary, Impulse Monitoring, is located in Columbia, Maryland. Ourprimary distribution and warehousing operations are located in our facility in Memphis, Tennessee. Our business is facilitated by rapid delivery of productsand surgical instruments for surgeries involving our products. Because of its location and proximity to overnight third-party transporters, our Memphisfacility enhances our ability to meet demanding delivery schedules and provide a greater level of customer service. Additionally, we have a manufacturingfacility located in Dayton, Ohio that produces spinal implants.Our StrategyWe are a leading provider of innovative medical products that provide comprehensive solutions for the surgical treatment of spine disorders. We continueto pursue the following business strategies in order to improve our competitive position:•Establish our MAS Platform as the Standard of Care. We believe our MAS platform has the potential to become the standard of care for spinesurgery as spine surgeons continue to recognize its benefits and adopt our products. We also believe that our MAS platform has the potential todramatically improve the clinical results of spine surgery. Because of this belief, we dedicate significant resources to researching clinical outcomes dataas well as educating spine surgeons and their patients on the clinical benefits of our products, and we intend to capitalize on the growing demand forminimally disruptive surgical procedures.•Continue to Develop and Introduce Procedurally Integrated Solutions and New Innovative Products. One of our core competencies is our abilityto rapidly develop and commercialize innovative spine surgery products and procedures. In the past several years, we have introduced a continual flowof new products and product enhancements. We have several additional products currently under development that should expand our presence infusion surgery. We intend to accomplish our continued product expansion with an unwavering commitment to our MAS platform and extending ourcore technology. We believe that these additional products will allow us to increase our market share while at the same time improving patient care.Protecting and defending the intellectual property related to our innovative products is also a core component to this strategy.•Expand the Reach of Our Exclusive Sales Force. We believe that having a sales force dedicated to selling only our products is critical to achievingcontinued growth across our various product lines, driving greater market penetration and increasing our revenues. In the United States, we have anexclusive sales force consisting of a mix of directly-employed sales shareowners (our employees) and exclusive sales agents that are responsible forparticular geographic regions of the country. Outside of the United States, our sales force consists of directly-employed sales shareowners, independentsales agents and territory-based distributors.•Provide Tailored Solutions in Response to Surgeon Needs. Responding quickly to the needs of spine surgeons, which we refer to as AbsoluteResponsiveness®, is central to our corporate culture, critical to our success and, we believe, differentiates us from our competition. We solicitinformation and feedback from our surgeon customers and clinical advisors regarding the utility of, and potential improvements to, our products. Forexample, we have an on-site machine shop to allow us to rapidly manufacture product prototypes and two state-of-the-art cadaver operating theatres inSan Diego, California and Paramus, New Jersey to provide clinical training and validate new ideas through prototype testing. Absolute Responsivenessgoes beyond product development to include active support in all areas, including clinical research and payer relations.•Selectively License or Acquire Complementary Spine Products and Technologies. In addition to building our company through internal productdevelopment efforts, we intend to selectively license or acquire complementary products and technologies that we believe will keep us on the forefront ofinnovation. By acquiring complementary products, we believe3Table of Contentswe can leverage our expertise at bringing new products to market that are intended to improve patient outcomes, simplify or better integrate techniques,reduce hospitalization and rehabilitation times and, as a result, reduce overall costs to the healthcare system.•Provide Intra-Operative Monitoring Capabilities. Monitoring the health of the nervous system during spinal surgery has been a key component ofour strategy of product differentiation since early in our development. Over time, surgeon and hospital demand for nerve monitoring has increasedalong with the advancement of technologies and techniques used in IOM. We believe that our proprietary NVJJB and NVM5 platforms aredifferentiators in the market and are unique in their ability to provide information about the directionality and proximity of nerves.Industry Background and MarketThe spine is the core of the human skeleton, and provides a crucial balance between structural support and flexibility. It consists of 33 separate bonescalled vertebrae that are connected together by connective tissue (defined as bone, muscle, or ligament) to form a column and to permit a normal range ofmotion. The spinal cord, the body’s central nerve system, is enclosed within the spinal column. Vertebrae are paired into what are called motion segments thatmove by means of three joints: two facet joints and one spine disc. The four major categories of spine disorders are degenerative conditions, deformities,trauma and tumors. The largest market and the focus of our business historically are degenerative conditions of the facet joints and the intervertebral discspace. These two conditions can result in instability and pressure on the nerve roots as they exit the spinal column, causing back or neck pain or radiatingpain in the arms or legs.In the United States, millions of people suffer from some type of chronic back or neck pain. The prescribed treatment depends on the severity andduration of the disorder. Initially, physicians will prescribe non-operative, conservative procedures including bed rest, medication, lifestyle modification,exercise, physical therapy, chiropractic care and steroid injections. In many cases, non-operative treatment options are effective; however, some patientseventually require spine fusion surgery. The vast majority of spine fusion surgeries are done using traditional open surgical techniques from either the front orback of the patient. These traditional open surgical approaches generally require a large incision in the patient’s abdomen or back in order to enable the surgeonto access and see the spine and surrounding area. These open procedures are invasive, lengthy and complex, and typically result in significant blood loss,extensive tissue damage and lengthy patient hospitalization and rehabilitation.We believe that the market for spine surgery procedures will continue to grow over the long term because of the following market dynamics:•Demand for Surgical Alternatives with Less Tissue Disruption. As with other surgical markets, we anticipate that the broader acceptance ofsurgical treatments with less tissue disruption and patient trauma will result in increased demand.•Favorable Demographics. The population segment most likely to experience back pain is expected to increase as a result of aging baby boomers,people born between 1946 and 1965. We believe this population segment will increasingly demand a quicker return to activities of daily livingfollowing surgery than prior generations.•Access to Care in Emerging Markets. Health care reforms in many emerging markets are expanding access to treatments to a greater proportion oftheir populations, which we believe will continue to drive strong increases in demand for healthcare-related product volumes. Increasing economicaffluence in key developing regions will further drive demand for health care treatments.Although we believe that the market for spine surgery procedures will continue to grow over the long term, recent economic, political and regulatoryinfluences are subjecting our industry to significant changes that may slow the spine market’s growth rate. These changes include pricing pressure from thecontinued consolidation of our hospital customers and the expansion of group purchasing organizations, unfavorable third-party payer coverage andreimbursement policies, and new and proposed legislation and regulations designed to contain or reduce the cost of healthcare.Surgical Alternatives with Less Tissue DisruptionThe benefits of minimally invasive surgery procedures in other areas of orthopedics have significantly contributed to the strong and growing demand forsurgical alternatives with less tissue disruption of the spine. Surgeons and hospitals seek spine procedures that result in fewer operative complications anddecreased patient hospitalization. At the same time, patients seek procedures that cause less trauma, allow for faster recovery times and more favorable clinicaloutcomes. Despite the patient and doctor demands, the rate of adoption of surgical alternatives with less tissue disruption procedures has been relatively slowwith respect to the spine. Currently, the majority of spine surgery patients are treated with open and invasive techniques.4Table of ContentsWe believe the principal factor contributing to spine surgeons’ slow adoption of traditional “minimally invasive” spine alternatives has been inconsistentoutcomes driven by two main reasons: (i) the limited or lack of direct access to and visibility of the surgical anatomy; and (ii) the associated complexinstruments that have been required to perform these procedures. Most traditional “minimally invasive” spine systems do not allow the surgeon to directlyview the spine and the relevant pathology point and, as such, provide only restrictive visualization through a camera system or endoscope, while alsorequiring the use of complex surgical techniques. In addition, most traditional “minimally invasive” spine systems use complex or highly customized surgicalinstruments that require special training and the completion of a large number of trial cases before the surgeon becomes proficient using the system.The NuVasive Solution — Maximum Access Surgery with minimal tissue disruptionOur MAS platform allows surgeons to perform a wide range of minimally disruptive spine procedures in all regions of the spine and from varioussurgical approaches, while overcoming the shortcomings of traditional “minimally invasive” spine surgical techniques. The MAS platform is designed to treata wide range of spinal pathologies while accommodating a surgeon's preferred surgical technique and is not limited to a single approach. We believe ourproducts improve clinical results and have both the potential to expand the number of minimally disruptive procedures performed, lead the market movementaway from open surgery and make less invasive techniques the standard of care in spine fusion and non-fusion surgery.Our MAS platform combines three product categories: our nerve monitoring systems, MaXcess and specialized implants. Our nerve monitoring systemsenable surgeons to detect and navigate around nerves while MaXcess affords direct customized access to the spine for implant delivery. MaXcess also allowssurgeons to use well-established traditional instruments in a minimally disruptive and less traumatic manner while our biologics offering complements ourMAS platform by facilitating bone growth and thereby fusion. We also offer a variety of specialized implants that enable the maximization of disc heightrestoration and sufficient structural support while conforming to the anatomical requirements of the patient.Our products facilitate minimally disruptive applications of the following spine surgery procedures, among others:•Lumbar and thoracic fusion procedures in which the surgeon approaches the spine through the patient’s back, side or abdomen;•Cervical fusion procedures for either the posterior occipito-cervico-thoracic region or the anterior cervical region;•Decompression, which is removal of a portion of bone or disc from over or under the nerve root to relieve pinching of the nerve; and•Procedures designed to correct and/or stabilize the spine while simultaneously maintaining motion.MAS — Nerve MonitoringOur nerve monitoring systems utilize electromyography (EMG), proprietary software hunting algorithms and graphical user interfaces to providesurgeons with an enhanced and intuitive nerve avoidance system. Our systems function by monitoring changes in electrical signals across muscle groups,which allows us to detect underlying changes in nerve activity. Through the NVM5 and NVJJB platforms, we give surgeons the option to connect theirinstruments to a computer system that provides discrete, real-time, surgeon directed and surgeon controlled feedback about the directionality and relativeproximity of nerves during surgery. Our systems analyze and then translate complex neurophysiologic data into simple, useful information to assist thesurgeon’s clinical decision-making process. For example, during a pedicle screw test, in which the integrity of the bone is tested where the implant is placed, ifthe insertion of a screw results in a breach of the bone, the system is designed so that a red light and corresponding numeric value will be displayed to alert thesurgeon that the screw may need to be repositioned to avoid potential nerve impingement or irritation. If no breach of the bone occurs, the system is designed sothat a green light and corresponding numeric value will result.Surgeons can connect certain instruments to our nerve monitoring systems, thus creating an interactive set of instruments that better enable the safenavigation through the body’s nerve anatomy. The connection is accomplished using a clip that is attached to the instrument, effectively providing the benefitsof our nerve monitoring systems through an instrument already familiar to the surgeon. The systems’ proprietary software and easy to use graphical userinterface enables the surgeon to make critical decisions in real time resulting in safer, more reproducible and faster procedures with the potential for improvedpatient outcomes. With recent additions, the health and integrity of the spinal cord and related nerves can also be assessed using motor evoked potentials(MEPs) and somatosensory evoked potentials (SSEPs). Both of these methods of IOM involve applying stimulation and recording the response that musttravel along the motor or sensory paths of the spinal cord.5Table of ContentsThrough our IOM subsidiary, Impulse Monitoring, the data from the various nerve monitoring systems, including our own, can be analyzed in realtime by healthcare professionals for additional interpretation of intra-operative information. Adding the value of real time healthcare professional oversightfurther improves the safety and reproducibility of the vast array of our spine procedures.MAS — MaXcessOur MaXcess system integrates nerve monitoring and specialized implants that provide maximum access to the spine with minimal soft tissuedisruption. MaXcess has a split blade design consisting of three blades that can be positioned to customize the surgical exposure in the shape and size specificto the surgical requirements rather than the more traditional fixed tube or two blade designs of traditional off the shelf “minimally invasive” spine surgicalsystems. MaXcess’ split blade design also provides customizable access to the spine, which allows surgeons to perform surgical procedures usinginstruments that are similar to those used in open procedures but with a smaller incision and less tissue disruption. The ability to use familiar instrumentsreduces the learning curve and facilitates the adoption of our products. Our system’s illumination of the operative corridor aids in providing surgeons withbetter direct visualization of the patient’s anatomy, without the need for additional technology or other special equipment such as endoscopes.Over the years, several improvements to our MaXcess systems have been made, including incorporating integrated neuromonitoring technology andimproving the blade systems, and the MAS approach has broadened from the lumbar to the thoracic region. Our MaXcess products are used in the cervicalspine for posterior application and anterior retraction, the lumbar spine for decompressions, transforaminal lumbar interbody fusions (TLIFs) and posteriorlumbar interbody fusions (PLIFs), the thoracic region for tumors and trauma, as well as in adult degenerative scoliosis procedures.MAS — Specialized Implants and Fixation SystemsWe have a number of implants and fixation devices designed to be used with our MAS platform. These implants are used for interbody disc heightrestoration for fusion and stabilization of the spine. Our implants are available in a variety of shapes and sizes to accommodate specific approach, pathologyand anatomical requirements of the patient and the particular fusion procedure. Our implants are designed for insertion into the smallest possible space whilemaximizing surface area contact for fusion. Our fixation systems have been uniquely designed and include a highly differentiated percutaneous minimallyinvasive solution with advanced guide technology, superior rod insertion options, and multiple reduction capabilities to be delivered through our MaXcesssystem to provide stabilization of the spine. These systems enable minimally disruptive placement of implants and are intended to reduce patient morbidity, attimes through a single approach.The following products and services complement our MAS platform:BiologicsThe global biologics market in spine surgery consists of autograft (autologous human tissue), allograft (donated human tissue), a varied offering ofsynthetic products, stem cell-based products, and growth factors. We currently offer FormaGraft, a collagen-based synthetic bone substitute and OsteocelPlus, an allograft cellular matrix designed to mimic the biologic profile of autograft that includes endogenous MSCs and osteoprogenitors to aid in fusion. Wehave developed biologics products such as AttraX, a synthetic bone graft material delivered in putty form, to meet the different needs of these internationalmarkets. We have successfully commercialized AttraX in several international countries.Intra-Operative Monitoring ServiceMonitoring the health of the nervous system during spinal surgery has been a key component of our strategy of product differentiation since early in ourdevelopment. Over time, surgeon and hospital demand for nerve monitoring has increased along with the advancement of technologies and techniques used inIOM. We believe that our proprietary NVJJB and NVM5 platforms are differentiators in the market and are unique in their ability to provide informationabout the directionality and proximity of nerves. With our October 2011 acquisition of Impulse Monitoring, we believe we can further leverage our platform ofnerve monitoring and uniquely meet the demands of our surgeon and hospital customers by offering best in class products and IOM services.Development ProjectsWe are developing proprietary total disc replacement devices for lateral lumbar spine applications and separately for cervical spine applications. Thesedevices are intended to allow surgeons to address a patient’s pain and dysfunction while maintaining a more natural physiological range of motion comparedwith fusion. Commercialization of these devices will require premarket6Table of Contentsapproval rather than 510(k) clearance. In the cervical spine, the PCM device was approved by the FDA in the fourth quarter of 2012.Our lumbar motion preservation development efforts include XL-TDR®, a mechanical total disc replacement implanted through the XLIF approach. Wehave completed enrollment in a FDA clinical trial in the United States, but we currently do not intend to pursue a Premarket Approval Application for the XL-TDR device to commercialize the product in the U.S.In addition to the motion preservation platforms previously mentioned, we continue development on a wide variety of projects intended to broadensurgical applications such as with tumor, trauma, and deformity, and increase fixation options for greater procedural integration of our MAS techniques. Wealso continue expanding our cervical product portfolio to provide for a comprehensive cervical offering that will include further segmentation of both thefixation and motion preservation markets. In biologics, we continue to pursue advancements in our existing product lines as well as new and innovativebiologics offerings.Research and DevelopmentOur research and development efforts are primarily focused on developing further enhancements to our existing products and improving and furtherintegrating our procedural solutions. Our research and development group has extensive experience in developing products to treat spine pathologies and thisgroup continues to work closely with our clinical advisors and spine surgeon customers to design products that are intended to improve patient outcomes,simplify techniques, reduce patient trauma and the subsequent hospitalization and rehabilitation times and, as a result, reduce overall costs to the healthcaresystem.InternationalWe believe the spine market shift towards minimally invasive surgery and increases in international access to healthcare provide us with an opportunityfor accelerated growth outside the U.S. Because our products and technologies treat similar pathologies around the world, we are focused on expanding ouroperations in select developed and emerging international markets. We are investing to tailor our products and technologies to meet varying international patient,surgeon and market requirements. We are also investing in expanding our global infrastructure to adapt to alternative distribution channels, to supportdiffering language and customer service requirements, and to provide training and surgeon education in our MAS surgical techniques, our complementaryinstruments and our implants to our international customers. During 2013, we opened new offices in Tokyo, Japan and Milan, Italy, and we also announcedthe expansion and relocation of our UK office to better execute our growth strategy across Europe. Additionally, we have continued to expand our productofferings internationally. During 2013, we successfully launched our XLIF procedure in Japan changing the way spine surgery is performed by surgeonsacross the country. We also launched Precept®, a minimally invasive posterior fixation system, in Japan and other select countries around the world. Ourgeographic expansion efforts will enable us to accelerate our global market share position and change patient's lives, not just in the U.S., but around the world.Sales and MarketingIn the United States, we currently sell our products through a combination of exclusive independent sales agencies and directly-employed salesshareowners. Each member of our U.S. sales force is responsible for a defined territory, with our independent sales agents acting as our sole representative intheir respective territories. The determination of whether to engage a directly-employed sales shareowner or an independent sales agency is made on a territoryby territory basis, with a focus on the candidate who brings the best skills and experience. Domestically, the split between directly-employed sales shareownersand independent sales agents in our sales force is approximately equal. Our international sales force is comprised of directly-employed sales shareowners aswell as exclusive distributors and independent sales agents. There are many reasons that we believe strongly in an exclusive sales force, none more importantthan having a sales force that is properly educated, trained and incentivized to sell and represent only our portfolio of products.Surgeon Training and EducationWe devote significant resources to training and educating surgeons regarding the safety and reproducibility of our MAS surgical techniques and ourcomplementary instruments and implants. We maintain state-of-the-art cadaver operating rooms and training facilities to help educate surgeons regarding ourproducts at our corporate headquarters in San Diego, California and our facility in Paramus, New Jersey. We continue to train surgeons on the XLIF techniqueand our other MAS platform products including: our proprietary nerve monitoring systems, MaXcess, biologics, and specialized implants. The number ofsurgeons trained annually includes first-time surgeons new to our MAS product platform as well as surgeons previously trained on our MAS productplatform who are attending advanced training programs. The Society of Lateral Access Surgery (SOLAS) Surgeon Education Committee helps direct thecontinued evolution of our many procedure-related training classes and materials.7Table of ContentsManufacturing and SupplyWe rely on third parties for the manufacture of a majority of our products, their components and servicing, and we maintain alternative manufacturingsources for a majority of our finished goods products. We also manufacture certain implants internally at our facility in Dayton, Ohio. We have identified orare in the process of identifying and qualifying additional suppliers, on a per product basis, for our highest volume products to maintain consistent supply toour customers. Our outsourcing strategy is targeted at companies that meet FDA, International Organization for Standardization, or ISO, and qualitystandards supported by internal policies and procedures. Supplier performance is maintained and managed through a supplier qualification, performancemanagement and corrective action program intended to ensure that all product requirements are met or exceeded. We believe at our current scale these types ofmanufacturing relationships balance our capital investment, help control costs, and provide manufacturing capacity necessary to compete with larger volumemanufacturers of spine surgery products. As our business continues to scale, we will continue to evaluate this strategy on selective product lines to driveimproving profitability and shareholder returns. In the future, we plan to manufacture a larger portion of our products and product components internally todrive improved profitability, speed to market, and further strengthen our quality control.Our products are inspected, packaged and labeled, as needed, at either our San Diego headquarters or our Memphis distribution facility. Under ourexisting contracts with third-party manufacturers, we reserve the exclusive right to inspect and assure conformance of each product and product component toour specifications.We currently rely on several tissue banks as our suppliers of allograft tissue implants. We have two tissue banks that supply us with Osteocel Plus,which is a cellular allograft. Like our relationships with our device manufacturing suppliers, we subject our tissue processing suppliers to the same qualitycriteria in terms of selection, qualification, and verification of processed tissue quality upon receipt of goods, as well as hold them accountable to compliancewith FDA regulations, state requirements, as well as voluntary industry standards such as those put forward by the American Association of Tissue Banks,or AATB.We rely on one exclusive supplier of polyetheretherketone (PEEK), which comprises our CoRoent PEEK partial vertebral body replacement andinterbody product lines. We have an exclusive supply arrangement to supply our NVM5 and NVJJB neuromonitoring systems, and an exclusive supplyarrangement to supply our neuromonitoring equipment outside of the NV platform. We rely on a limited number of suppliers for our motion preserving totaldisc replacement device, PCM.We, and our third-party manufacturers, are subject to the FDA’s quality system regulations, state regulations, such as the regulations promulgated bythe California Department of Health Services, and regulations promulgated by the European Union. For tissue products, we are FDA registered and licensed inthe States of California, New York, Florida, Maryland and Oregon. For our device implants and instruments, we are FDA registered, California licensed, CEmarked and ISO certified. CE is an abbreviation for “Conformité Européenne” or European Conformity. Our facilities and the facilities of our third-partymanufacturers are subject to periodic announced and unannounced inspections by regulatory authorities, and may undergo compliance inspections conductedby the FDA, state or international regulatory agencies.Surgical Instrument and Implant SetsFor many of our customers, we seek to deliver surgical instrumentation sets, including both implants and instruments, as well as our nerve monitoringsystems, on a just in time basis to fulfill our customer obligations to meet surgery schedules.We do not generally receive separate economic value specific to the surgical instrument sets from the surgeons or hospitals that utilize them. In manycases, once the surgery is finished, the surgical instrument sets are returned to us and we prepare them for shipment to meet future surgeries.A wide selection of implants are also delivered to our customers on a just in time basis to enable them to choose the best shape and size implant for eachof their patients.We complement this model with field-based assets. This hybrid strategy is designed to improve customer service, minimize backlogs, increase assetturns, optimize freight costs, and maximize cash flow. Our pool of surgical equipment that we loan to or place with hospitals continues to increase as weincrease our product offering, expand our distribution channels and increase market penetration of our products. These surgical instrumentation and implantsets are important to the growth of our business, and we anticipate additional investments in our loaner assets.8Table of ContentsIntellectual PropertyWe rely on a combination of patent, trademark, copyright, trade secret and other intellectual property laws, nondisclosure agreements and othermeasures to protect our intellectual property rights. We believe that in order to have a competitive advantage, we must develop and maintain the proprietaryaspects of our technologies. We require our shareowners, consultants and advisors to execute confidentiality agreements in connection with their employment,consulting or advisory relationships with us. We also require our shareowners, consultants and advisors who we expect to work on our products to agree todisclose and assign to us all inventions conceived using our property or which relate to our business. Despite any measures taken to protect our intellectualproperty, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary.PatentsAs of December 31, 2013, we had 230 issued U.S. patents, 165 foreign national patents, and 284 pending patent applications, including 198U.S. applications, 1 international (PCT) application and 85 foreign national applications. Our issued and pending patents cover, among other things:•MAS surgical access instrumentation and methodology, including our XLIF procedure and aspects thereof;•Neurophysiology enabled instrumentation and methodology, including pedicle screw test systems, software hunting algorithms, navigated guidance,rod bending and surgical access systems;•Implants and related instrumentation and targeting systems;•Biologics, including Osteocel Plus, Formagraft and AttraX; and•Motion preservation products.Our issued patents begin to expire in 2018. We do not believe that the expiration of any single patent is likely to significantly affect our intellectualproperty position.The medical device industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patentinfringement. Patent litigation can involve complex factual and legal questions and its outcome is uncertain. Our success will depend in part on our notinfringing patents issued to others, including our competitors and potential competitors. As the number of entrants into our market increases, the possibility offuture patent infringement claims against us grows. While we make extensive efforts to ensure that our products do not infringe other parties’ patents andproprietary rights, our products and methods may be covered by patents held by our competitors. There are numerous risks associated with our intellectualproperty. For a complete discussion of these risks, please see the “Risk Factors” section of this Annual Report.TrademarksAs of December 31, 2013, we had 201 trademark registrations, both domestic and foreign, including the following U.S. trademarks: AbsoluteResponsiveness, Acuity, Affix, Armada, Attrax, Back Pact, Bendini, Better Back Alliance, Better Insight. Better Decisions. Better Medicine, Brigade,CerPass, CoRoent, Creative Spine Technology, DBR, Embody, Embrace, ExtenSure, FormaGraft, Gradient Plus, Halo, ILIF, InStim, JJB, Leverage, M5,Magnitude, MAS, MaXcess, NeoDisc, Nerve Avoidance Leader, NeuroVision, NuVasive, NVJJB, NVM5, Osteocel, PCM, Precept, Radian, SOLAS,Speed of Innovation, SpheRx, The Better Way Back, Traverse, Triad, VuePoint, X-Core, XL-TDR, XLIF and XLP. We also had 16 trademark applicationspending, both domestic and foreign, including the following trademarks: $1 Billion Start-Up, ACR, Archon, GSB, Helix, IGB, ILIF, IOS IntegratedOperative Solutions, Leaders in Lateral, MicroLIF, MicroXLIF, Relign, and StruXure.CompetitionWe compete with companies located throughout the world with regard to all of our products and services. We are aware of a number of major medicaldevice companies that have developed or plan to develop competing products for use in minimally disruptive surgical spine procedures. Several of our currentand potential competitors have substantially greater financial, technical and marketing resources than we do, and they may succeed in developing productsthat would render our products obsolete or noncompetitive. In addition, these competitors may have significantly greater operating history and patent portfoliosthan we do in their respective fields. Our ability to compete successfully will depend on our ability to develop proprietary products that reach the market in atimely manner, receive adequate reimbursement and are safer, less invasive and less expensive than alternatives available for the same purpose. Because of thesignificant size of the potential market, we anticipate that companies will continue to dedicate significant resources to developing competing products.9Table of ContentsCompetition within the industry is primarily based on technology, innovation, quality, reputation and customer service. We believe that our significantcompetitors are Medtronic Sofamor Danek (Medtronic), DePuy/Synthes, a Johnson & Johnson company, Stryker Spine, Globus Medical, Biomet Spine, andZimmer Spine, which together represent a significant portion of the spine market. We also face competition from a significant number of smaller companieswith more limited product offerings and geographic reach than our larger competitors. These companies, who represent intense competition in specifc markets,include Orthofix International N.V. (Orthofix), Alphatec Spine (Alphatec), K2M and others.We also face competition from physician owned distributorships (PODs), which are medical device distributors that are owned, directly or indirectly,by physicians. However, these PODs have recently come under scrutiny by the Office of Inspector General (OIG) as the associated physicians derive a portionof their revenue from selling or arranging for the sale of medical devices for use in procedures they perform on their own patients.Government RegulationOur products are medical devices and tissue subject to extensive regulation by the FDA and other regulatory bodies both inside and outside the U.S. Tovarying degrees, each of these agencies requires us to comply with laws and regulations governing the development, testing, manufacturing, storage, labeling,marketing and distribution of our products.FDA’s Premarket Clearance and Approval RequirementsUnless an exemption applies, each medical device that we market and sell in the U.S. must first receive either premarket clearance (by submitting a510(k) notification) or premarket approval (by filing a premarket approval application (“PMA”)) from the FDA. In addition, certain modifications made tomarketed devices also may require 510(k) clearance or approval of a PMA supplement. The FDA’s 510(k) clearance process usually takes from three totwelve months from the date the application is completed, but may last longer. The process of obtaining PMA approval is much more costly, lengthy anduncertain than the 510(k) clearance process and generally takes from one to three years, or even longer, from the time the application is submitted to the FDAuntil an approval is obtained. In addition, a clinical trial is almost always required to support a PMA application and may be required for a 510(k) premarketnotification. There are numerous risks associated with conducting clinical trials, including high costs and uncertain outcomes. For a complete discussion ofthese risks, please see the “Risk Factors” section of this Annual Report.Human Cell, Tissue, and Cellular and Tissue Based ProductsOur allograft products, Triad, H2 and ExtenSure, and our Osteocel Plus products are regulated by the FDA as Human Cell, Tissue, and Cellular andTissue Based Products. FDA regulations do not currently require products regulated as minimally manipulated human tissue-based products to be 510(k)cleared or PMA approved before they are marketed. We are, however, required to register our establishment, list these products with the FDA and comply withCurrent Good Tissue Practices for Human Cell, Tissue, and Cellular and Tissue Based Product Establishments. The FDA periodically inspects tissueprocessors to determine compliance with these requirements. Entities that provide us with allograft bone tissue are responsible for performing donor recovery,donor screening and donor testing and our compliance with those aspects of the Current Good Tissue Practices regulations that regulate those functions aredependent 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 Organ Transplant Act, or NOTA, acriminal statute which prohibits the purchase and sale of human organs used in human transplantation, including bone and related tissue, for “valuableconsideration,” as defined in the NOTA. NOTA permits reasonable payments associated with the removal, transportation, processing, preservation, qualitycontrol, implantation and storage of human bone tissue. With the exception of removal and implantation, we provide services in all of these areas. We makepayments to vendors in consideration for the services they provide in connection with the recovery and screening of donors. Failure to comply with therequirements of NOTA could result in enforcement action against us.The procurement of human tissue is also subject to state anatomical gift acts and some states have statutes similar to NOTA. In addition, some statesrequire that tissue processors be licensed by that state. Failure to comply with state laws could also result in enforcement action against us.Pervasive and Continuing FDA RegulationAfter a device is placed on the market, numerous regulatory requirements continue to apply. These regulatory requirements include, but are not limitedto, the following:•product listing and establishment registration;10Table of Contents•adherence to the Quality System Regulation (“QSR”) which requires stringent design, testing, control, documentation and other quality assuranceprocedures;•labeling requirements and FDA prohibitions against the promotion of off-label uses or indications;•adverse event reporting;•post-approval restrictions or conditions, including post-approval clinical trials or other required testing;•post-market surveillance requirements;•the FDA’s recall authority, whereby it can ask for, or require, the recall of products from the market; and•requirements relating to voluntary corrections or removals.Failure to comply with applicable regulatory requirements can result in fines and other enforcement actions by the FDA, which could adversely impactour business.We are also subject to unannounced device inspections by the FDA and the California Food and Drug Branch, as well as other regulatory agenciesoverseeing the implementation and adherence of applicable state and federal tissue licensing regulations. These inspections may include our manufacturing andsubcontractors’ facilities.Pursuant to FDA regulations, we can only market our products for cleared or approved uses. Although surgeons are permitted to use medical devices forindications other than those cleared or approved by the FDA based on their medical judgment, we are prohibited from promoting products for such "off-label"uses.Healthcare Regulation and Commercial ComplianceThe healthcare industry is highly regulated and changes in laws and regulations can be significant. Changes in the law or new interpretation of existinglaws can have a material effect on our permissible activities, the relative costs associated with doing business and the amount of reimbursement by governmentand other third-party payers. The federal government and all states in which we currently operate regulate various aspects of our business. Failure to complywith these laws could adversely affect our ability to receive reimbursement for our services and subject us and our officers and agents to civil and criminalpenalties.Anti-kickback Statute: We are subject to the federal anti-kickback statute which, among other things, prohibits the knowing and willful solicitation,offer, payment or receipt of any remuneration, direct or indirect, in cash or in kind, in return for or to induce the referral of patients for items or servicescovered by Medicare, Medicaid and certain other governmental health programs. Under the Patient Protection and Affordable Care Act, as amended by theHealth Care and Education Reconciliation Act of 2010, or PPACA, knowledge of the anti-kickback statute or the specific intent to violate the law is notrequired. Violation of the anti-kickback statute may result in civil or criminal penalties and exclusion from Medicare, Medicaid and other federal healthcareprograms, and according to PPACA, now provides a basis for liability under the False Claims Act. Many states have enacted similar statutes, which are notlimited to items and services paid for under Medicare or a federally funded healthcare program. We believe that our operations materially comply with the anti-kickback statutes; however, because these provisions are interpreted broadly by regulatory authorities, we cannot be assured that law enforcement officials orothers will not challenge our operations under these statutes.Federal False Claims Act: The Federal False Claims Act and, in particular, the False Claims Act’s “qui tam” or “whistleblower” provisions allow aprivate individual to bring actions in the name of the government alleging that a defendant has made false claims for payment from federal funds. In addition,various states are considering enacting or have enacted laws modeled after the Federal False Claims Act, penalizing false claims against state funds. During thesecond quarter of 2013, we received a federal administrative subpoena from the Office of the Inspector General of the U.S. Department of Health and HumanServices (OIG) in connection with an investigation into possible false or otherwise improper claims submitted to Medicare and Medicaid. The subpoena seeksdiscovery of documents for the period January 2007 through April 2013. We are working with the OIG to understand the scope of the subpoena and to providethe requested documents. Responding to the subpoena requires Management's attention and results in significant legal expense. Any adverse findings related tothis investigation could result in material financial penalties against the Company.Health Insurance Portability and Accountability Act: Under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, as wasamended in 2005 and in 2009, a Covered Entity, as further defined under HIPAA, is required to adhere to certain requirements regarding the use, disclosureand security of protected health information, or PHI. In the past, HIPAA has generally affected us indirectly, as NuVasive is generally neither a Covered Entitynor a Business Associate, as further defined under HIPAA, to Covered Entities, except that our provision of IOM services through various subsidiaries maycreate a Business11Table of ContentsAssociate relationship and/or our Puerto Rico subsidiary may be a Covered Entity. Regardless of Covered Entity status under HIPAA, in those cases wherepatient data is received, NuVasive is committed to maintaining the security and privacy of PHI. The potential for enforcement action against us is now greater,as the U.S. Department of Health and Human Services (HHS) can take action directly against Business Associates. Thus, while we believe we are and will bein compliance with all required HIPAA standards, there is no guarantee that the government will agree. Enforcement actions can be costly and interrupt regularoperations of our business.Foreign Corrupt Practices Act: The United States and foreign government regulators have increased regulation, enforcement, inspections andgovernmental investigations of the medical device industry, including increased United States government oversight and enforcement of the Foreign CorruptPractices Act. Whenever the United States or another foreign governmental authority concludes that we are not in compliance with applicable laws orregulations, such governmental authority can impose fines, delay or suspend regulatory clearances, institute proceedings to detain or seize our products, issuea recall, impose operating restrictions, enjoin future violations and assess civil penalties against us or our officers or employees, and can recommend criminalprosecution to the Department of Justice. Moreover, governmental authorities can ban or request the recall, repair, replacement or refund of the cost of anydevice or product we manufacture or distribute. We are also potentially subject to the UK Bribery Act, which could also lead to the imposition of civil andcriminal fines. Any of the foregoing actions could result in decreased sales as a result of negative publicity and product liability claims, and could have amaterial adverse effect on our financial condition, results of operations and prospects.Physician Payments Sunshine Act of 2009, or Sunshine Act: The Sunshine Act was enacted into law in 2010 and requires public disclosure to thefederal government of payments to physicians, including in-kind transfers of value such as free gifts or meals. These requirements provide for penalties fornon-compliance. The Centers for Medicare and Medicaid Services, or CMS, issued final regulations and the requirement of the collection of payments tophysicians began effective August 2013, with the first annual report due March 2014. This law, along with individual state reporting requirements, such as inMassachusetts and Vermont, increases the possibility that a healthcare company may run afoul of one or more of the requirements.Compliance Program: The federal government has recommended that healthcare companies, among others, develop and maintain an effectivecompliance program to reduce the likelihood of non-compliance by the company, its employees, agents and contractors. A compliance program is a set ofinternal controls established by a company to prevent and/or detect any non-compliant activities and to address properly those issues that may be discovered.In addition, some states, such as Massachusetts and California, now require certain healthcare companies to have a formal compliance program in place inorder to do business within the state. For years, we have maintained a compliance program structured to meet the requirements of the federal sentencingguidelines for an effective compliance program and the model compliance program guidance promulgated by HHS over the years. Our program includes, butis not limited to, a Code of Ethical Business Conduct, designation of a compliance officer, compliance committee, policies and procedures, a confidentialdisclosure method (a hotline), and conducting periodic audits to ensure compliance.Foreign Government RegulationSales of medical devices outside the United States are subject to foreign government regulations, which vary substantially from country to country. Thetime required to obtain approval by a foreign country may be longer or shorter than that required for FDA approval, and the requirements may differ.The European Union, which consists of 28 countries in Europe, has adopted numerous directives and standards regulating the design, manufacture,clinical trials, labeling, and adverse event reporting for medical devices. Other countries, such as Switzerland, have voluntarily adopted laws and regulationsthat mirror those of the European Union with respect to medical devices. Devices that comply with the requirements of a relevant directive will be entitled tobear CE conformity marking and, accordingly, can be commercially distributed throughout Europe. The method of assessing conformity varies depending onthe class of the product, but normally involves a combination of self-assessment by the manufacturer and a third-party assessment by a “Notified Body.”This third-party assessment consists of an audit of the manufacturer’s quality system and technical review of the manufacturer’s product. We have nowsuccessfully passed several Notified Body audits since our original certification in 2001, granting us ISO registration and allowing the CE conformitymarking to be applied to certain of our devices under the European Union Medical Device Directive.The Japanese government in recent years made revisions to the Pharmaceutical Affairs Law (PAL) that made significant changes to the preapprovalregulatory systems. These changes have in part, stipulated that in addition to obtaining a manufacturing or import approval from the Ministry of Health,Labor and Welfare, certain low-risk medical devices can now be evaluated by third-party organizations. Based on the risk-based classification, manufacturersare provided three procedures for satisfying the PAL requirements prior to placing products on the market, Pre-market Submission (Todokede), Pre-marketCertification (Ninsho) and Pre-market Approval (Shonin). NuVasive intends to market devices in Japan that will be assessed by both government entities andthird-party organizations using all three procedures in place for manufacturers. The level of review and time line for medical12Table of Contentsdevice approval will depend on the risk-based classification and subsequent regulatory procedure that the medical device is aligned based on assessmentagainst the Pharmaceutical Affairs Law. Manufacturers must also obtain a manufacturing or import license from the prefectural government prior to importingmedical devices. We will also be pursuing authorizations required by the prefectural government.Third-Party ReimbursementBroadly speaking, payer pushback on spine surgery in the U.S. has increased in the recent past, and we believe this has had an overall dampeningeffect on spine procedure volumes and prices.We expect that sales volumes and prices of our products and services will continue to be largely dependent on the availability of reimbursement fromthird-party payers, such as governmental programs, for example, Medicare and Medicaid, private insurance plans, accountable care organizations andmanaged care programs. Reimbursement is contingent on established coding for a given procedure, coverage of the codes by the third-party payers, andadequate payment for the resources used.Physician coding for procedures is established by the American Medical Association, or AMA. For coding related to spine surgery, the North AmericanSpine Society, or NASS, is the primary liaison to AMA. In July of 2006, NASS established the proper physician coding for the XLIF procedure by declaringit to be encompassed in existing codes that describe an anterolateral approach to the spine. This position was confirmed in a formal statement by NASS inJanuary 2010. Hospital coding is established by CMS. XLIF is included in the nomenclature for hospital codes as an additional descriptor under longstanding codes. All physician and hospital coding is subject to change which could impact reimbursement and physician practice behavior.Independent of the coding status, third-party payers may deny coverage based on their own criteria, including if they feel that a device or procedure isnot well established clinically, is not the most cost-effective treatment available, or is used for an unapproved indication. At various times in the past, certaininsurance providers have adopted policies of not providing reimbursement for the XLIF procedure. We have worked with our surgeon customers and NASSwho, in turn, have worked with these insurance providers to supply the information, explanation and clinical data they require to categorize the XLIFprocedure as a procedure entitled to reimbursement under their policies. At present, the majority of insurance companies provide reimbursement for XLIFprocedures.However, certain carriers, large and small, may have policies significantly limiting coverage of XLIF, Interlaminar Lumbar Interbody Fusion (ILIF),Osteocel Plus, the PCM Cervical Disc System, cervical interbody implants, or other procedures or products we sell. We will continue to provide theappropriate resources to patients, surgeons, hospitals, and insurers in order to ensure optimum patient care and clarity regarding reimbursement and work toremove any and all non-coverage policies. National and regional coverage policy decisions are subject to unforeseeable change and have the potential to impactphysician behavior and reimbursement for physician services. We cannot offer definitive time frames or final outcomes regarding reversal of the coverage-limiting policies, as the process is dictated by the third-party insurance providers. For a discussion of these risks, please see the “Risk Factors” section of thisAnnual Report.Payment amounts are established by government and private payer programs and are subject to fluctuations which could impact physician practicebehavior. Third-party payers are increasingly challenging the prices charged for a wide range of medical products and services, including those in spine andintraoperative monitoring where we participate.In international markets, reimbursement and healthcare payment systems vary significantly by country and many countries have instituted priceceilings on specific product lines. There can be no assurance that our products will be accepted by third-party payers, that reimbursement will be available or,if available, that the third-party payers’ reimbursement policies will not adversely affect our ability to sell our products profitably.Particularly in the United States where major healthcare reform provisions are scheduled, third-party payers must demonstrate they can improve qualityand reduce costs and thus we see an increase in pre-approval/prior authorizations and non-coverage policies citing higher levels of evidence required formedical therapies and technologies. In addition, insured individuals are facing increased premiums and higher out of pocket costs for medical coverage whichcan lead a patient to delay medical treatment. An increasing number of insured individuals receive their medical care through managed care programs, whichmonitor and often require pre-approval of the services that a member will receive. The percentage of individuals covered by managed care programs is expectedto grow in the United States over the next decade.In addition, there is downward pressure on reimbursement for the IOM services provided by Impulse Monitoring. Significant coding changes for IOMservices took effect in 2013. New Current Procedural Terminology (CPT) codes were introduced in 2013 that have led to reduced reimbursement by privatepayers for the professional remote oversight component of the service. Medicare patients were also subject to additional coding changes imposed by CMSwhich may restrict access to care and limit Impulse Monitoring's ability to cover, bill and collect for cases performed.13Table of ContentsWe believe that the overall escalating cost of medical products and services has led to, and will continue to lead to, increased pressures on the healthcareindustry to reduce the costs of products and services. There can be no assurance that third-party reimbursement and coverage will be available or adequate, orthat future legislation, regulation, or reimbursement policies of third-party payers will not adversely affect the demand for our products and services or ourability to sell these products and services on a profitable basis. The unavailability or inadequacy of third-party payer coverage or reimbursement could have amaterial adverse effect on our business, operating results and financial condition. For a discussion of these risks, please see the “Risk Factors” section of thisAnnual Report.Shareowners (our employees)We refer to our employees as shareowners. As of December 31, 2013, we had 1,358 shareowners. In addition to our shareowners, we partner withexclusive independent sales agencies and independent distributors who sell our products in the United States and internationally. There are approximately 426individuals associated with the exclusive independent sales agencies and independent distributors with whom we partner. None of our shareowners arerepresented by a labor union, and we believe our shareowner relations are good.NuVasive Spine FoundationThe NuVasive Spine Foundation, formerly known as Cheetah Gives Back Foundation, is a non-profit organization that has common management withus. The NuVasive Spine Foundation is committed to providing life-changing spine surgery to individuals around the world who have limited access to medicaltreatment and to developing sustainable spine care programs and advancing spine surgery technology by providing surgeons to train and educate othersurgeons in disadvantaged communities.We are not required to make contributions to The NuVasive Spine Foundation, except for any committed pledged amounts. No pledged amounts werecommitted by us as of December 31, 2013.Corporate InformationOur business was incorporated in Delaware in July 1997. Our principal executive offices are located at 7475 Lusk Boulevard, San Diego, California92121, and our telephone number is (858) 909-1800. Our website is located at www.nuvasive.com.We file our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to those reports,electronically with the Securities and Exchange Commission (the Commission). We make these reports available free of charge on our website under theinvestor relations page as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Commission. All such reports weremade available in this fashion during 2013.This report may refer to brand names, trademarks, service marks or trade names of other companies and organizations, and these brand names,trademarks, service marks and trade names are the property of their respective holders.Item 1A. Risk FactorsRisk factors which could cause actual results to differ from our expectations and which could negatively impact our financial condition andresults of operations are discussed below and elsewhere in this report. If any of the following risks actually occurs, our business, financial condition,results of operations and our future growth prospects could be materially and adversely affected. Under these circumstances, the trading price of ourcommon stock could decline, and you may lose all or part of your investment. Further, additional risks not currently known to us or that we currentlybelieve are immaterial also may impair our business, operations, liquidity and stock price materially and adversely.14Table of ContentsRisks Related to Our Business and IndustryTo be commercially successful, we must convince spine surgeons that our minimally disruptive surgical products are an attractive alternative toour competitors' products for the treatment of spine disorders.Acceptance of our products by spine surgeons depends on educating and training spine surgeons as to the distinctive characteristics, perceived benefits,safety and cost-effectiveness of our minimally disruptive spine surgery products as compared to our competitors' products. Surgeons may be hesitant tochange their medical treatment practices for the following reasons, among others:•lack of experience with minimally disruptive surgical products and procedures;•lack or perceived lack of evidence supporting additional patient benefits;•perceived liability risks generally associated with the use of new products and procedures;•limited or lack of availability of coverage and reimbursement within healthcare payment systems;•increased competition in lateral procedural offerings;•lack of perceived differentiation among lateral procedures;•costs associated with the purchase of new products and equipment; and•the time commitment that may be required for training.If we are not successful in convincing spine surgeons of the merit of our minimally disruptive surgical products, educating them on the use of ourproducts and maintaining their support in the use of our minimally disruptive products, we will be unable to increase our sales and sustain our growth orprofitability. Subsequently, if we fail to adequately and continually promote and market our products to spine surgeons or if spine surgeons adopt competingproducts into their practice, our sales could significantly decrease which could significantly impact our profitability and cash flow.Our future success depends on our strategy of obsoleting our own products and our ability to timely acquire, develop and introduce newproducts or product enhancements that will be accepted by the market.We have the objective of staying ahead of the spine market by obsoleting our own products with new products and enhancements. It is important to ourbusiness that we continue to build upon our product offering to surgeons and hospitals, and enhance the products we currently offer. As such, our successwill depend in part on our ability to acquire, develop and introduce new products and enhancements to our existing products to keep pace with the rapidlychanging spine market. We cannot assure you that we will be able to successfully acquire, develop, obtain regulatory approval for or market new products orthat any of our future products or enhancements will be accepted by the surgeons who use our products or the third-party payers who financially supportmany of the procedures performed with our products. Additionally, in our quest to obsolete our own products, we must effectively manage our inventory, thedemand for new and current products and the regulatory process for new products in order to avoid unintended adverse financial and accountingconsequences.If we do not effectively manage our strategy of obsoleting our own products by acquiring or developing new products or product enhancements that wecan introduce in time to meet market demand or if there is insufficient demand for these products or enhancements, or if we do not manage the producttransitions well which would result in margin reducing write-offs for obsolete inventory, our results of operations may suffer.Changes to third-party reimbursement policies and practices, including non-coverage decisions, can negatively impact our ability to sell ourproducts and services.We believe that future reimbursement may be subject to changes in policies and practices, such as more restrictive criteria to qualify for surgery orreduction in payment amounts to hospitals and surgeons for approved surgery and intraoperative monitoring, both in the United States and in internationalmarkets. Sales of our products and services will depend on the availability of adequate reimbursement from third-party payers. Future legislation, regulationor reimbursement policies of third-party payers may adversely affect the demand for our products and services as healthcare providers, such as hospitals thatpurchase medical devices and services for treatment of their patients, generally rely on third-party payers to reimburse all or part of the costs and feesassociated with the procedures performed with these devices and services. Likewise, spine surgeons, neurophysiologists and their supervising physicians relyprimarily on third-party reimbursement for the surgical or monitoring fees they earn. Spine surgeons are unlikely15Table of Contentsto use our products and services if they do not receive reimbursement adequate to cover the cost of their involvement in the surgical procedures.Certain third-party payers have stated non-coverage decisions concerning our technologies and services and implementation of such policies couldsignificantly alter our ability to sell our products.There is downward pressure on reimbursement for the IOM services provided by Impulse Monitoring. Significant coding changes for IOM services tookeffect in 2013. New Current Procedural Terminology (CPT) codes were introduced in 2013 that have led to reduced reimbursement by private payers for theprofessional remote oversight component of the service. Medicare patients were also subject to additional coding changes imposed by CMS which may restrictaccess to care and limit Impulse Monitoring's ability to cover, bill and collect for cases performed.As we sell our products internationally, market acceptance may depend, in part, upon the availability of reimbursement within prevailing healthcarepayment systems. In international markets, reimbursement and healthcare payment systems vary significantly by country and many countries have institutedprice ceilings on specific product lines.Pricing pressure from our competitors, hospital customers and insurance providers can negatively impact our ability to sell our products andservices.The market for spine surgery products is large and this has attracted numerous new companies and technologies, and encouraged more establishedcompanies to intensify competitive pressure. New entrants to our markets include numerous niche companies with singular product focus, as well ascompanies owned partially by spine surgeons, who have significant market knowledge and access to the surgeons who use our products. As a result of thisincreased competition, we believe there will be continued pricing pressure. In addition, we may experience decreasing prices for our products due to pricingpressure experienced by our hospital customers from managed care organizations, insurance providers and other third-party payers and increased marketpower of our hospital customers as the medical device industry consolidates.If competitive forces drive down the price we are able to charge for some of our products, and we are not able to counter that pressure as we havehistorically with the rapid introduction of new offerings, our profit margins will shrink, which will hamper our ability to generate profits and cash flow, and,as a result, to invest in and grow our business, including the investment into new and innovative technologies.We are in a highly competitive market segment and face competition from large, well-established medical device manufacturers as well as newmarket entrants.The market for spine surgery products and procedures is intensely competitive, subject to rapid change and significantly affected by new productintroductions and other market activities of industry participants. With respect to our nerve monitoring systems and IOM services, we compete withMedtronic and VIASYS Healthcare, a division of CareFusion Corporation, both of which have significantly greater resources than we do, as well asnumerous regional nerve monitoring companies. With respect to MaXcess®, our minimally disruptive surgical system, our largest competitors are Medtronic,DePuy/Synthes, Stryker Spine, Globus Medical, and Zimmer Spine. We compete with many of the same companies with respect to our other products. Wealso compete with numerous smaller companies with respect to our implant products, many of whom have a significant regional market presence. At any time,these companies may develop alternative treatments, products or procedures for the treatment of spine disorders that compete directly or indirectly with ourproducts.Many of our larger competitors are either publicly traded or divisions or subsidiaries of publicly traded companies, and enjoy several competitiveadvantages over us, including:•significantly greater name recognition;•established relations with a greater number of spine surgeons, hospitals, other healthcare providers and third-party payers;•larger and more well established distribution networks with significant international presence;•products supported by long-term clinical data;•greater experience in obtaining and maintaining FDA and other regulatory approvals or clearances for products and product enhancements;•more expansive portfolios of intellectual property rights and greater funds available to engage in legal action; and16Table of Contents•greater financial assets, cash flow, capital markets access and other resources for product research and development, sales and marketing, andlitigation.In addition, the spine industry is becoming increasingly crowded with new market entrants, including physician-owned distributorships (PODs). Manyof these new competitors focus on a specific product or market segment, making it more difficult for us to expand our overall market position. If thesecompanies become successful, we expect that competition will become even more intense, leading to greater pricing pressure and making it more difficult for usto expand.The proliferation of physician-owned distributorships, as well as aggressive competitive tactics to attract away key customers, could result inincreased pricing pressure on our products and harm our ability to maintain or grow revenues.PODs are medical device distributors that are owned, directly or indirectly, by physicians. These physicians derive a portion of their revenue fromselling or arranging for the sale of medical devices for use in procedures they perform on their own patients at hospitals that agree to purchase from or throughthe POD, or that otherwise furnish ordering physicians with income that is based directly or indirectly on those orders of medical devices. We do not sell ordistribute any of our products to PODs. However, the prevalence of PODs may reduce our market opportunities and may hamper our ability to grow ormaintain revenues. In addition, we have seen increasingly aggressive competitive tactics focused on attracting customers away from us. To the extent thesetactics are successful, our revenues may materially suffer.If our acquisitions are unsuccessful, our business may be harmed.As part of our business strategy, we have acquired companies, technologies, and product lines to maintain our objectives of developing or acquiringinnovative technologies. Acquisitions involve numerous risks, including the following:•the possibility that we will pay more than the value we derive from the acquisition, which could result in future non-cash impairment charges and/ora dilution of future earnings per share;•difficulties in integration of the operations, technologies, personnel, and products of the acquired companies, which may require significant attentionof our management that otherwise would be available for the ongoing development of our business;•the applicability of additional laws, regulations and policies that have particular application to our acquisitions, including those relating to patientprivacy, insurance fraud and abuse, false claims, prohibitions against self-referrals, anti-kickbacks, direct billing practices, HIPAA compliance,and prohibitions against the corporate practice of medicine and fee-splitting;•the assumption of certain known and unknown liabilities of the acquired companies;•difficulties in retaining key relationships with shareowners (employees), customers, partners and suppliers of the acquired company; and•difficulties in operating in different business markets where we may not have historical experience.Any of these factors could have a negative impact on our business, results of operations or financing position. Further, past and potential acquisitionsentail risks, uncertainties and potential disruptions to our business, especially where we have limited experience as a company developing or marketing aparticular product or technology. For example, we may not be able to successfully integrate an acquired company's operations, business processes,technologies, products and services, information systems and personnel into our business. Acquisitions may also further strain our existing financial andmanagerial controls, and divert Management's attention away from our other business concerns.Our IOM business exposes us to risks inherent with the sale of services, to which we were not previously exposed as a medical device company.With the acquisition of Impulse Monitoring in October 2011, we now sell IOM services that are unique from the sale of our biologics, lumbar, thoracic,cervical and motion preservation products and have applications outside of our core business of spinal surgery. Our IOM services involve neurophysiologistslocated in the operating room, working in partnership with supervising physicians who oversee and interpret neurophysiological data gathered via broadbandtransmission in real-time. Providing this service subjects us to malpractice exposure.Our ability to deliver our IOM services could be severely affected if we fail to manage our relationships with the supervising physicians and the hospitalcustomers. Any disruption to our technology infrastructure or the Internet could harm our service operations and our reputation among our customers. Anydisruption to our computer systems could adversely impact the performance of our neurophysiologists.17Table of ContentsImpulse Monitoring also engages in direct billing of Medicare and commercial payers for IOM service which brings with it additional risks associatedwith proper billing practice regulations, HIPAA compliance, corporate practice of medicine laws, and new collections risk associated with third-party payers.Due to the breadth of many healthcare laws and regulations, we could be subject to healthcare fraud regulation and enforcement by both the federalgovernment and the states in which we conduct our business. The laws that may affect our ability to operate include: (i) the federal healthcare programs Anti-Kickback Law, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly orindirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for whichpayment may be made under federal healthcare programs such as Medicare or Medicaid, (ii) federal false claims laws which prohibit, among other things,individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors thatare false or fraudulent, and which may apply to entities like us which provide coding and billing advice to customers, and/or (iii) state law equivalents of eachof the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payer, includingcommercial insurers, many of which differ from their federal counterparts in significant ways, thus complicating compliance efforts.If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may besubject to penalties, including civil and criminal penalties, damages, fines and the curtailment or restructuring of our operations. Any penalties, damages,fines, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results. The risk of our beingfound in violation of these laws is increased by the fact that their provisions are open to a variety of interpretations. Any action against us for violation of theselaws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management's attention from the operation ofour business.If we are unable to maintain and expand our network of direct and independent sales representatives, we may not be able to generateanticipated sales.In the United States, we sell our products through a combination of exclusive independent sales agencies and directly-employed sales shareowners(employees). Our international sales force is comprised of directly-employed sales shareowners as well as exclusive distributors and independent sales agents.We expect these sales representatives to develop long-lasting relationships with the spine surgeons they serve. If our sales representatives fail to adequatelypromote, market and sell our products, our sales could significantly decrease.We face significant challenges and risks in managing our geographically dispersed distribution network and retaining the individuals who make up thatnetwork. For example, in 2012 and 2013, we experienced an increase in sales representatives leaving us. If any additional sales representatives were to leave us,our sales could be adversely affected. If sales representatives were to depart and be retained by one of our competitors, we may be unable to prevent them fromhelping competitors solicit business from our existing customers, which could further adversely affect our sales. Because of the intense competition for theirservices, we may be unable to recruit or retain sales representatives to work with us. Failure to hire or retain qualified sales representatives would prevent usfrom expanding our business and generating sales.Our 2004 Amended and Restated Equity Incentive Plan expired in February 2014 and the failure to approve a new equity plan could adverselyaffect the recruitment and retention of management and key personnel.In order to attract and retain personnel in a competitive marketplace, we believe that we must provide a competitive compensation package that includesequity-based compensation. Our sole equity incentive plan, the 2004 Amended and Restated Equity Incentive Plan, as further amended, had a ten year termand expired in February 2014. We plan to approve a new equity incentive plan and plan to seek stockholder approval of the plan at our next AnnualStockholder Meeting in May 2014, but, until we are able to obtain stockholder approval of a new equity plan, we will not have a stockholder approved equityplan and are unable to issue equity awards to our employees (who we refer to as “shareowners”).Our performance depends on attracting, motivating and retaining executive talent and other key shareowners. Specifically, our success depends in parton the continued services of many of our current shareowners including members of management and other key personnel. Competition for qualified personnelin our industry is significant. Without a stockholder approved equity plan, our recruitment and retention efforts may be adversely affected, and we mayexperience difficulty in implementing our business strategy.If we fail to properly manage our anticipated international growth, our business could suffer.We have invested, and expect to increase our investment for the foreseeable future, in our expansion into international markets. To execute our anticipatedgrowth in international markets we must:18Table of Contents•manage the complexities associated with a larger, faster growing and more geographically diverse organization;•expand our clinical development resources to manage and execute increasingly global, larger and more complex clinical trials;•expand our sales and marketing presence in international markets generally to avoid revenue concentration in a small number of markets that wouldsubject us to the risk of business disruption as a result of economic or political problems in concentrated locations;•upgrade our internal business processes and capabilities (e.g., information technology platform and systems, product distribution and tracking) tocreate the scalability and properly handle the transaction volumes that our growing geographically diverse organization demands; and•expend time and resources to receive product approvals and clearances to sell and promote products.We expect that our operating expenses will continue to increase as we continue to expand into international markets. International markets may be slowerthan domestic markets in adopting our products and are expected, in many instances, to yield lower profit margins when compared to our domestic operations.We have only limited experience in expanding into international markets as well as marketing and operating our products and services in such markets.Additionally, our international endeavors may involve significant risks and uncertainties, including distraction of Management from domesticoperations, insufficient revenue to offset the expenses associated with our international strategy, and unidentified issues not discovered in our due diligence.Because expansion into international markets is inherently risky, no assurance can be given that such strategies and initiatives will be successful and will notmaterially adversely affect our financial condition and operating results. Even if our international expansion is successful, our expenses may increase at agreater pace than our revenues and our operating results could be harmed.A significant portion of our foreign subsidiaries' operating expenses are incurred in foreign currencies. If the U.S. dollar weakens, our consolidatedoperating expenses would increase. Should the U.S. dollar strengthen, our products may become more expensive for our international customers, and as aresult, our results of operations and net cash flows from international operations may be adversely affected, especially if international sales continue to grow asa percentage of our total sales.Further, our anticipated growth internationally will place additional strain on our suppliers and manufacturers, resulting in increased need for us tocarefully monitor quality assurance. Any failure by us to manage our growth effectively could have an adverse effect on our ability to achieve our developmentand commercialization goals.Sales to customers outside the United States have accounted for an increasing portion of our revenues, which exposes us to risks inherent ininternational sales.As a key component of our business strategy to develop new markets, we intend to continue to expand our international sales, but success cannot beassured. The sale and shipment of our products across international borders, as well as the purchase of components and products from international sources,subject us to extensive U.S. and foreign governmental trade, import and export and customs regulations and laws. Compliance with these regulations and lawsis costly and exposes us to penalties for non-compliance. Other laws and regulations that can significantly affect us include various anti-bribery laws,including the U.S. Foreign Corrupt Practices Act (FCPA), and anti-boycott laws. Any failure to comply with applicable legal and regulatory obligations in theUnited States or abroad could adversely affect us in a variety of ways that include, but are not limited to, significant criminal, civil and administrativepenalties, including imprisonment of individuals, fines and penalties, denial of export privileges, seizure of shipments and restrictions on certain businessactivities. Also, the failure to comply with applicable legal and regulatory obligations could result in the disruption of our distribution and sales activities. Anyreduction in international sales, or our failure to further develop our international markets, could have a material adverse effect on our business, results ofoperations and financial condition.Our reliance on single source suppliers and manufacturers could limit our ability to meet demand for our products in a timely manner orwithin our budget.We rely on third-party suppliers and manufacturers to supply and manufacture a majority of our products. To be successful, our contractmanufacturers must be able to provide us with products and components in substantial quantities, in compliance with regulatory requirements, in accordancewith agreed upon specifications, at acceptable cost and on a timely basis. Our anticipated growth could strain the ability of suppliers to deliver an increasinglylarge supply of products, materials and components. If we are unable to obtain sufficient quantities of high quality components to meet customer demand on atimely basis, we could lose customers, our reputation may be harmed and our business could suffer.19Table of ContentsWe currently use one or two manufacturers for many of our devices or components. Our dependence on one or two manufacturers involves several risks,including limited control over pricing, availability, quality and delivery schedules. If any one or more of our manufacturers cease to provide us with sufficientquantities of our components in a timely manner or on terms acceptable to us, cease to manufacture components of acceptable quality or cease to do businessin general, we would have to seek alternative sources of manufacturing. We could incur delays while we locate and engage alternative qualified suppliers andwe might be unable to engage alternative suppliers on favorable terms. Any such disruption or increased expenses could harm our commercialization effortsand adversely affect our ability to generate revenue. In the event we experience delays, shortages, or stoppages of supply with any supplier, we would be forcedto locate a suitable alternative supplier which could take significant time and result in significant expense. Any inability to meet our customers' demands forthese products could lead to decreased sales and harm our reputation and result in the loss of customers to our competitors, which could cause the marketprice of our common stock to decline.Manufacturing risks may adversely affect our ability to manufacture products and could reduce our gross margins and negatively affect ouroperating results.In May 2013, we acquired a spine implant manufacturer based in Dayton, Ohio and currently manufacture a portion of our products at this facility. Aspart of our business strategy, we intend to expand our ability to manufacture our current and new products with exceptional quality and in sufficient quantitiesto meet demand, while complying with regulatory requirements and managing manufacturing costs. We are subject to numerous risks relating to ourmanufacturing capabilities, including both those of our owned manufacturing facilities and those of our third party suppliers, such as:•defects in product components that we source from third-party suppliers;•failing to increase production of products to meet demand;•potential adverse effects on existing business relationships with current third-party suppliers as we expand our in-house manufacturing capabilities;•maintaining control over manufacturing expenses as production expands;•the inability to modify production lines to enable the efficient manufacture of new products or to quickly implement changes to current products inresponse to regulatory requirements; and•potential damage to or destruction of our, or our suppliers' manufacturing equipment or manufacturing facilities.These risks may be exacerbated by our limited experience with in-house manufacturing processes and procedures. In addition, as we seek to expand ourmanufacturing capabilities, we will have to invest additional resources to hire and train employees and enhance our current production processes. If we fail toincrease our manufacturing capacity efficiently, our profit margins will shrink, which will negatively affect our operating results.20Table of ContentsRisks Related to Our Intellectual Property and LitigationWe are currently involved in patent litigation involving Medtronic, and, if we do not prevail in the litigation and/or on our appeal of theMedtronic verdict in phase one of the litigation, we could be liable for substantial damages and might be prevented from making, using, selling,offering to sell, importing or exporting certain of our products.On August 18, 2008, Medtronic filed suit against us in the U.S. District Court for the Southern District of California, alleging that certain of ourproducts infringe, or contribute to the infringement of, U.S. patents owned by Medtronic. Trial in the first phase of the case began in August 2011, and inSeptember 2011, a jury delivered an unfavorable verdict against us with respect to three Medtronic patents and a favorable verdict with respect to one of ourpatents. The jury awarded monetary damages of approximately $0.7 million to us which includes back royalty payments. Additionally, the jury awardedmonetary damages of approximately $101.2 million to Medtronic which includes lost profits and back royalties. On June 11, 2013, the District Courtdetermined that the amount of ongoing royalties owed by us to Medtronic was 13.75% on certain of NuVasive's CoRoent XL implants and 8.25% on certain ofNuVasive's MaXcess III retractors and related products. On August 20, 2013, NuVasive and Medtronic filed their respective notices of appeal, and the appealis now proceeding before the U.S. Court of Appeals for the Federal Circuit. We entered into an escrow arrangement in 2012 and transfered $113.3 million ofcash into a restricted escrow account to secure the amount of judgment, plus prejudgment interest, during pendency of appeal. As a result of the June 2013ruling, we will be required to escrow funds to secure accrued royalties, estimated at $21 million to date, and ongoing royalties, plus prejudgment interest,which represents a material reduction in our cash resources available for investment.In August 2012, Medtronic filed additional patent claims against us alleging that various NuVasive spinal implants (including our CoRoent® XL familyof spinal implants) and NuVasive's Osteocel® Plus bone graft product, along with the XLIF procedure, infringe Medtronic patents not asserted in prior phasesof the case. We deny infringing any valid claims of these additional patents and on March 7, 2013, we filed counterclaims against Medtronic asserting thatMedtronic's MAST Quadrant retractor system, the NIM-Eclipse Spinal System, the Clydesdale Spinal System, the Capstone-L products, and the DirectLateral Interbody Fusion (“DLIF”) procedure infringe eight NuVasive patents. Trial on this phase of the litigation is currently scheduled to begin in December2014.If we do not prevail in the Medtronic litigation we could be required to stop selling certain of our products, pay substantial monetary amounts asdamages, and/or enter into expensive royalty or licensing arrangements. Such adverse results may limit our ability to generate profits and cash flow, and, as aconsequence, to invest in and grow our business, including investments into new and innovative technologies.We are currently involved in a trademark litigation action involving the NeuroVision brand name and, if we do not prevail, we could be liablefor substantial damages.In September 2009, Neurovision Medical Products, Inc. (NMP) filed suit against us in the U.S. District Court for the Central District of Californiaalleging trademark infringement and unfair competition. NMP sought cancellation of our “NeuroVision” trademark registrations, injunctive relief and damagesbased on NMP's common law use of the “Neurovision” mark. Trial of the matter took place in October 2010, and an unfavorable jury verdict was deliveredagainst us relating to our use of the NeuroVision trade name in the amount of $60.0 million plus attorney fees and costs, as well as an injunction. Wepromptly appealed the verdict to the Ninth Circuit Court of Appeals. During the pendency of the appeal, we were required to escrow the amount of thejudgment, plus interest. In September 2012, the Circuit Court reversed and vacated the District Court's judgment against us, and also reversed and vacated theinjunction and the award of attorney fees and costs. The Circuit Court remanded the case for a new trial and instructed the District Court to assign the case toa different judge. In December 2012, the full $62.5 million was released from escrow and returned to us. A retrial on the matter is anticipated to begin in theDistrict Court in Spring 2014.This litigation process has been expensive, complex and lengthy and its outcome is difficult to predict. We may also be subject to additional negativepublicity due to this trademark litigation. This litigation may significantly divert the attention of our technical and management personnel. In the event that weare unsuccessful in our defense, we could be required to pay significant damages which are not covered under any of our insurance plans. In the event thisoutcome occurs, our business, liquidity, financial condition and results of operations would be materially adversely affected.We are currently involved in several additional litigation actions which could cause us to incur significant legal expenses and/or prevent usfrom making, using, selling, offering to sell, importing or exporting certain of our products.In addition to our ongoing patent litigation with Medtronic and trademark litigation with NMP, in October 2010, we initiated a patent infringementlawsuit against Globus Medical, Inc. (Globus) to protect our investment in our XLIF procedure and MaXcess retractor system. We also initiated a patentinfringement lawsuit against Cadwell Laboratories, Inc. to protect our investment in21Table of Contentsour neuromonitoring platform. The outcome of these litigation efforts is difficult to predict, and in certain cases, we have entered into a contingent feearrangement which grants our legal counsel the ability to share in the monetary recovery, if any, resulting from prosecution of the lawsuit.Intellectual property litigation is expensive, complex and lengthy and its outcome is difficult to predict. A court could enter orders that temporarily,preliminarily or permanently enjoin us or our customers from modeling, using, selling, offering to sell or importing our current or future products, or couldenter an order mandating that we undertake certain remedial activities. We may also be subject to negative publicity due to litigation. Pending or future patentlitigation against us or any strategic partners or licensees may force us or any strategic partners or licensees to stop or delay developing, manufacturing orselling potential products that are claimed to infringe a third-party's intellectual property, unless we develop alternative non-infringing technology or that partygrants us or any strategic partners or licensees rights to use its intellectual property, and may significantly divert the attention of our technical and managementpersonnel. In the event that our right to market any of our products is successfully challenged, or if we fail to obtain a required license or are unable to designaround a patent, our business, financial condition or results of operations could be materially adversely affected. In such cases, we may be required to obtainlicenses to patents or proprietary rights of others in order to continue to commercialize our products. However, we may not be able to obtain any licensesrequired under any patents or proprietary rights of third parties on acceptable terms, or at all, and any licenses may require substantial royalties or otherpayments by us. Even if any strategic partners, licensees or we were able to obtain rights to the third-party's intellectual property, these rights may be non-exclusive, thereby giving our competitors access to the same intellectual property. Furthermore, if we are found to infringe patent claims of a third-party, wemay, among other things, be required to pay damages, including up to treble damages and attorneys' fees and costs, which may be substantial.An unfavorable outcome for us in patent or other intellectual property litigation could significantly harm our business if such outcome makes us unableto commercialize some of our current or potential products or cease some of our business operations. In addition, costs of prosecution of claims and defense,and any damages resulting from litigation may materially adversely affect our business and financial results. Litigation may also harm our relationships withexisting customers and subject us to negative publicity, each of which could harm our business and financial results.Our ability to protect our intellectual property and proprietary technology through patents and other means is uncertain.Our success depends significantly on our ability to protect our proprietary rights to the technologies used in our products. We rely on patent protection,as well as a combination of copyright, trade secret and trademark laws, and nondisclosure, confidentiality and other contractual restrictions to protect ourproprietary technology. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep anycompetitive advantage. For example, our pending U.S. and foreign patent applications may not issue as patents at all or not in a form that will be advantageousto us or may issue and be subsequently successfully challenged by others and invalidated. In addition, our pending patent applications include claims tomaterial aspects of our products and procedures that are not currently protected by issued patents. Both the patent application process and the process ofmanaging patent disputes can be time consuming and expensive. Competitors may be able to design around our patents or develop products which provideoutcomes which are comparable to ours. Moreover, competitors may challenge our issued patents through post-grant challenge procedures (domestically)and/or opposition proceedings (internationally). On March 16, 2012, the America Invents Act amended the post-grant challenge procedures in the U.S. toeliminate inter partes reexamination, maintain ex parte reexamination, and add inter partes review and supplemental examination. Both Medtronic and Globusfiled inter partes reexamination requests (before March 16, 2012) against the patents we asserted against them. Those inter partes reexamination requests weregranted and those proceedings are in progress. Medtronic filed multiple inter partes review petitions (after March 16, 2012) against the patents we assertedagainst them in phase 3. Those inter partes review petitions have not yet been decided. If the U.S. Patent Office ultimately cancels or narrows the claims in anyof our patents through these proceedings, it could prevent or hinder us from being able to enforce them against competitors.Although we have taken steps to protect our intellectual property and proprietary technology, including entering into confidentiality agreements andintellectual property assignment agreements with our officers, shareowners, consultants and advisors, such agreements may not be enforceable or may notprovide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of theagreements. To the extent that our shareowners, consultants, or contractors use intellectual property owned by others in their work for us, disputes may ariseas to the rights in related or resulting know-how and inventions. Furthermore, the laws of some foreign countries may not protect our intellectual propertyrights to the same extent as do the laws of the United States.In addition, recently enacted changes to the U.S. patent laws, together with proposed changes to the rules of the U.S. Patent Office to comport with thenewly enacted laws may have a significant impact on our ability to protect our technology and enforce our intellectual property rights. Of significance in thenewly enacted patent laws, the United States has shifted from a “first to invent” to a “first inventor to file” system, which went into effect on March 16, 2013.Consequently, the pool of prior art available to inhibit or limit our ability to obtain issued patents on the technology utilized in our products is expected toexpand and the grace22Table of Contentsperiod for filing a patent application has been reduced in some ways. It is now possible for a situation to arise in which a competitor is able to obtain patentrights to technology which we invented first. Furthermore, the newly enacted patent laws have expanded the types of post grant challenges of issued patentsand these proceedings may provide our competitors with additional opportunities to challenge the validity of our issued patents.In the event a competitor infringes upon our patent or other intellectual property rights, enforcing those rights may be costly, difficult and timeconsuming. We may not have sufficient resources to enforce our intellectual property rights or to defend our patents against a challenge.The medical device industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patentinfringement. It is not unusual for parties to exchange letters surrounding allegations of intellectual property infringement and licensing arrangements. Patentlitigation can involve complex factual and legal questions and its outcome is uncertain. Any claim relating to infringement of patents that is successfullyasserted against us may require us to pay substantial damages, including treble damages in some cases. Even if we were to prevail, any litigation could becostly and time-consuming and would divert the attention of our management and key personnel from our business operations. Our success will also dependin part on our not infringing patents issued to others, including our competitors and potential competitors. If our products are found to infringe the patents ofothers, our development, manufacture and sale of such potential products could be severely restricted or prohibited. In addition, our competitors mayindependently develop technologies similar to ours. Because of the importance of our patent portfolio to our business, we may lose market share to ourcompetitors if we fail to adequately protect our intellectual property rights.As the number of entrants into our market increases, the possibility of a patent infringement claim against us grows. While we make an effort to ensurethat our products do not infringe other parties' rights, our products and methods may be covered by patents held by our competitors. In addition, ourcompetitors may assert that future products we may market infringe their patents.A patent infringement suit brought against us or any of our strategic partners or licensees may force us or such strategic partners or licensees to stop ordelay developing, manufacturing or selling potential products that are claimed to infringe a third-party's intellectual property, unless that party grants us or ourstrategic partners or licensees rights to use its intellectual property. In such cases, we may be required to obtain licenses to patents or proprietary rights ofothers in order to continue to commercialize our products. However, we may not be able to obtain any licenses required under any patents or proprietary rightsof third parties on acceptable terms, or at all, and any licenses may require substantial royalties or other payments by us. Even if our strategic partners,licensees or we were able to obtain rights to the third-party's intellectual property, these rights may be non-exclusive, thereby giving our competitors access tothe same intellectual property. Ultimately, we may be unable to commercialize some of our potential products or may have to cease some of our businessoperations as a result of patent infringement claims, which could severely harm our business.Risks Related to our Legal and Regulatory EnvironmentWe are subject to rigorous governmental regulations regarding the development, manufacture, and sale of our products and we may incursignificant expenses to comply with these regulations and develop products that are compatible with these regulations. In addition, failure tocomply with these regulations could subject us to substantial sanctions which could adversely affect our business, results of operations andfinancial condition.The medical devices we manufacture and market are subject to rigorous regulation by the FDA and numerous other federal, state and foreigngovernmental authorities, including regulations that cover the composition, labeling, testing, clinical study, manufacturing, packaging, marketing anddistribution of our products.We are required to register with the FDA as a device manufacturer and tissue bank. As a result, we are subject to periodic inspection by the FDA forcompliance with the FDA's Quality System Regulation (QSR) and Good Tissue Practices requirements, which require manufacturers of medical devices andtissue banks to adhere to certain regulations, including testing, quality control and documentation procedures. Our compliance with applicable regulatoryrequirements is subject to continual review and is rigorously monitored through periodic inspections by the FDA. In the European Community, we are requiredto maintain certain ISO certifications in order to sell our products, and are subject to periodic inspections by notified bodies to obtain and maintain thesecertifications. If we or our suppliers fail to adhere to QSR, ISO or other applicable regulations and standards, this could delay product production and lead tofines, difficulties in obtaining regulatory clearances and approvals, recalls or other consequences, which in turn could have a material adverse effect on ourfinancial condition, results of operations, or prospects.Most medical devices must receive FDA clearance or approval before they can be commercially marketed. In addition, the FDA may require testing andsurveillance programs to monitor the effects of approved products that have been commercialized, and can prevent or limit further marketing of a productbased upon the results of post-marketing programs. In addition, the federal23Table of ContentsMedical Device Reporting regulations require us to provide information to the FDA whenever there is evidence that reasonably suggests that a device may havecaused or contributed to a death or serious injury or, if a malfunction were to occur, could cause or contribute to a death or serious injury. Furthermore, mostmajor markets for medical devices outside the United States require clearance, approval or compliance with certain standards before a product can becommercially marketed. The process of obtaining regulatory approvals to market a medical device, particularly from the FDA and certain foreigngovernmental authorities, can be costly and time-consuming, and approvals may not be granted for future products or product improvements on a timelybasis, if at all. Delays in receipt of, or failure to obtain, approvals for future products or product improvements could result in delayed realization of productrevenues or in substantial additional costs, which could have a material adverse effect on our business or results of operations or prospects. At any time afterapproval of a product, the FDA may conduct periodic inspections to determine compliance with both QSR requirements and/or current Medical DeviceReporting regulations. Product clearances or approvals by the FDA can be withdrawn due to failure to comply with regulatory standards or the occurrence ofunforeseen problems following initial clearance or approval.Pursuant to FDA regulations, we can only market our products for cleared or approved uses. Although physicians are permitted to use medical devicesfor indications other than those cleared or approved by the FDA based on their medical judgment, we are prohibited from promoting products for such off-label uses. We market our products and provide promotional materials and training programs to physicians regarding the use of our products. Although webelieve our marketing, promotional materials and training programs for physicians do not constitute promotion of unapproved uses of our products, if it isdetermined that our marketing, promotional materials or training programs constitute promotion of unapproved uses, we could be subject to significant finesin addition to regulatory enforcement actions, including the issuance of a warning letter, injunction, seizure and criminal penalty.Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC has promulgated rules regarding disclosure of the presence in acompany's products of certain metals, known as “conflict minerals,” which are metals mined from the Democratic Republic of the Congo and adjoiningcountries, as well as procedures regarding a manufacturer's efforts to identify the sourcing of those minerals from this region. Complying with these rules willrequire investigative efforts, which will cause us to incur associated costs, and could adversely affect the sourcing, supply, and pricing of materials used inour products, or result in process or manufacturing modifications, all of which could adversely affect our results of operations.Whenever the United States or another foreign governmental authority concludes that we are not in compliance with applicable laws or regulations, suchgovernmental authority can impose fines, delay or suspend regulatory clearances, institute proceedings to detain or seize our products, issue a recall, imposeoperating restrictions, enjoin future violations and assess civil penalties against us or our officers or employees, and can recommend criminal prosecution tothe Department of Justice (DOJ). Moreover, governmental authorities can ban or request the recall, repair, replacement or refund of the cost of any device orproduct we manufacture or distribute. Any of the foregoing actions could result in decreased sales as a result of negative publicity and product liability claims,and could have a material adverse effect on our financial condition, results of operations and prospects. In addition to the sanctions for noncompliancedescribed above, commencement of an enforcement proceeding, inspection or investigation could divert substantial Management attention from the operation ofour business and have an adverse effect on our business, results of operations and financial condition.During the second quarter of 2013, we received a federal administrative subpoena from the Office of Inspector General of the U.S. Department of Healthand Human Services (OIG) in connection with an investigation into possible false or otherwise improper claims submitted to Medicare and Medicaid. Thesubpoena seeks discovery of documents for the period January 2007 through April 2013. We cannot control the pace or scope of any investigation, andresponding to the subpoena requests and any investigation requires an allocation of resources, including management time and attention. If we were to becomethe subject of an enforcement action, including any action resulting from the investigation by the OIG, it could result in negative publicity, penalties, fines, theexclusion of our products from reimbursement under federally-funded programs and/or prohibitions on our ability to sell our products, which could have amaterial adverse effect on our results of operations, financial condition and liquidity.We may fail to obtain or maintain foreign regulatory approvals to market our products in other countries.We currently market our products internationally and intend to expand our international marketing. International jurisdictions require separate regulatoryapprovals and compliance with numerous and varying regulatory requirements. The approval procedures vary among countries and may involve requirementsfor additional testing, and the time required to obtain approval 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 or jurisdictions, and approval orcertification by one foreign regulatory authority does not ensure approval or certification by regulatory authorities in other foreign countries or by the FDA. Theforeign regulatory approval or certification process may include all of the risks associated with obtaining FDA clearance or approval. We may not obtainforeign 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 necessaryapprovals to24Table of Contentscommercialize our products in any market. If we fail to receive necessary approvals or certifications to commercialize our products in foreign jurisdictions on atimely basis, or at all, our business, results of operations and financial condition could be adversely affected.If we fail to obtain, or experience significant delays in obtaining, FDA clearances or approvals for our future products or productenhancements, our ability to commercially distribute and market our products could suffer.Our medical devices are subject to rigorous regulation by the FDA and numerous other federal, state and foreign governmental authorities. The process ofobtaining regulatory clearances or approvals to market a medical device, particularly from the FDA, can be costly and time consuming, and there can be noassurance that such clearances or approvals will be granted on a timely basis, if at all. In particular, the FDA permits commercial distribution of a newmedical device only after the device has received clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act, or is the subject of an approvedPMA. If clinical trials of our current or future product candidates do not produce results necessary to support regulatory approval, we will be unable tocommercialize these products, which could have a material adverse effect on our financial results.The FDA will clear marketing of a medical device through the 510(k) process if it is demonstrated that the new product is substantially equivalent toother 510(k)-cleared products. The PMA process is more costly, lengthy and uncertain than the 510(k) clearance process. Additionally, any modification to a510(k)-cleared device that could significantly affect its safety or efficacy, or that would constitute a major change in its intended use, requires a new 510(k)clearance or, possibly, a PMA. The FDA may not agree with any of our decisions regarding whether new clearances or approvals are necessary. More recently,in July 2012, President Obama signed into law the Food and Drug Administration Safety and Innovation Act, or FDASIA. Among other things, FDASIAincludes several reforms which are further intended to clarify and improve medical device regulation both pre- and post-approval. One of these provisionsobligates the FDA to prepare a report for Congress on the FDA’s approach for determining when a new 510(k) will be required for modifications or changes toa previously cleared device. After submitting this report, the FDA is expected to issue revised guidance to assist device manufacturers in making thisdetermination. Until then, manufacturers may continue to adhere to the FDA’s 1997 guidance on this topic when making a determination as to whether or nota new 510(k) is required for a change or modification to a device, but the practical impact of the FDA’s continuing scrutiny of these issues remains unclear.Our failure to comply with such regulations could lead to the imposition of injunctions, suspensions or loss of regulatory approvals, product recalls,termination of distribution, or product seizures. In the most egregious cases, criminal sanctions or closure of our manufacturing facilities are possible.Pursuant to FDA regulations, we can only market our products for cleared or approved uses. If the FDA determines that our promotional materials ortraining constitute promotion of an unapproved use, it could request that we modify our training or promotional materials, or subject us to regulatoryenforcement actions, including the issuance of a warning letter, injunction, seizure, civil fine and criminal penalties. It is also possible that other federal, stateor foreign enforcement authorities might take action if they consider promotional or training materials to constitute promotion of an unapproved use, whichcould result in significant fines or penalties under other statutory authorities. Additionally, surgeons use several of our products for unapproved uses. Whilesurgeons are permitted by the FDA to use our products for unapproved uses, there is a heightened risk of an enforcement action against us by a governmentalenforcement authority when surgeons engage in this practice.Foreign governmental authorities that regulate the manufacture and sale of medical devices have become increasingly stringent and, to the extent wemarket and sell our products in foreign countries, we may be subject to rigorous regulation in the future. In such circumstances, we would rely significantlyon our foreign subsidiaries and independent sales agencies to comply with the varying regulations, and any failures on their part could result in restrictions onthe sale of our products in foreign countries.The safety of our products is not yet supported by long-term clinical data and our products may therefore prove to be less safe and effectivethan initially thought which could subject us to product liability claims.We obtained clearance to offer almost all of our medical device products that require FDA clearance through the FDA's 510(k) premarket notificationclearance process. The FDA's 510(k) process, much like other foreign premarket regulatory review processes to which our devices are subject, seldomrequires clinical data. As a result, we currently lack the breadth of published long-term clinical data supporting the safety and effectiveness of our products,devices and tissue that might have been generated in connection with a U.S. PMA-like application. For these reasons, spine surgeons may be slow to adopt ourproducts; we may not have comparative data that our competitors have or are generating and we may be subject to greater regulatory and product liabilityrisks. Further, future patient studies or clinical experience may indicate that treatment with our products does not improve patient outcomes. Such resultswould reduce demand for our products, affect our ability to have sustainable reimbursement for our products from third-party payers, significantly reduceour ability to achieve expected revenues and could prevent us from sustaining or increasing profitability. Moreover, if future results and experience indicate thatour products cause unexpected or25Table of Contentsserious complications or other unforeseen negative effects, we could be subject to significant legal liability and harm to our business reputation. The spinemedical device market has been particularly prone to potential product liability claims that are inherent in the testing, manufacture and sale of medical devicesand products for spine surgery procedures.A product liability or other damages claim, product recall or product misuse, regardless of the ultimate outcome, could require us to spend significanttime and money in litigation or to pay significant damages or costs and could seriously harm our business. Any product liability claim brought against us,with or without merit, could result in the increase of our product liability insurance rates or the inability to secure coverage in the future. In addition, if ourproduct liability insurance proves to be inadequate to pay a damage award, we may have to pay the excess out of our cash reserves which may harm ourfinancial condition. If longer-term patient results and experience indicate that our products or any component cause tissue damage, motor impairment or otheradverse effects, we could be subject to significant liability. Finally, even a meritless or unsuccessful product liability claim could harm our reputation in theindustry, lead to significant legal fees and could result in the diversion of management's attention from managing our business. A product liability or otherdamages claim, product recall, or product misuse involving any of our products could also materially and adversely damage our reputation and affect ourability to attract and retain customers, irrespective of whether or not the claim or recall was meritorious.If we or our suppliers fail to comply with the FDA's quality system regulations or equivalent global regulations and standards, themanufacture and processing of our products could be delayed and we may be subject to an enforcement action by the FDA or other governmentagencies.We and our suppliers are required to comply with the FDA's quality system regulations, and other applicable standards and requirements, which coverthe methods and documentation of the design, testing, production or processing, control, quality assurance, labeling, packaging, storage and shipping of ourproducts. The FDA and other regulatory bodies enforce compliance with regulatory requirements and standards through periodic inspections. If we or one ofour suppliers fail an inspection or if any corrective action plan is not sufficient, the release of our products could be delayed. We have undergone FDA andother regulatory body's inspections regarding our allograft business and FDA inspections regarding our medical device activities. In connection with theseinspections as well as prior inspections, regulatory agencies have requested minor corrective actions, which we have implemented. There can be no assurancethe FDA will not subject us to further enforcement action and the FDA and other regulatory agencies may impose additional inspections at any time.Additionally, we are the legal manufacturer of record for the products that are distributed and labeled by NuVasive, regardless of whether the productsare manufactured by us or our suppliers. Thus, a failure by us or our suppliers to comply with applicable regulatory requirements can result in enforcementaction against us by the FDA, which may include any of the following sanctions:•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) clearance or premarket approval of new products;•withdrawing 510(k) clearance or premarket approvals that are already granted; and•criminal prosecution.We or our suppliers may be the subject of claims for non-compliance with FDA regulations in connection with the processing or distribution ofallograft products.It is possible that allegations may be made against us or against donor recovery groups or tissue banks, including those with which we have acontractual relationship, claiming that the acquisition or processing of tissue for allograft products does not comply with applicable FDA regulations or otherrelevant statutes and regulations. Allegations like these could cause regulators or other authorities to take investigative or other action against us, or could causenegative publicity for us or our industry in general. These actions or any negative publicity could cause us to incur substantial costs, divert the attention ofour management from our business, harm our reputation and cause the market price of our shares to decline.Any claims relating to our making improper payments or providing improper gifts or benefits to physicians or other potential violations of lawsor regulations governing interactions between us and healthcare professionals and our involvement in federal healthcare programs could be timeconsuming and costly.Our relationship with healthcare professionals, such as physicians, hospitals and those that may market our products (e.g., distributors, etc.), aresubject to scrutiny under various state and federal laws, rules and regulations (e.g., anti-kickback statute,26Table of Contentsself-referral/Stark laws, false claims, etc.), often referred to collectively as healthcare fraud and abuse laws. These laws are broad in scope and are subject toevolving interpretation, which could require us to incur substantial costs to monitor compliance or to alter our practices if they are found not to be incompliance. Violations of these laws may be punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion fromparticipation in governmental healthcare programs. Despite implementation of a comprehensive global healthcare compliance program, we cannot provideassurance that any of the healthcare fraud and abuse laws will not change or be interpreted in the future in a manner which restricts or adversely affects ourbusiness activities or relationships with healthcare professionals nor can we make any assurances that authorities will not challenge or investigate our currentor future activities under these laws.In recent years, both the United States and foreign government regulators have increased regulation, enforcement, inspections and governmentalinvestigations of the medical device industry, including increased United States government oversight and enforcement of the FCPA. Despite implementation ofa comprehensive global healthcare compliance program, we may be subject to more regulation, enforcement, inspections and investigations by governmentalauthorities in the future. Whenever the United States or another foreign governmental authority concludes that we are not in compliance with applicable laws orregulations, such governmental authority can impose fines, delay or suspend regulatory clearances, institute proceedings to detain or seize our products, issuea recall, impose operating restrictions, exclude or debar us from federal healthcare programs, impose compliance obligations, enjoin future violations andassess civil penalties against us or our officers or employees, and can recommend criminal prosecution to the DOJ. Any of the foregoing actions could result indecreased sales as a result of negative publicity, and could have a material adverse effect on our financial condition, results of operations and prospects.Although physicians are permitted to use medical devices for indications other than those cleared or approved by the FDA based on their medicaljudgment, we are prohibited from promoting products for such off-label uses. We market our products and provide promotional materials and trainingprograms to physicians regarding the use of our products. Although we believe our marketing, promotional materials and training programs for physicians donot constitute promotion of unapproved uses of our products, if it is determined that our marketing, promotional materials or training programs constitutepromotion of unapproved uses, we could be subject to significant fines in addition to regulatory enforcement actions, including the issuance of a warningletter, injunction, seizure and criminal penalty.In addition to the sanctions for noncompliance described above, commencement of an enforcement proceeding, inspection or investigation could divertsubstantial Management attention from the operation of our business, as well as could result in a material adverse effect on the market price of our commonstock and on our business, results of operations and financial condition.For example, during the second quarter of 2013, we received a federal administrative subpoena from the OIG in connection with an investigation intopossible false or otherwise improper claims submitted to Medicare and Medicaid. Responding to the subpoena requests and investigation requires an allocationof resources, including management time and attention. If we were to become the subject of an enforcement action, including any action resulting from theinvestigation by the OIG, it could result in negative publicity, penalties, fines, the exclusion of our products from reimbursement under federally-fundedprograms and/or prohibitions on our ability to sell our products, which could have an adverse effect on our results of operations and financial condition.Additionally, we must comply with a variety of other laws, such as the (i) HIPAA and the HITECH Act which protects the privacy of individuallyidentifiable healthcare information; (ii) the Physician Payment Sunshine Act which requires medical device companies to begin reporting all compensation,gifts and benefits provided to certain healthcare professionals in 2013; and (iii) the Federal Trade Commission Act and similar laws regulating advertisementand consumer protections.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 their intermediaries from makingimproper payments to non-U.S. officials for the purpose of obtaining or retaining business. The FCPA also imposes accounting standards and requirementson publicly traded U.S. corporations and their foreign affiliates, which are intended to prevent the diversion of corporate funds to the payment of bribes andother improper payments, and to prevent the establishment of “off books” slush funds from which such improper payments can be made. Because of thepredominance of government-sponsored healthcare systems around the world, many of our customer relationships outside of the United States are withgovernmental entities and are therefore subject to such anti-bribery laws. Our internal control policies and procedures may not always protect us from recklessor criminal acts committed by our employees or agents. Violations of these laws, or allegations of such violations, could disrupt our operations, involvesignificant Management distraction and result in a material adverse effect on our business, results of operations and financial condition. We also could suffersevere penalties, including criminal and civil penalties, disgorgement and other remedial measures, including further changes or enhancements to ourprocedures, policies and controls, as well as potential personnel changes and disciplinary actions.27Table of ContentsFurthermore, we are subject to the export controls and economic embargo rules and regulations of the United States, including, but not limited to, theExport Administration Regulations and trade sanctions against embargoed countries, which are administered by the Office of Foreign Assets Control within theDepartment of the Treasury, as well as the laws and regulations administered by the Department of Commerce. These regulations limit our ability to market,sell, distribute or otherwise transfer our products or technology to prohibited countries or persons. A determination that we have failed to comply, whetherknowingly or inadvertently, may result in substantial penalties, including fines and enforcement actions and civil and/or criminal sanctions, the disgorgementof profits and the imposition of a court-appointed monitor, as well as the denial of export privileges, and may have an adverse effect on our reputation.These and other factors may have a material adverse effect on our international operations or on our business, results of operations and financialcondition generally.Risks Related to Our Financial Results and Need for FinancingWe may be unable to grow our revenue or earnings as anticipated, which may have a material adverse effect on our future operating results.We have experienced rapid growth since our inception, and have increased our revenues from $38.4 million in 2004, the year of our initial publicoffering, to approximately $685.2 million in 2013. Our ability to achieve future growth will depend upon, among other things, the success of our growthstrategies, which we cannot assure will be successful. In addition, we may have more difficulty maintaining our prior rate of growth of revenues or recentlevels of profitability and cash flow. Our future success will depend upon various factors, including the strength of our brand image, the market success ofour current and future products, competitive conditions and our ability to manage increased revenues, if any, or implement our growth strategy. In addition,we anticipate significantly expanding our infrastructure and adding personnel in connection with our anticipated growth, which we expect will cause ourselling, general and administrative expenses to increase in absolute dollars and as a percentage of revenue. Because these expenses are generally fixed,particularly in the short-to-medium term, our operating and financial results may be adversely impacted if we do not achieve our anticipated growth.Future deterioration or prolonged difficulty in worldwide economic conditions may adversely affect our liquidity and the liquidity of ourcustomers.As of December 31, 2013, we had approximately $326.1 million in cash, cash equivalents and investments in marketable securities. In May 2012, weentered into an escrow arrangement in connection with the Medtronic litigation and have transferred $113.3 million of cash into a restricted escrow account tosecure the amount of judgment, plus prejudgment interest, during the pendency of our appeal of the judgment. This escrow arrangement has significantlyreduced the liquidity available to run or grow our business. Additionally, as a result of the June 2013 ruling, we will be required to escrow funds to secureaccrued royalties, estimated at $21 million to date, and ongoing royalties.We have historically invested our cash primarily in U.S. government sponsored entities and U.S. treasuries, corporate debt, and money market funds.Certain of these investments are subject to general credit, liquidity and other market risks. The general condition of the financial markets and the economymay exacerbate these risks and may affect the value of our current investments and restrict our ability to access the capital markets or even our own funds.The liquidity of our customers and suppliers may also be affected by adverse global economic conditions. The economic crisis in 2008 and 2009 andthe related worldwide financial industry turmoil caused extreme disruption in the financial markets, including severely diminished liquidity and creditavailability. Although these conditions have improved, we continue to monitor the creditworthiness of our customers and suppliers. If our suppliers experiencecredit or liquidity problems, important sources of raw materials or manufactured goods may be affected. If our customers' liquidity and creditworthiness isnegatively impacted by the condition of the economy, our ability to collect on our outstanding invoices and our collection cycles may be adversely affected.The sale of our 2.75% Senior Convertible Notes due 2017 significantly increased our amount of long-term debt, and our financial conditionand results of operations could be adversely affected if we do not efficiently manage our liabilities.In June 2011, we issued $402.5 million aggregate principal amount of our 2.75% Senior Convertible Notes due in 2017 (the 2017 Notes). As a result ofthe sale of the 2017 Notes, we have a substantial amount of long-term debt. Our maintenance of such debt could adversely affect our financial condition andresults of operations.In addition, there are a large number of shares of common stock reserved for issuance upon the potential conversion of our 2017 Notes and our Series APreferred Stock that may be available for future sale and the sale of these shares may depress the market price of our common stock.28Table of ContentsOur future effective tax rates could be affected by the allocation of our income among different geographic regions, which could affect ourfuture operating results, financial condition and cash flows.We are subject to various taxes in the United States and many foreign jurisdictions and states. Significant judgment is required to determine and estimateour worldwide tax liabilities. Our effective income tax rates have recently been and could in the future be adversely affected by changes in tax laws orinterpretations of those tax laws, by stock-based compensation and other non-deductible expenses, by changes in the mix of earnings in countries withdiffering statutory tax rates, or by changes in the valuation of our deferred tax assets and liabilities.During 2013, we began work on a Globalization Initiative which became effective in January 2014. The initiative involved establishing new internationaloperations and entering into new intercompany transfer pricing arrangements, including the licensing of intangibles. We intend to continue to streamline ourinternational operations to better align with and support our international business activities and markets through changes in how we develop, license and useour intangible property and how we structure our international procurement and customer service functions. We anticipate a negative impact to our effective taxrate over the next several years while achieving an overall reduction to our effective tax rate over the longer term. There can be no assurance that the taxingauthorities of the jurisdictions in which we operate or will operate or to which we are otherwise deemed to have sufficient tax presence will not challenge the taxbenefits that we ultimately expect to realize as a result of implementing the new structure. In addition, future changes to U.S. or non-U.S. tax laws, includingproposed legislation to reform the U.S. taxation of international business, could negatively impact the anticipated tax benefits of the proposed new structure.Any long term benefits to our tax rate will also depend on our ability to achieve our anticipated international growth projections and to operate our business in amanner consistent with the new structure. If we do not operate our business consistent with the new structure and applicable tax provisions, we may fail toachieve the financial efficiencies that we anticipate as a result of the new structure and our future operating results and financial condition may be negativelyimpacted. Finally, we may be subject in the future to examination of our income tax returns by the Internal Revenue Service and other taxing authorities whichmay result in the assessment of additional income taxes. Unanticipated outcomes of such potential examinations could have a material adverse effect on ourfinancial condition or results of operations.Risks Related to the Securities Markets and Ownership of Our Common StockWe expect that the price of our common stock will fluctuate substantially, potentially adversely affecting the ability of investors to sell theirshares.The market price of our common stock has been and may continue to be subject to wide fluctuations. For example, the closing price for our stock on thelast day of the past four quarters was: $32.33 on December 31, 2013, $24.49 on September 30, 2013, $24.79 on June 30, 2013 and $21.31 on March 31,2013. Fluctuation in the stock price may occur due to many factors, including:•general market conditions and other factors related to the economy or otherwise, including factors unrelated to our operating performance or theoperating performance of our competitors. These conditions might include people’s expectations, favorable or unfavorable, as to the likely unit growthof the spine sector;•negative stock market reactions to the results of litigation;•negative publicity regarding spine surgeon’s practices or outcomes, whether warranted or not, that cast the sector in a negative light;•the introduction of new products or product enhancements by us or our competitors;•changes in the availability of third-party reimbursement in the United States or other countries;•disputes or other developments with respect to intellectual property rights or other potential legal actions;•our ability to develop, obtain regulatory clearance or approval for, and market new and enhanced products on a timely basis;•quarterly variations in our or our competitor’s results of operations;•sales of large blocks of our common stock, including sales by our executive officers and directors;•announcements of technological or medical innovations for the treatment of spine pathology;•changes in governmental regulations or in the status of our regulatory approvals, clearances or applications;29Table of Contents•the acquisition or divestiture of businesses, products, assets or technology;•litigation, including intellectual property litigation and any associated negative verdicts or ruling;•announcements of actions by the FDA or other regulatory agencies; and•changes in earnings estimates or recommendations by us or by securities analysts.Market price fluctuations may negatively affect the ability of investors to sell our shares at consistent prices.Anti-takeover provisions in our organizational documents and Delaware law may discourage or prevent a change of control, even if anacquisition would be beneficial to our stockholders, which could affect our stock price adversely and prevent attempts by our stockholders toreplace or remove our current management.Our certificate of incorporation and bylaws contain provisions that could delay or prevent a change of control of our company or changes in our boardof directors that our stockholders might consider favorable. Some of these provisions:•authorize the issuance of preferred stock which can be created and issued by the board of directors without prior stockholder approval, with rightssenior to those of the common stock;•provide for a classified board of directors, with each director serving a staggered three-year term;•provide that our stockholders may remove our directors only for cause;•prohibit our stockholders from filling board vacancies, calling special stockholder meetings, or taking action by written consent;•prohibit our stockholders from making certain changes to our certificate of incorporation or bylaws except with 66 2/3% stockholder approval; and•require advance written notice of stockholder proposals and director nominations.In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain business combinationswith stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our certificate of incorporation, our bylaws andDelaware law could make it more difficult for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposedby our then-current board of directors, including delay or impede a merger, tender offer, or proxy contest involving our company. Any delay or prevention of achange of control transaction or changes in our board of directors could cause the market price of our common stock to decline.We do not intend to pay cash dividends.We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use inthe operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. In addition, the terms of any future debtor credit facility may preclude us from paying any dividends. As a result, capital appreciation, if any, of our common stock will be our stockholders’ sourceof potential gain for the foreseeable future.Item 1B. Unresolved Staff CommentsNone.30Table of ContentsItem 2.PropertiesAs of December 31, 2013, we operated the following facilities: Description of UseSquare Footage Location Lease TermCorporate office and training facilities (1)145,765 San Diego, CA From 2008 to 2023Corporate office facilities62,367 San Diego, CA From 2012 to 2014Fulfillment and warehouse operations100,000 Memphis, TN OwnedOffice and training facilities63,761 Paramus, NJ From 2010 to 2020Office facilities10,579 Columbia, MD From 2006 to 2017Manufacturing facilities36,060 Dayton, OH From 2013 to 2017Office facilities800 Las Vegas, NV From 2013 to 2014Office facilities2,073 Puerto Rico From 2011 to 2018Office facilities7,210 UK From 2013 to 2023Office facilities5,191 Japan From 2013 to 2015Office facilities4,456 Singapore From 2011 to 2014Office facilities8,588 Australia From 2009 to 2015Office facilities and warehouse7,383 Germany From 2009 to 2015Office facilities1,076 Italy From 2012 to 2019Office facilities1,851 Malaysia From 2011 to 2014Office facilities753 Spain From 2013 to 2018 (1)Our corporate headquarters.Item 3.Legal Proceedings.Medtronic Sofamor Danek USA, Inc. LitigationAs reported by us previously, Warsaw Orthopedic, Inc., Medtronic Sofamor Danek USA, Inc. and other Medtronic related entities (collectively,Medtronic), on August 18, 2008, filed a patent infringement lawsuit against NuVasive in the United States District Court for the Southern District ofCalifornia, alleging that certain of NuVasive’s products or methods, including the XLIF® procedure, infringe, or contribute to the infringement of, twelve U.S.patents. Three of the patents were later withdrawn by Medtronic leaving the following nine patents in the lawsuit: Nos. 5,860,973; 5,772,661; 6,936,051;6,936,050; 6,916,320; 6,945,933; 6,969,390; 6,428,542; 6,592,586 assigned or licensed to Medtronic (Medtronic Patents).NuVasive counterclaimed alleging that NuVasive’s U.S. Patent Nos. 7,207,949; 7,582,058; and 7,470,236 are infringed by Medtronic’s NIM-EclipseSystem and accessories and Quadrant products, and DLIF (Direct Lateral Interbody Fusion) surgical technique.Given the number of patents asserted in the litigation, the first phase of the case included three Medtronic patents and one NuVasive patent. Trial on thefirst phase of the case began in August 2011 and on September 20, 2011, a jury from the District Court, delivered an unfavorable verdict against NuVasivewith respect to three Medtronic patents and a favorable verdict with respect to the one NuVasive patent. The jury awarded monetary damages of approximately$101.2 million to Medtronic, which includes lost profits and back royalties (the 2011 verdict). Medtronic's subsequent motion for a permanent injunction wasdenied by the District Court on January 26, 2012. On March 19, 2012, the District Court issued an order granting prejudgment interest, and on June 11,2013, the District Court ruled on the ongoing royalty rates (the June 2013 ruling). On August 20, 2013, NuVasive and Medtronic filed their respective noticesof appeal, and the appeal is now proceeding before the U.S. Court of Appeals for the Federal Circuit. In addition, the Company entered into an escrowarrangement in 2012 and transferred $113.3 million of cash into a restricted escrow account to secure the amount of judgment, plus prejudgment interest,during pendency of the appeal. These funds are included in restricted cash and investments on the Company's December 31, 2013 consolidated balance sheet.In accordance with the authoritative guidance on the evaluation of loss contingencies, during the third quarter of 2011, the Company recorded an accrualof $101.2 million for the 2011 verdict. In addition, on sales subsequent to the 2011 verdict and through March 31, 2013, the Company accrued royalties atthe royalty rates stated in the 2011 verdict. Upon receiving the District Court ruling in June 2013, the Company began accruing ongoing royalties on sales atthe royalty rates stated in the June 201331Table of Contentsruling, and recorded a charge of approximately $7.9 million to account for the difference between using the royalty rates stated in the 2011 verdict and those inthe June 2013 ruling on sales through March 31, 2013. As a result of the June 2013 ruling, we will be required to escrow funds to secure accrued royalties,estimated at $21 million to date, and ongoing royalties. NuVasive is also accruing post-judgment interest. With respect to the prejudgment interest award, theCompany, based on its own assessment as well as that of outside counsel, believes a reversal of the prejudgment interest award on appeal is probable, andtherefore, in accordance with the authoritative guidance on the evaluation of loss contingencies, the Company has not recorded an accrual for this amount,which is estimated to approximate $13 million. Additional damages, including interest, may still be awarded, and at December 31, 2013, the Company cannotestimate a range of additional potential loss.The second phase of the case pending in the Southern District of California involved one Medtronic cervical plate patent. On April 25, 2013, NuVasiveand Medtronic entered into a settlement agreement fully resolving the second phase of the case. The settlement also removes from the case the cervical platepatent (U.S. Patent No. 6,592,586) that was part of the first phase. As part of the settlement, NuVasive received a broad license to practice (i) the Medtronicpatent (U.S. Patent No. 6,916,320) that was the sole subject of the second phase of the litigation, (ii) the Medtronic patent (U.S. Patent No. 6,592,586) thatwas part of the first phase of the litigation, and (iii) each of the Medtronic patent families that collectively represent the vast majority of Medtronic's patentrights related to cervical plate technology. In exchange for these license rights, NuVasive made a one-time payment to Medtronic of $7.5 million, which amountwill be fully offset against any damage award ultimately determined to be owed by NuVasive in connection with a final resolution of the first phase of thelitigation. In addition, Medtronic will receive a royalty on certain cervical plate products sold by NuVasive, including the Helix® and Gradient® lines ofproducts. As a result of this settlement, all current patent disputes between the parties related to cervical plate technology have been resolved.In August 2012, Medtronic filed additional patent claims in the U.S. District Court for the Northern District of Indiana alleging that various NuVasivespinal implants (including its CoRoent® XL family of spinal implants) infringe U.S. Patent No. 8,021,430 (the '430 patent), that NuVasive's Osteocel® Plusbone graft product infringes U.S. Patent No. 5,676,146, and that NuVasive's XLIF® procedure and use of MaXcess IV retractor during the XLIF procedureinfringe methodology claims of U.S. Patent No. 8,251,997 (the '997 patent). The case was later transferred to the Southern District of California, and onMarch 7, 2013, NuVasive counterclaimed to allege infringement by Medtronic of U.S. Patent Nos. 8,000,782 (systems and related methods for performingsurgical procedures), 8,005,535 (systems and related methods for performing surgical procedures), 8,016,767 (a surgical access system including a tissuedistraction assembly and a tissue retraction assembly), 8,192,356 (a system for accessing a surgical target site and related methods, involving an initialdistraction system, among other things), 8,187,334 (spinal fusion implant), 8,361,156 (spinal fusion implant), D652,922 (dilator design), and D666,294(dilator design). On June 27, 2013, NuVasive filed an inter partes review petition with the U.S. Patent Office challenging U.S. Patent No. 8,444,696 (the '696Patent) which issued to Medtronic on May 21, 2013. On July 25, 2013, Medtronic amended its complaint to add a charge of infringement of the '696 Patent.The District Court has yet to determine which patents are to be tried in this phase of the case, and a trial readiness conference is scheduled for November 2014.Trial on this third phase of the case is currently scheduled to begin in December 2014. At December 31, 2013, the probable outcome of this litigation cannot bedetermined, nor can the Company estimate a range of potential loss. In accordance with the authoritative guidance on the evaluation of loss contingencies, theCompany has not recorded an accrual related to this litigation.Trademark Infringement LitigationIn September 2009, Neurovision Medical Products, Inc. (NMP) filed suit against NuVasive in the U.S. District Court for the Central District ofCalifornia (Case No. 2:09-cv-06988-R-JEM) alleging trademark infringement and unfair competition. NMP sought cancellation of NuVasive's “NeuroVision”trademark registrations, injunctive relief and damages based on NMP's common law use of the “Neurovision” mark. On November 23, 2009, the Companydenied the allegations in NMP's complaint. The matter was tried in October 2010 and an unfavorable jury verdict was delivered against the Company relatingto its use of the “NeuroVision” trade name. The verdict awarded damages to NMP of $60.0 million, which was upheld in a January 2011 judgment orderedby the District Court. NuVasive appealed the judgment and on September 10, 2012, the Court of Appeals reversed and vacated the District Court judgmentand ordered the case back to the District Court for a new trial before a different judge. On October 5, 2012, the case was reassigned to a new District Courtjudge and re-trial of the matter is currently scheduled to begin in the District Court in Spring 2014. During pendency of the appeal, NuVasive was required toescrow funds totaling $62.5 million to secure the amount of judgment, plus interest, attorney's fees and costs. As a result of the reversal of the judgment, thefull $62.5 million was released from escrow and returned to the Company. At December 31, 2013, the probable outcome of this litigation cannot bedetermined, nor can the Company estimate a range of potential loss. In accordance with the authoritative guidance on the evaluation of loss contingencies, theCompany has not recorded an accrual related to this litigation.32Table of ContentsSecurities LitigationOn August 28, 2013, a purported securities class action lawsuit was filed by Danny Popov in the U.S. District Court for the Southern District ofCalifornia naming NuVasive and certain of its current and former executive officers for allegedly making false and materially misleading statements regardingthe Company's business and financial results, specifically relating to the purported improper submission of false claims to Medicare and Medicaid. Thecomplaint asserts a putative class period stemming from October 22, 2008 to July 30, 2013. The complaint alleges violations of Sections 10(b) and 20(a) of theSecurities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder and seeks unspecified monetary relief, interest, and attorneys’ fees.The Company intends to vigorously defend against this action. At December 31, 2013, the probable outcome of this litigation cannot be determined, nor canthe Company estimate a range of potential loss.Item 4.Mine Safety Disclosures.Not applicable.PART IIItem 5.Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesCommon Stock Market PriceOur common stock is traded on the NASDAQ Global Select Market under the symbol “NUVA.” The following table presents the high and low pershare sale prices of our common stock during the periods indicated, as reported on NASDAQ. High Low2012: First Quarter$17.89 $11.25Second Quarter25.37 15.36Third Quarter25.99 19.44Fourth Quarter23.81 12.352013: First Quarter$21.46 $15.70Second Quarter24.90 19.74Third Quarter27.20 22.44Fourth Quarter33.91 23.83We had approximately 109 stockholders of record as of January 31, 2014. We believe that the number of beneficial owners is substantially greater thanthe number of record holders because a large portion of our common stock is held of record through brokerage firms in “street name.”Recent Sales of Unregistered SecuritiesDuring the fourth quarter of 2013, we did not issue any securities that were not registered under the Securities Act of 1933, as amended (the SecuritiesAct).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 ourbusiness and do not anticipate that we will declare or pay cash dividends on our capital stock in the foreseeable future.Equity Compensation Plan InformationThe following table provides certain information with respect to all of our compensation plans in effect as of December 31, 2013: 33Table of ContentsPlan CategoryNumber of Securities tobe Issued Upon Exerciseof Outstanding Option,Warrants and Rights (a) Weighted AverageExercise Price ofOutstandingOptions Warrantsand Rights (b) Number of SecuritiesRemaining Available forFuture Issuance UnderEquity CompensationPlans (excludingsecurities reflected incolumn (a)) (c) Equity Compensation Plans approved by stockholders9,126,033(1) $30.75 2,875,473(2)Equity Compensation Plans not approved bystockholders— — — Total9,126,033 $30.75 2,875,473 (1) Consists of shares subject to outstanding options and restricted stock units under our 1998 Stock Option/Stock Issuance Plan and our 2004 EquityIncentive Plan.(2)Consists of shares available for future issuance under our 2004 Equity Incentive Plan and 2004 Employee Stock Purchase Plan. As of December 31, 2013,an aggregate of 1,286,075 shares of common stock were available for issuance under the 2004 Equity Incentive Plan and 1,589,398 shares of commonstock were available for issuance under the 2004 Employee Stock Purchase Plan. The 2004 Equity Incentive Plan contains a provision for an automaticincrease in the number of shares available for grant each January until and including January 1, 2014, subject to certain limitations, by a number ofshares equal to the least of: (1) 4% of the number of shares of our common stock issued and outstanding on the immediately preceding December 31,(2) 4,000,000 shares, or (3) a number of shares set by our Board. The 2004 Employee Stock Purchase Plan contains a provision for an automatic increasein the number of shares available for grant each January until and including January 1, 2014, subject to certain limitations, by a number of shares equalto the least of: (1) 1% of the number of shares of our common stock outstanding on that date, (2) 600,000 shares, or (3) a lesser number of sharesdetermined by our Board.PERFORMANCE GRAPHThe following graph compares the cumulative total stockholder return data on our common stock with the cumulative return of (i) The NASDAQ StockMarket Composite Index, and (ii) NASDAQ Medical Equipment Index over the five year period ending December 31, 2013. The graph assumes that $100was invested on December 31, 2008 in our common stock and in each of the comparative indices. The stock price performance on the following graph is notnecessarily indicative of future stock price performance.The following graph and related information shall not be deemed “soliciting material” or be deemed to be “filed” with the SEC, nor shall suchinformation be incorporated by reference into any future filing, except to the extent that we specifically incorporate it by reference into such filing.34Table of ContentsCOMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*AMONG NUVASIVE, INC.,THE NASDAQ COMPOSITE INDEXAND THE NASDAQ MEDICAL EQUIPMENT INDEX *$100 invested on 12/31/08 in stock or index, including reinvestment of dividends.Item 6.Selected Financial Data.The selected consolidated financial data set forth in the table below has been derived from our audited financial statements. The data set forth belowshould be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited financialstatements and notes thereto appearing elsewhere in this report. 35Table of Contents Year Ended December 31, 2013(1) 2012(1) 2011(1) 2010 2009 (In thousands, except per share amounts)Statement of Operations Data: Total revenues$685,173 $620,255 $540,506 $478,237 $370,340Gross profit504,689 466,846 428,395 393,098 309,230Consolidated net income (loss)6,985 2,442 (71,021) 76,533 4,437Net income (loss) attributable to NuVasive, Inc.7,902 3,144 (69,849) 78,285 5,808Net income (loss) per share attributable to NuVasive,Inc.: Basic$0.18 $0.07 $(1.73) $1.99 $0.16Diluted$0.17 $0.07 $(1.73) $1.85 $0.15 December 31, 2013(1) 2012(1) 2011(1) 2010 2009 (In thousands)Balance Sheet Data: Cash, cash equivalents and marketable securities$326,103 $346,116 $342,223 $229,690 $204,660Working capital418,856 349,474 384,457 262,795 262,355Total assets1,179,568 1,163,785 1,123,562 802,029 652,820Senior Convertible Notes, net of current portion346,060 332,404 394,019 230,000 230,000Litigation liability93,700 101,200 — — —Other long-term liabilities17,778 18,328 17,413 16,821 58,222Noncontrolling interests (2)— 10,003 10,705 11,877 13,629Total equity604,878 537,575 494,045 434,355 296,222 (1)Consolidated statement of operations and balance sheet data for the years ended December 31, 2013, 2012 and 2011 include Impulse Monitoring fromOctober 7, 2011, the date of acquisition.(2)On June 13, 2013, the noncontrolling interest in Progentix Orthobiology, B.V. became non-redeemable and therefore was reclassified out of mezzanineequity to its own component of total equity within the Company's consolidated balance sheet.Item 7.Management’s Discussion and Analysis of Financial Condition and Results of OperationsForward-Looking Statements May Prove InaccurateYou should read the following discussion and analysis of our financial condition and results of operations in conjunction with the consolidatedfinancial statements and the notes to those statements included in this report. This discussion and analysis may contain forward-looking statementsthat involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result ofcertain factors, such as those set forth under heading “Risk Factors,” and elsewhere in this report.OverviewWe are a medical device company focused on developing minimally disruptive surgical products and procedurally integrated solutions for the spine. Ourcurrently-marketed product portfolio is focused on applications for spine fusion surgery, including biologics, a combined market estimated to exceed $8.7billion globally in 2014. Our principal product offering includes a minimally disruptive surgical platform called Maximum Access Surgery, or MAS®. TheMAS platform combines three categories of solutions that collectively minimize soft tissue disruption during spine fusion surgery, provide maximumvisualization and are designed to enable safe and reproducible outcomes for the surgeon and the patient. The platform includes our proprietary software-drivennerve detection and avoidance systems, NVM5 and NVJJB, and Intra-Operative Monitoring (IOM) support; MaXcess®, an integrated split-blade retractorsystem; and a wide variety of specialized implants. The individual components of our MAS platform,36Table of Contentsand many of our products, can also be used in open or traditional spine surgery. Our spine surgery product line offerings, which include products for thethoracolumbar and the cervical spine, are primarily used to enable access to the spine and to perform restorative and fusion procedures in a minimallydisruptive fashion. Our biologic product line offerings used to aid the spinal fusion or bone healing process include allograft (donated human tissue), OsteocelPlus®, an allograft cellular matrix containing viable mesenchymal stem cells, or MSCs, FormaGraft®, a collagen synthetic product, and AttraX®, a syntheticbone graft material, currently available commercially only in select markets outside of the United States. Our subsidiary, Impulse Monitoring, Inc. (ImpulseMonitoring) provides IOM services for insight into the nervous system during spine and other surgeries. We continue to focus significant research anddevelopment efforts to expand our MAS product platform and advance the applications of our unique technology into procedurally integrated surgicalsolutions. We have dedicated and continue to dedicate significant resources toward training spine surgeons who are new to our MAS product platform as wellas surgeons previously trained on our MAS product platform who are attending advanced training courses.Our MAS platform, with the unique advantages provided by our nerve monitoring systems, enables an innovative lateral procedure known as eXtremeLateral Interbody Fusion, or XLIF®, in which surgeons access the spine for a fusion procedure from the side of the patient’s body, rather than from the frontor back. Our MaXcess instruments provide access to the spine in a manner that affords direct visualization and our nerve monitoring systems assist surgeonsin avoiding critical nerves.At various times in the past, certain insurance providers have adopted policies of not pre-authorizing and/or providing reimbursement for the XLIFprocedure. We have worked with our surgeon customers and the North American Spine Society (NASS) who, in turn, have worked with these insuranceproviders in an effort to supply the information, explanation and clinical data they require to categorize the XLIF procedure as a procedure entitled toreimbursement under their policies. At present, the majority of insurance companies provide reimbursement for XLIF procedures. However, certain carriers,large and small, may have policies significantly limiting coverage of XLIF, Interlaminar Lumbar Interbody Fusion (ILIF), Osteocel Plus, the PCM® CervicalDisc System, Cervical interbody implants, or other procedures or products we sell. We cannot offer definitive time frames or final outcomes regarding reversalof the limiting-coverage policies, as the process is dictated by the third-party payers. To date, once pre-authorization has been received, we have not experiencedsignificant lack of payment for our procedures based on these policies.In addition, there is a downward pressure on reimbursement for IOM services such as those provided by our subsidiary ImpulseMonitoring. Significant coding changes for IOM services took effect in 2013. New Current Procedural Terminology (CPT) codes were introduced that have ledto reduced reimbursement by private payers for the professional remote oversight component of the service. Medicare patients were also subject to additionalcoding changes imposed by CMS which may restrict access to care and limit Impulse Monitoring's ability to cover, bill and collect for cases performed.Private payers may also elect to adopt these coding changes.In recent years, we have significantly expanded our product offerings relating to procedures in the cervical spine. Our cervical product offerings nowprovide a full set of solutions for cervical fusion surgery, including both allograft tissue and CoRoent® implants, as well as cervical plating and posteriorfixation products. In the fourth quarter of 2012, we received U.S. Food and Drug Administration (FDA) approval of the PCM device, a motion preserving totaldisc replacement device, which further strengthens our cervical product offerings and enables us to continue our trend of increasing our market share.Revenues. To date, the majority of our revenues have been derived from the sale of implants, biologics and disposables, and we expect this trend tocontinue for the foreseeable future. We generally loan our proprietary software-driven nerve monitoring systems and surgical instrument sets at no cost tosurgeons and hospitals that purchase disposables and implants for use in individual procedures. In addition, we place our proprietary software-driven nervemonitoring systems, MaXcess® and other MAS or cervical surgical instrument sets with hospitals for an extended period at no up-front cost to them. Ourimplants, biologics and disposables are currently sold and shipped from our primary distribution and warehousing operations facility located in Memphis,Tennessee. We generally recognize revenue for implants or disposables used upon receiving acknowledgement of a purchase order from the hospital indicatingproduct use or implantation. In addition, we sell an immaterial number of MAS instrument sets, MaXcess devices, and our proprietary software-driven nervemonitoring systems. To date, we have derived less than 5% of our total revenues from these sales.Monitoring service revenue consists of hospital based revenues and net patient service revenues and is recorded in the period the service is provided.Hospital based revenues are recorded based upon contracted billing rates. Net patient services are billed to various payers, including Medicare, commercialinsurance companies, other directly billed managed healthcare plans, employers, and individuals. We report revenues based on the amount expected to becollected.Sales and Marketing. The majority of our operations are located in the United States and the majority of our sales through 2013 have been generatedin the United States. We sell our products in the United States through a sales force comprised of exclusive independent sales agencies and directly-employedsales shareowners; both selling only NuVasive products. Our sales37Table of Contentsforce provides a delivery and consultative service to our surgeon and hospital customers and is compensated based on sales and product placements in theirterritories. Sales force commissions are reflected in our statement of operations in the sales, marketing and administrative expense line. We expect to continue toexpand our distribution channels. We are continuing our expansion of international sales efforts with the focus on European, Asian and Latin Americanmarkets. Our international sales force is comprised of directly-employed sales shareowners as well as exclusive distributors and independent sales agents.During the second quarter of 2013, we received a federal administrative subpoena from the Office of the Inspector General of the U.S. Department ofHealth and Human Services (OIG) in connection with an investigation into possible false or otherwise improper claims submitted to Medicare and Medicaid.The subpoena seeks discovery of documents for the period January 2007 through April 2013. We are working with the OIG to understand the scope of thesubpoena and to provide the requested documents. We intend to fully cooperate with the OIG's request and will provide periodic updates as informationbecomes available. Responding to the subpoena requires Management's attention and results in significant legal expense. Any adverse findings related to thisinvestigation could result in significant financial penalties against the Company.Critical Accounting PoliciesOur discussion and analysis of our financial condition and results of operations is based upon our audited consolidated financial statements, whichhave been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of these financial statementsrequires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluateour estimates including those related to bad debts, inventories, valuation of financial instruments, goodwill, intangibles, property and equipment, stock-basedcompensation, income taxes, and legal proceedings. We base our estimates on historical experience and on various other assumptions we believe to bereasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities not readilyapparent from other sources. Actual results may differ from these estimates.We believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements.Revenue Recognition. In accordance with the Securities and Exchange Commission's guidance, we recognize revenue when all four of the followingcriteria are met: (i) persuasive evidence that an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed ordeterminable; and (iv) collectability is reasonably assured. Specifically, revenue from the sale of implants and disposables is generally recognized uponacknowledgement of a purchase order from the hospital indicating product use or implantation or upon shipment to third-party customers who immediatelyaccept title. Revenue from the sale of our instrument sets is recognized upon receipt of a purchase order and the subsequent shipment to customers whoimmediately accept title.Monitoring service revenue consists of hospital based revenues and net patient service revenues and is recorded in the period the service is provided.Hospital based revenues are recorded based upon contracted billing rates. Net patient services are billed to various payers, including Medicare, commercialinsurance companies, other directly billed managed healthcare plans, employers, and individuals. We report revenues from contracted payers, includingMedicare, certain insurance companies and certain managed healthcare plans, based on the contractual rate, or in the case of Medicare, the published feeschedules. We report revenues from non-contracted payers, including certain insurance companies and individuals, based on the amount expected to becollected. The difference between the amount billed and the amount expected to be collected from non-contracted payers is recorded as a contractual allowance toarrive at net revenues. The expected revenues from non-contracted payers are based on the historical collection experience of each payer or payer group, asappropriate. In each reporting period, we review our historical collection experience for non-contracted payers and adjust our expected revenues for current andsubsequent periods accordingly.Allowance for Doubtful Accounts and Sales Return Reserve. We maintain an allowance for doubtful accounts for estimated losses resulting from theinability of our customers to make required payments. The allowance for doubtful accounts is reviewed quarterly and is estimated based on the aging ofaccount balances, collection history and known trends with current customers and in the economy in general. As a result of this review, the allowance isadjusted on a specific identification basis. An increase to the allowance for doubtful accounts results in a corresponding charge to sales, marketing andadministrative expense. If the historical data used to calculate the allowance provided for doubtful accounts does not reflect the Company’s future ability tocollect outstanding receivables or if the financial condition of customers were to deteriorate, resulting in impairment of their ability to make payments, anincrease in the provision for doubtful accounts may be required. We maintain a relatively large customer base that mitigates the risk of concentration with anyone particular customer. However, if the overall condition of the healthcare industry were to deteriorate, or if the historical data used to calculate the allowanceprovided for doubtful accounts does not accurately reflect our customer’s future failure to pay outstanding receivables, significant additional allowances couldbe required.In addition, we establish a reserve for estimated sales returns that is recorded as a reduction to revenue. This reserve is maintained to account for futurereturn of products sold in the current period. This reserve is reviewed quarterly and is estimated based on an analysis of our historical experience related toproduct returns.38Table of ContentsExcess and Obsolete Inventory. We provide an inventory reserve for estimated obsolescence and excess inventory based upon historical turnover andassumptions about future demand for our products and market conditions. Our allograft products have shelf lives ranging from two to five years and aresubject to demand fluctuations based on the availability and demand for alternative products. Our inventory, which consists primarily of disposables andspecialized implants, is at risk of obsolescence following the introduction and development of new or enhanced products. Our estimates and assumptions forexcess and obsolete inventory are reviewed and updated on a quarterly basis. The estimates we use for demand are also used for near-term capacity planningand inventory purchasing and are consistent with our revenue forecasts. Increases in the reserve for excess and obsolete inventory result in a correspondingcharge to cost of goods sold.A stated goal of our business is to focus on continual product innovation and to obsolete our own products. While we believe this provides a competitiveedge, it also results in the risk that our products and related capital instruments will become obsolete prior to sale or to the end of their anticipated useful lives.If we introduce new products or next-generation products, we may be required to dispose of existing inventory prior to the end of its estimated useful life and/orwrite off the value or accelerate the depreciation of the capital instruments.Financial Instruments and Fair Value. Inputs to valuation techniques are observable or unobservable. Observable inputs reflect market data obtainedfrom independent sources, while unobservable inputs reflect our market assumptions. These two types of inputs have created the following fair-valuehierarchy:Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.Level 3: Unobservable inputs are used when little or no market data is available.This hierarchy requires us to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value. Werecognize transfers between levels of this hierarchy based on the fair values of the respective financial instruments at the end of the reporting period in whichthe transfer occurred. Changes in fair value are recognized in earnings each period for financial instruments that are carried at fair value.The types of instruments that trade in markets that are not considered to be active, but are valued based on quoted market prices, broker or dealerquotations, or alternative pricing sources with reasonable levels of price transparency are generally classified within Level 2 of the fair value hierarchy.As more fully discussed in Note 1 to the consolidated financial statements included in this Annual Report, in June 2011, in connection with the offeringof the 2.75% Convertible Senior Notes due 2017 (the 2017 Notes), we entered into convertible note hedge transactions, and recorded an embedded conversionderivative liability and derivative asset. The fair values of these derivatives were determined using an option pricing model based on unobservable inputs andwere classified within Level 3. The significant inputs to the model included our stock price, risk free interest rate, bond yield, credit rating, and expectedvolatility of our stock price. On September 28, 2011, upon obtaining stockholder approval to increase the number of authorized shares of our common stock,in accordance with authoritative literature, the derivative asset and liability were marked to fair value and reclassified to stockholders’ equity.Certain contingent consideration liabilities are classified within Level 3 of the fair value hierarchy because they use unobservable inputs. For thoseliabilities, fair value is determined using a probability-weighted discounted cash flow model, the significant inputs which are not observable in the market.Property and Equipment. Property and equipment is carried at cost less accumulated depreciation. Depreciation is computed using the straight-linemethod based on estimated useful lives. Effective January 1, 2011, we changed the estimated useful lives of certain surgical instrument sets that we loan to orplace with hospitals from three to four years. If we introduce new products or next-generation products, we may be required to dispose of surgical instrumentsets prior to the end of their estimated useful life and/or write off the value or accelerate the depreciation of the these assets. Maintenance and repairs on allproperty and equipment are expensed as incurred.Valuation of Goodwill and Intangible Assets. Our goodwill represents the excess of the cost over the fair value of net assets acquired from ourbusiness combinations. Our intangible assets are comprised primarily of purchased technology, in-process research and development, customer relationships,manufacturing know-how and trade secrets, and trade name and trademarks. We make significant judgments in relation to the valuation of goodwill andintangible assets resulting from business combinations and asset acquisitions.The determination of the value of goodwill and intangible assets arising from business combinations and asset acquisitions requires extensive use ofaccounting estimates and judgments to allocate the purchase price to the fair value of the net tangible39Table of Contentsand intangible assets acquired, including in-process research and development (IPR&D). Goodwill and IPR&D are not amortized. The value and useful livesassigned to other purchased intangible assets impact future amortization.Authoritative guidance requires that goodwill and intangible assets with indefinite lives be assessed for impairment using fair value measurementtechniques on an annual basis or more frequently if facts and circumstance warrant such a review. For purposes of assessing the impairment of goodwill, weestimate the value of our primary reporting unit using our market capitalization as the best evidence of fair value. For other reporting units, we estimate the fairvalue using the income approach valuation methodology based on discounted cash flows. If the carrying amount of a reporting unit exceeds its fair value, thena goodwill impairment test is performed to measure the amount of the impairment loss, if any. During 2013, consistent with the continued integration ofImpulse Monitoring into our core business, discrete financial information for Impulse Monitoring is no longer available which resulted in the combination ofthe former Impulse Monitoring reporting unit into our primary reporting unit. As such, in 2013, we had two reporting units; the Progentix reporting unit andthe remainder of the Company. During the years ended December 31, 2013 and 2011, we did not record any impairment charges related to goodwill. During thefourth quarter of 2012, we updated our discounted cash flow valuation model for Impulse Monitoring and based on Management's current estimates ofrevenues and expenses, related cash flows and the discount rate used in the model, the estimated fair value of the then Impulse Monitoring's reporting unit atthe time was less than its carrying value. Management's estimates of revenues and related cash flows reflected the impacts of the significant coding changes forIOM services which took effect in 2013 and resulted in reduced reimbursement for IOM services. In accordance with the authoritative guidance, as ofDecember 31, 2012, we recorded an impairment charge to Impulse Monitoring's goodwill of $8.3 million.Additionally, during the years ended December 31, 2012 and 2011, we recorded an impairment charge of $1.4 million and $17.6 million, respectively,related to the IPR&D recorded for the PCM® device acquired from Cervitech in 2009. The primary factor contributing to this impairment charge was thereduction in Management’s revenue estimate and the related decrease to the estimated cash flows for this device. The PCM device received U.S. FDA approvalin late 2012.We evaluate our intangible assets with finite lives for indications of impairment whenever events or changes in circumstances indicate that the carryingvalue may not be recoverable. Intangible assets consist of purchased technology, trademarks and trade names, customer relationships and agreements,manufacturing know-how and other intangibles and are amortized on a straight-line basis over their estimated useful lives of one to 17 years. Factors thatcould trigger an impairment review include significant under-performance relative to expected historical or projected future operating results, significantchanges in the manner of our use of the acquired assets or the strategy for our overall business or significant negative industry or economic trends. If thisevaluation indicates that the value of the intangible asset may be impaired, we make an assessment of the recoverability of the net carrying value of the assetover its remaining useful life. If this assessment indicates that the intangible asset is not recoverable, based on the estimated undiscounted future cash flows ofthe technology over the remaining amortization period, we reduce the net carrying value of the related intangible asset to fair value and may adjust theremaining amortization period. During the year ended December 31, 2011, we recorded an impairment charge of $0.6 million related to developed technologyacquired from Cervitech in 2009. The primary factor contributing to this impairment charge was the reduction in Management’s revenue estimate and therelated decrease to the estimated cash flows for this device.Significant judgment is required in the forecasts of future operating results that are used in the discounted cash flow valuation models. It is possible thatplans may change and estimates used may prove to be inaccurate. If our actual results, or the plans and estimates used in future impairment analyses, arelower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges.Valuation of Stock-Based Compensation. The estimated fair value of stock-based awards exchanged for shareowner (employee) and non-employeedirector services are expensed over the requisite service period. Awards issued to non-employees (excluding non-employee directors) are recorded at their fairvalue as determined in accordance with authoritative guidance, and are periodically revalued as the options vest and are recognized as expense over the relatedservice period.For purposes of calculating stock-based compensation, we estimate the fair value of stock options and shares issued under the Employee StockPurchase Plan using a Black-Scholes option-pricing model. The determination of the fair value of stock-based payment awards utilizing the Black-Scholesmodel is affected by our stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends.The expected volatility is based on the historical volatility of our common stock over the most recent period commensurate with the estimated expected term ofthe stock options. The expected life of the stock options is based on historical and other economic data trended into the future. The risk-free interest rateassumption is based on observed interest rates appropriate for the expected terms of our stock options. The dividend yield assumption is based on our historyand expectation of no dividend payouts. The fair value of restricted stock units granted is based on the market price of our common stock on the date of grant.40Table of ContentsThe fair value of performance-based restricted stock units (PRSUs) that have pre-defined Company-specific performance criteria is determined based onthe stock price at the date of grant. We recognize the stock-based compensation expense on PRSUs granted based on the probability of achieving the specifiedperformance criteria, as defined in the Performance Award agreements. Expense is recognized using the accelerated method over the remaining recognitionperiod based on these probabilities. Due to the nature of the performance goals, assessing the probability of achieving those goals is a highly subjective processthat requires judgment. Additionally, certain of our PRSUs are earned based on the achievement of pre-defined market conditions. The fair value of PRSUswith market conditions is estimated on the date of grant using a Monte Carlo valuation model and key assumptions are expected volatility and the risk freeinterest rate. We collectively refer to PRSUs with both Company-specific performance criteria and pre-defined market conditions as Performance Awards.If factors change and we employ different assumptions, stock-based compensation expense may differ significantly from what we have recorded in thepast. If there is a difference between the assumptions used in determining stock-based compensation expense and the actual factors which become known overtime, specifically with respect to anticipated forfeitures, we may change the input factors used in determining stock-based compensation costs for futuregrants. These changes, if any, may materially impact our results of operations in the period such changes are made.Accounting for Income Taxes. Significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilitiesand the valuation allowance recorded against our net deferred tax assets. Deferred tax assets and liabilities are determined using the enacted tax rates in effect forthe years in which those tax assets are expected to be realized. A valuation allowance is established when it is more likely than not the future realization of all orsome of the deferred tax assets will not be achieved. The evaluation of the need for a valuation allowance is performed on a jurisdiction-by-jurisdiction basis,and includes a review of all available positive and negative evidence. Factors reviewed include projections of pre-tax book income for the foreseeable future,determination of cumulative pre-tax book income after permanent differences, earnings history, and reliability of forecasting.At December 31, 2013, as a result of three years of cumulative profits and projected future taxable income, we determined that it was more likely thannot that most of our foreign deferred tax assets would be realized and, accordingly, we reversed a valuation allowance totaling approximately $2.2 million thatwas recorded against these deferred tax assets.As a result of the litigation award accrual totaling $101.2 million recorded in the third quarter of 2011, we evaluated the need for a valuation allowanceon our deferred tax assets by reviewing all available positive and negative evidence. Based on our review, we concluded that it was more likely than not that wewould be able to realize the benefit of our U.S. federal deferred tax assets and our deferred tax assets for all states except California in the future. Thisconclusion was primarily based on historical and projected operating performance, as well as our expectation that our operations will generate sufficient taxableincome in future periods to realize the tax benefits associated with the federal deferred tax assets well within the statutory carryover periods. Accordingly, wedid not establish a valuation allowance on our federal or non-California state deferred tax assets as of December 31, 2013 or 2012.Based on this same evidence and consideration of the state of California’s past suspension of the use of net operating loss carryforwards, the state ofCalifornia’s statutory carryover periods and our apportionment election beginning in 2011, we concluded that it is more likely than not that we will not be ableto utilize our California deferred tax assets. Therefore, we established a full valuation allowance on our California deferred tax assets as of December 31, 2011.Accordingly, the income tax benefit reported for the year ended December 31, 2011, includes income tax expense totaling $4.8 million in connection with theestablishment of this valuation allowance. A full valuation allowance on our California deferred tax assets continues to exist as of December 31, 2013.We will continue to assess the need for a valuation allowance on our deferred tax assets by evaluating both positive and negative evidence that may exist.Any adjustment to the net deferred tax asset valuation allowance would be recorded in the statement of operations for the period that the adjustment isdetermined to be required.Legal Proceedings. We are involved in a number of legal actions arising out of the normal course of our business. The outcomes of these legal actionsare not within our complete control and may not be known for prolonged periods of time. In some actions, the claimants seek damages as well as other relief,including injunctions barring the sale of products that are the subject of the lawsuit, that could require significant expenditures or result in lost revenues. Inaccordance with authoritative guidance, we disclose information regarding each material claim where the likelihood of a loss contingency is probable orreasonably possible. An estimated loss contingency is accrued in our financial statements if it is both probable that a liability has been incurred and theamount of the loss can be reasonably estimated. If a loss is reasonably possible and can be reasonably estimated, the estimated loss or range of loss isdisclosed in the notes to the consolidated financial statements. In most cases, significant judgment is required to estimate the amount and timing of a loss to berecorded. Our significant legal proceedings are discussed in Note 11 to the consolidated financial statements included in this Annual Report. While it is notpossible to predict the outcome for the matters41Table of Contentsdiscussed in Note 11 to the consolidated financial statements, we believe it is possible that costs associated with them could have a material adverse impact onour consolidated earnings, financial position or cash flows.The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particulartransaction is specifically dictated by GAAP. See our consolidated financial statements and notes thereto included in this report, which contain accountingpolicies and other disclosures required by GAAP.Results of OperationsRevenue Year Ended December 31, 2012 to 2013 2011 to 2012 2013 2012 2011 $ Change % Change $ Change % Change (Dollars in thousands)Spine Surgery Products$530,370 $471,186 $430,970 Biologics115,633 110,179 99,759 Monitoring Service39,170 38,890 9,777 Total revenue$685,173 $620,255 $540,506 $64,918 10% $79,749 15%Our Spine Surgery Product line offerings, which include products for the thoracolumbar spine, the cervical spine, and a set of motion preservationproduct offerings, are primarily used to enable access to the spine and to perform restorative and fusion procedures in a minimally disruptive fashion. OurBiologic product line offerings include allograft (donated human tissue), FormaGraft, a collagen synthetic product, Osteocel Plus, an allograft cellular matrixcontaining viable mesenchymal stem cells, or MSCs, and AttraX, a synthetic bone graft material currently available commercially only in select marketsoutside of the U.S., all used to aid the spinal fusion process. Our Monitoring Service line offering includes hospital-based revenues and net patient servicerevenues related to IOM services performed.The continued adoption of minimally invasive procedures for spine has led to the expansion of our innovative procedures. In addition, increased marketacceptance in our international markets contributed to the increase in revenues noted for the periods presented. We expect continued adoption of our innovativeminimally invasive procedures and deeper penetration into existing accounts and our newer international markets as our sales force executes on our strategy ofselling the full mix of our products. However, the continued consolidation and increased purchasing power of our hospital customers and group purchasingorganizations, the proliferation of physician-owned distributorships, recent changes in the public and private insurance markets regarding reimbursement,and ongoing policy and legislative changes in the United States have created less predictability in the lumbar portion of the spine market and have limited thespine market’s procedural growth rate. Accordingly, we believe that our growth in revenue in 2014 will come primarily from market share gains in the shifttoward less invasive spinal surgery and international growth. We expect monitoring service revenue from IOM services to be slightly down relative to thecurrent year.Our total revenues increased $64.9 million in 2013 compared to 2012 and $79.7 million in 2012 compared to 2011, representing total revenue growthof 10% and 15%, respectively. To date, foreign currency fluctuations have not materially impacted our revenues.Revenue from our Spine Surgery Products increased $59.2 million, or 13%, in 2013 compared to 2012 and $40.2 million, or 9%, in 2012 compared to2011. These increases resulted from increases in volume of approximately 15% and 11% for the years ended December 31, 2013 and 2012 respectively,compared to the prior periods, offset by small unfavorable changes in price of approximately 2% and 1%, respectively, for the same periods.Revenue from Biologics increased $5.5 million, or 5%, in 2013 compared to 2012, and $10.4 million, or 10%, in 2012 compared to 2011. Theseincreases resulted from increases in volume of approximately 6% and 11% for the years ended December 31, 2013 and 2012, respectively, compared to theprior periods, offset by small unfavorable changes in price of approximately 1% for the same periods.Revenue from Monitoring Services increased $0.3 million in 2013 compared to 2012. This increase resulted primarily from increases in volume offsetby unfavorable changes in reimbursement rates during the year ended December 31, 2013 compared to 2012. During the year ended December 31, 2012,revenue from Monitoring Services increased $29.1 million compared to 2011 as a result of the acquisition of Impulse Monitoring in October of 2011.42Table of ContentsCost of Goods Sold, excluding amortization of purchased technology Year Ended December 31, 2012 to 2013 2011 to 2012 2013 2012 2011 $ Change % Change $ Change % Change (Dollars in thousands)Cost of Goods Sold$180,484 $153,409 $112,111 $27,075 18% $41,298 37%% of total revenue26% 25% 21% Cost of goods sold consists primarily of raw materials, labor and overhead associated with product manufacturing, purchased goods, inventory-relatedcosts and royalty expense, as well as the cost of providing IOM services, which includes personnel and physician oversight costs.Cost of goods sold as a percentage of revenue increased during the year ended December 31, 2013 compared to 2012. The increase was a result of boththe medical device excise tax effective January 1, 2013 of approximately 1% and the June 2013 ruling related to the Medtronic litigation that determined theongoing royalty rates and resulted in the recording of a charge of approximately $7.9 million in the second quarter of 2013. This charge accounts for thedifference in using the royalty rates stated in the September 2011 verdict and those in the June 2013 ruling on sales through March 31, 2013 (see Note 11 to theConsolidated Financial Statements included in this Annual Report). Cost of goods sold as a percentage of revenue increased in 2012 over 2011 primarilyrelated to higher costs as a percentage of revenue with monitoring service revenues of approximately 2% and estimated royalty expense accruals associated withthe judgment in the Medtronic litigation of approximately 1%.On a long term basis, we expect cost of goods sold, as a percentage of revenue, to decrease moderately.Operating ExpensesSales, Marketing and Administrative Year Ended December 31, 2012 to 2013 2011 to 2012 2013 2012 2011 $ Change % Change $ Change % Change (Dollars in thousands)Sales, Marketing andAdministrative$420,064 $372,416 $349,052 $47,648 13% $23,364 7%% of total revenue61% 60% 65% Sales, marketing and administrative expenses consist primarily of compensation, commission and training costs for shareowners engaged in sales,marketing and customer support functions; distributor commissions; depreciation expense for surgical instrument sets; shipping costs; surgeon trainingcosts; shareowner (employee) related expenses for our administrative functions; and third-party professional service fees.As a percentage of revenue, sales, marketing and administrative expenses increased in 2013 compared to 2012, primarily as a result of our continuedinvestment in our international operations. As a percentage of revenue, sales, marketing and administrative expenses decreased in 2012 compared to 2011,primarily as a result of the acquisition of Impulse Monitoring, which has a lower sales, marketing and administrative expense profile than the rest ofNuVasive, as well as lower stock-based compensation expense and lower legal expenses incurred in connection with the Medtronic litigation.Costs that tend to vary based on revenue, which include commissions, depreciation expense for loaned surgical instrument sets, worldwide sales forceheadcount, distribution and customer support headcount, and shipping, increased $19 million in 2013 compared to 2012. This increase is primarily a resultof our continued investment in our international markets, our revenue growth during the year ended December 31, 2013 compared to 2012, and increases infreight expenses. These costs increased $22.2 million in 2012 compared to 2011, which is less than our increased revenue growth in 2012 compared to theprior year due to the addition of Impulse Monitoring.We continue to make significant investments in our Japanese operations. This investment, along with depreciation expense associated with certainsystem software investments, increased $8.0 million and $4.0 million in 2013 and 2012, respectively, compared to the prior year.Compensation and other shareowner related expenses for our marketing and administrative support functions increased $6.7 million in 2013 comparedto 2012. This increase is primarily the result of an increase in headcount as well as computer-related expenses. Compensation and other shareowner relatedexpenses for our marketing and administrative support functions increased43Table of Contents$8.3 million in 2012 compared to 2011. This increase is primarily the result of additions to our headcount and an increase in performance-basedcompensation.Stock-based compensation increased $7.3 million in 2013 compared to 2012. This increase is primarily attributed to the increase in compensationexpense related to market-based performance awards, as well as the increase in our average stock price for 2013 compared to 2012. Stock-based compensationdecreased $5.5 million in 2012 as compared to 2011, primarily related to a decrease in our average stock price for 2012 compared to 2011, as well as thetiming of annual grants in the current year as compared to the prior year.Legal expenses increased $7.8 million in 2013 compared to 2012. Legal expenses incurred in connection with the Medtronic litigation and the OIGsubpoena received in the second quarter of 2013, increased $6.1 million in 2013 compared to 2012. In addition, legal expenses incurred in connection withother matters increased by $2.9 million in 2013 compared to 2012. These increases are offset by the reimbursement of $1.2 million related to legal expenses inconnection with the settlement of several lawsuits related to a competitor during the third quarter of 2013. Legal expenses decreased $3.2 million in 2012compared to 2011. Legal expenses incurred in connection with the Medtronic litigation decreased $4.6 million in 2012 as compared to 2011, offset by a $1.4million increase in legal expenses incurred in connection with other matters.On a long-term basis, we expect total sales, marketing and administrative costs, as a percentage of revenue, to decrease moderately.Research and Development Year Ended December 31, 2012 to 2013 2011 to 2012 2013 2012 2011 $ Change % Change $ Change % Change (Dollars in thousands)Research andDevelopment$32,209 $35,296 $38,408 $(3,087) (9)% $(3,112) (8)%% of total revenue5% 6% 7% Research and development expense consists primarily of product research and development, clinical trial and study costs, regulatory and clinicalfunctions, and shareowner related expenses.In the last several years, we have introduced numerous new products and product enhancements that have significantly expanded our MAS platform,enhanced the applications of the XLIF procedure, expanded our offering of cervical products, and continued to invest to further enable our entry into thegrowing motion preservation market. We have also acquired complementary and strategic assets and technology, particularly in the area of biologics.Expenses incurred in connection with clinical trials, various studies, and ongoing development projects, including outside professional services,decreased approximately $1.0 million in 2013 compared to 2012 as a result of the completion of enrollment in a clinical trial and ongoing study relatedactivities. Expenses incurred in connection with clinical trials and various studies decreased approximately $2.4 million in 2012 compared to 2011, primarilyas a result of the completion of enrollment in a clinical trial and the completion of certain studies.Research and development facilities expenses and compensation and other shareowner related expenses, including performance-based and stock-basedcompensation, decreased $4.0 million in 2013 compared to 2012 due to a decrease in headcount and shareowner related expenses. Research and developmentfacilities expenses and compensation and other shareowner related expenses, including performance-based compensation, decreased $0.5 million in 2012compared to 2011 primarily due to compensation-related savings, including a shift of expenses out of shareowner compensation and into outside consultingexpenses.Expenses incurred related to the acquisition of research and development intangible assets charged to expense in accordance with the authoritativeaccounting guidance increased $2.1 million in 2013 compared to 2012 and remained materially consistent in 2012 compared with 2011.Over the next two years, we expect total research and development costs as a percentage of revenue to increase moderately.44Table of ContentsAmortization of Intangible Assets Year Ended December 31, 2012 to 2013 2011 to 2012 2013 2012 2011 $ Change % Change $ Change % Change (Dollars in thousands)Amortization of Intangible Assets$19,326 $12,430 $6,609 $6,896 55% $5,821 88%% of total revenue3% 2% 1% Amortization of intangible assets relates to the amortization of finite-lived intangible assets acquired. Amortization expense increased $6.9 million in2013 compared to 2012, primarily due to the acquisition of intangible assets acquired in 2013, and additional expense resulting from the approval of the PCMCervical Disc System that occurred during the fourth quarter of 2012. Amortization expense increased $5.8 million in 2012 compared with 2011, primarilydue to the acquisition of Impulse Monitoring in October 2011.In 2014, we expect amortization of intangible assets expenses as a percentage of revenue to moderately decrease.Impairment of Goodwill and Intangible Assets Year Ended December 31, 2012 to 2013 2011 to 2012 2013 2012 2011 $ Change % Change $ Change % Change (Dollars in thousands)Impairment of Goodwill andIntangible Assets$— $9,700 $18,167 $(9,700) (100)% $(8,467) (47)%% of total revenue—% 2% 3% During the years ending December 31, 2012 and 2011, we recorded $1.4 million and $18.2 million, respectively, of impairment charges related tointangible assets acquired from Cervitech in 2009. Additionally, during the year ended December 31, 2012, we recorded $8.3 million of impairment chargesrelated to Impulse Monitoring's goodwill.Litigation Award Year Ended December 31, 2012 to 2013 2011 to 2012 2013 2012 2011 $ Change % Change $ Change % Change (Dollars in thousands)Litigation Award$— $— $101,200 $— —% $(101,200) 100%% of total revenue—% —% 19% Litigation award expenses represent the monetary damages awarded to Medtronic during September 2011.45Table of ContentsInterest and Other Expense, Net Year Ended December 31, 2012 to 2013 2011 to 2012 2013 2012 2011 $ Change % Change $ Change % Change (Dollars in thousands)Interest income$755 $915 $832 Interest expense(27,178) (27,710) (17,933) Other income, net3,101 1,047 2,078 Total interest and otherexpense, net$(23,322) $(25,748) $(15,023) $2,426 9% $(10,725) 71%% of total revenue(3)% (4)% (3)% Interest and other expense, net, consists principally of interest expense incurred on our outstanding $402.5 million Senior Convertible Notes, offset byincome earned on marketable securities and other income (expense) items. Interest and other expense, net, decreased $2.4 million in 2013 and increased $10.7million in 2012 primarily driven by changes in interest expense and other income, net, as compared to prior years. Interest expense decreased $0.5 million in2013 as a result of the maturity of the 2013 Senior Convertible Notes on March 15, 2013. In 2012, interest expense increased $9.8 million as a result of theadditional cash and non-cash interest expense associated with the 2017 Notes offering which closed in June 2011, slightly offset by reduced interest expenseincurred from the repurchase of the 2013 Notes during 2011.Other income, net, increased $2.1 million in 2013, primarily due to the recognition of other income of approximately $2.8 million in connection with thesettlement of several lawsuits with a competitor during the year ended December 31, 2013. In 2012, other income, net, decreased $1.0 million, primarily as aresult of the $2.4 million net non-cash gain recorded during 2011 related to the changes in the fair values of the derivative asset and liability recorded inconnection with the 2017 Notes offering, slightly offset by a foreign currency gain of $0.9 million in 2012 and a foreign currency loss of $0.7 million in2011.Interest and other expense, net, as a percentage of revenue, is expected to increase slightly in 2014.Income Tax Expense (Benefit) Year Ended December 31, 2012 to 2013 2011 to 2012 2013 2012 2011 $ Change % Change $ Change % Change (Dollars in thousands)Income Tax Expense (Benefit)$2,783 $8,814 $(29,043) $(6,031) (68)% $37,857 (130)%Effective income tax (Benefit)rate28% 78% (29)% The effective income tax expense rate for 2013 was 28% compared to 78% in 2012. The effective tax rate for 2013 reflects federal, foreign and stateincome taxes, net of federal benefit, offset by the reversal of valuation allowances on foreign deferred tax assets of approximately $2.2 million. At December31, 2013, as a result of three years of cumulative profits and projected future taxable income, we determined that it was more likely than not that most of ourforeign deferred tax assets would be realized and, accordingly, we reversed a valuation allowance totaling approximately $2.2 million that was recorded againstthese deferred tax assets. Excluding the impact of the reversal of the valuation allowances, the effective income tax rate for 2013 would have differed from theU.S. federal statutory rate of 35% due to foreign taxes, state income taxes, net of federal benefit, and non-deductible stock based compensation.In January 2013, the American Taxpayer Relief Act of 2012 was signed into law in the U.S. This legislation includes the temporary extension of severalexpired business tax incentives retroactively to calendar year 2012 and prospectively through calendar year 2013. Among the expired tax provisions was theresearch and development tax credit. The effects of the change in the tax law were recognized in our first quarter of 2013, the quarter during which the law wasenacted. Had the legislation been enacted during 2012, our income tax expense in 2012 would have been reduced by approximately $0.8 million for the yearended December 31, 2012. Because of the timing of enactment, we effectively benefited from two years’ worth of research and development credits in 2013 fora total benefit to tax expense in 2013 of approximately $1.7 million.The effective income tax expense rate for 2012 of 78% reflects the impact of the non-deductible goodwill impairment charge of $8.3 million. Excludingthe impact of the non-deductible goodwill impairment charge, the effective tax rate for 2012 would46Table of Contentshave differed from the U.S. federal statutory rate of 35% due primarily to state income taxes, net of federal benefit, and nondeductible stock awardcompensation.The 29% effective tax benefit rate for 2011 reflects the impact of the significant charges related to the litigation award and asset impairment. As a resultof the litigation award accrual totaling $101.2 million recorded in 2011, we evaluated the need for a valuation allowance on our deferred tax assets by reviewingall available positive and negative evidence. Based on our review, we concluded that it was more likely than not that we would be able to realize the benefit ofour U. S. federal deferred tax assets and our deferred tax assets for all states except California in the future. This conclusion was primarily based on historicaland projected operating performance, as well as our expectation that our operations will generate sufficient taxable income in future periods to realize the taxbenefits associated with the federal deferred tax assets well within the statutory carryover periods. Accordingly, we did not establish a valuation allowance onour federal or non-California state deferred tax assets as of December 31, 2011.Based on this same evidence and consideration of the state of California’s past suspension of the use of net operating loss carryforwards, the state ofCalifornia’s statutory carryover periods and our apportionment election beginning in 2011, we concluded that it is more likely than not that we will not be ableto utilize our California deferred tax assets. Therefore, we established a full valuation allowance on our California deferred tax assets as of December 31, 2011.Accordingly, the income tax benefit reported for 2011 includes income tax expense totaling $4.8 million in connection with the establishment of this valuationallowance. A full valuation allowance on our California deferred tax assets continues to exist at December 31, 2013.In addition, certain future tax deductions were no longer going to be realized as a result of the repurchase of $155.7 million of our 2013 Notes in 2011.Accordingly, the income tax benefit for 2011 includes a charge totaling $1.8 million, representing the write off of deferred tax assets associated with thesefuture deductions.Excluding the impact of the establishment of the $4.8 million valuation allowance on our California deferred tax assets, the effective income tax rate for2011 would have differed from the U.S. federal statutory rate of 35% due primarily to state income taxes, net of federal benefit, and non-deductible stockaward compensation.We are subject to audits by federal, state, local, and foreign tax authorities. We believe that adequate provisions have been made for any adjustments thatmay result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. Should any issues addressed in our tax audits beresolved in a manner not consistent with Management’s expectations, we could be required to adjust our provision for income taxes in the period suchresolution occurs. We will continue to assess the likelihood of realization of our tax credits and other net deferred tax assets. If future events occur that do notmake the realization of such assets more likely than not, a valuation allowance will be established against all or a portion of the net deferred tax assets.We expect our future effective income tax rate to exceed the U.S federal and statutory income tax rates due to various factors, including non-deductibleexpenses, state income taxes, net of federal benefits, and the impacts of the beginning implementation of our planned Globalization Initiative during 2013which became effective in January 2014. The initiative involved establishing new international operations and entering into new intercompany transfer pricingarrangements, including the licensing of intangibles. We intend to continue to streamline our international operations over time, including procurement,logistics and customer service functions, with the expectation of achieving overall operational efficiencies, including asset utilization, cost and expensesavings, and standardization and compliance benefits.47Table of ContentsStock-Based CompensationThe compensation expense that has been included in the statement of operations for all stock-based compensation arrangements was as follows: Year Ended December 31, 2012 to 2013 2011 to 2012 2013 2012 2011 $ Change % Change $ Change % Change (Dollars in thousands)Stock-BasedCompensation Sales, Marketing &Administrative$31,425 $24,096 $29,583 Research &Development1,649 2,138 2,487 Cost of Goods Sold166 78 — Total Stock-BasedCompensation$33,240 $26,312 $32,070 $6,928 26% $(5,758) (18)%% of total revenue5% 4% 6% Stock-based compensation related to stock awards is recognized and amortized on an accelerated basis in accordance with authoritative guidance. Stock-based compensation increased $6.9 million in 2013 compared to 2012. This increase is primarily attributed to the increase in compensation expense related tomarket-based performance awards, as well as the increase in our average stock price for 2013 compared to 2012. The decrease in stock-based compensation ofapproximately $5.8 million in 2012 as compared to 2011 primarily related to a decrease in our average stock price for 2012 compared to 2011, as well as thetiming of annual grants in the current year as compared to the prior year.As of December 31, 2013, there was approximately $0.6 million, $16.1 million and $4.7 million of unrecognized compensation expense for stockoptions, RSUs and Performance Awards, respectively, which is expected to be recognized over a weighted-average period of approximately 0.7 years, 2.8 yearsand 1.1 years, respectively. In addition, as of December 31, 2013, there was $3.3 million of unrecognized compensation expense for shares expected to beissued under the Employee Stock Purchase Plan which is expected to be recognized through October 2015.Business Combinations and Asset AcquisitionsAcquisition of Impulse Monitoring, Inc. In October 2011, we completed the purchase of all of the outstanding shares of Impulse Monitoring pursuantto an Agreement and Plan of Merger dated September 28, 2011 for the aggregate purchase price of approximately $80.9 million, consisting of cash totalingapproximately $41.7 million and the issuance of 2,336,200 shares of NuVasive common stock to certain stockholders of Impulse Monitoring. ImpulseMonitoring provides IOM services for insight into the nervous system during spine and other surgeries. The acquisition complemented the Company’s existingnerve monitoring systems, which are designed for discreet and directional nerve avoidance and detection, making lateral access to the spine during the XLIFprocedure more safe and reproducible. The Company allocated the purchase price to the assets acquired and liabilities assumed at estimated fair values as ofthe closing date. The excess of the purchase price over the aggregate fair values of approximately $57.7 million was recorded as goodwill. During the fourthquarter of 2012, we updated our discounted cash flow valuation model for Impulse Monitoring and based on Management's current estimates of revenues andexpenses, related cash flows and the discount rate used in the model, the estimated fair value of the then Impulse Monitoring reporting unit was less than itscarrying value. Management's estimates of revenues and related cash flows reflect the impacts of the significant coding changes for IOM services which tookeffect in 2013 and resulted in reduced reimbursement for IOM services. In accordance with the authoritative guidance, we recorded an impairment charge toImpulse Monitoring's goodwill of $8.3 million.Investment in Progentix Orthobiology, B.V. On January 13, 2009, we completed the purchase of forty percent (40%) of the capital stock of ProgentixOrthobiology, B.V., a company organized under the laws of the Netherlands (Progentix), from existing shareholders (the Progentix Shareholders) pursuant to aPreferred Stock Purchase Agreement for $10 million in cash (the Initial Investment). NuVasive, Progentix and the Progentix Shareholders also entered into anOption Purchase Agreement, as amended (the Option Agreement), whereby NuVasive was obligated under certain circumstances, and had the option underother circumstances, to purchase the remaining sixty percent (60%) of capital stock of Progentix (Remaining Shares) from its shareholders for an amount up to$35 million, subject to certain reductions. The Option Agreement expired unexercised on June 13, 2013. Concurrent with the Initial Investment, NuVasive andProgentix also entered into a Senior Secured Facility Agreement, whereby Progentix may borrow up to $5.0 million from us to fund ongoing clinical andregulatory efforts (the Loan). At December 31,48Table of Contents2013, we had advanced Progentix the full $5.0 million in accordance with the loan agreement. The Loan accrues interest at a rate of six percent (6%) per year.We also entered into a Distribution Agreement, as amended, with Progentix, whereby Progentix appointed us as its exclusive distributor for certain Progentixproducts. The Distribution Agreement will be in effect for a term of ten years unless terminated earlier in accordance with its terms.In accordance with authoritative guidance issued by the FASB, we determined that Progentix is a variable interest entity and that we are the primarybeneficiary. Accordingly, the financial position and results of operations of Progentix have been included in the consolidated financial statements from the dateof the Initial Investment. The equity interests in Progentix not owned by us are reported as noncontrolling interests on our consolidated balance sheet. Lossesincurred by Progentix are charged to us and to the noncontrolling interest holders based on their ownership percentage. The Remaining Shares and the OptionAgreement that was entered into between us, Progentix and the Progentix Shareholders are not considered to be freestanding financial instruments as defined byauthoritative guidance. Therefore, the Remaining Shares and the Option Agreement were accounted for as a combined unit in the consolidated financialstatements as a redeemable noncontrolling interest that was initially recorded at fair value and classified as mezzanine equity. Upon the expiration of the OptionAgreement on June 13, 2013, the noncontrolling interest was no longer redeemable and therefore, pursuant to the authoritative guidance, the noncontrollinginterest was reclassified out of mezzanine equity to its own component of total equity within the Company's consolidated balance sheet.Liquidity, Cash Flows and Capital ResourcesLiquidity and Capital ResourcesOur principal sources of liquidity are our existing cash, cash equivalents and marketable securities, cash generated from operations and proceeds fromour convertible debt financing issued in June 2011.In March 2008, we issued $230.0 million principal amount of 2.25% Senior Convertible Notes due 2013 (the 2013 Notes). The net proceeds from theoffering, after deducting the initial purchasers’ discounts and costs directly related to the offering, were approximately $208.4 million. During the year endedDecember 31, 2011, the Company repurchased, in privately negotiated transactions, approximately $155.7 million in principal of its 2013 Notes. Theremaining balance of the 2013 Notes matured on March 15, 2013 and accordingly, during the first quarter of 2013, the Company repaid the remainingoutstanding principal amount of $74.3 million in cash.In June 2011, we issued $402.5 million principal amount of the 2.75% Convertible Senior Notes due 2017 (the 2017 Notes). The net proceeds from theoffering, after deducting initial purchasers’ discounts and costs directly related to the offering, were approximately $359.2 million. We pay 2.75% interest perannum on the principal amount of the 2017 Notes semiannually on January 1 and July 1 of each year. The 2017 Notes mature on July 1, 2017 and may besettled in cash, stock, or a combination thereof, solely at our election.In connection with the Medtronic litigation, a jury from the U.S. District Court, Southern District of California delivered an unfavorable verdict to usand awarded monetary damages of approximately $101.2 million to Medtronic. In May 2012, in accordance with an escrow arrangement, we transferred$113.3 million of cash into a restricted escrow account to secure the amount of the judgment, plus prejudgment interest, during pendency of our appeal of thejudgment. These funds are included in restricted cash and investments in our December 31, 2013 consolidated balance sheet. Further, as a result of the June2013 District Court ruling on the ongoing royalty rates, we will be required to escrow additional funds to secure accrued royalties, estimated at $21 million todate, and ongoing royalties.Cash, cash equivalents and marketable securities was $326.1 million and $346.1 million at December 31, 2013 and 2012, respectively. We believe thatour existing cash, cash equivalents and short-term marketable securities will be sufficient to meet our anticipated cash needs for the next 12 months. Ourfuture capital requirements will depend on many factors including our rate of revenue growth, the timing and extent of spending to support developmentefforts, the expansion of sales, marketing and administrative activities, the timing of introductions of new products and enhancements to existing products,the continuing market acceptance of our products, the expenditures associated with possible future acquisitions or other business combination transactions,and the outcome of current and future litigation. At December 31, 2013, we have cash and investments totaling $119.2 million in restricted accounts which arenot available to us to meet any ongoing capital requirements if and when needed. This could materially impact our liquidity and our ability to invest in andrun our business on an ongoing basis.We expect that cash provided by operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in ouroperating results and working capital requirements. We have historically invested our cash primarily in U.S. treasuries and government agencies, corporatedebt, and money market funds. Certain of these investments are subject to general credit, liquidity and other market risks. The general condition of thefinancial markets and the economy has exacerbated those risks and may affect the value of our current investments and restrict our ability to access the capitalmarkets or even our own funds.49Table of ContentsCash FlowsThe following table summarizes, for the periods indicated, selected items in our consolidated statements of cash flows (in thousands): Year Ended December 31, 2012 to 2013 2011 to 2012 2013 2012 2011 $ Change $ ChangeCash provided by operating activities$97,439 $130,082 $62,965 $(32,643) $67,117Cash used in investing activities(64,570) (147,894) (201,724) 83,324 53,830Cash (used in) provided by financing activities(52,482) (22,556) 209,879 (29,926) (232,435)Effect of exchange rate changes on cash(861) 175 (225) (1,036) 400(Decrease) increase in cash and cash equivalents$(20,474) $(40,193) $70,895 $19,719 $(111,088)Cash flows from operating activitiesCash provided by operating activities was $97.4 million in 2013, compared to $130.1 million in 2012. The $32.6 million decrease in cash provided byoperating activities in 2013 as compared to 2012 is due to a small increase in days sales outstanding which affects our accounts receivable balance and isconsistent with our international growth, an increase in amounts paid for other current assets, driven primarily by a refund of $11.2 million received in thefirst quarter of 2012 relating to an overpayment at December 31, 2011, and increased investments in inventory. These decreases in cash flows from operatingactivities were offset by increases in accounts payable and accrued liabilities primarily related to an increase in royalty accruals. Cash provided by operatingactivities was $130.1 million in 2012, compared to $63.0 million in 2011. The $67.1 million increase in cash provided by operating activities in 2012 ascompared to 2011 is primarily due to an increase in net income, adjusted for noncash items, a decrease in amounts paid for other current assets, including arefund of $11.2 million relating to an overpayment at December 31, 2011, increased collections on outstanding accounts receivable and other working capitalmanagement initiatives related to accounts payable, inventories and accrued liabilities.Cash flows used in investing activitiesCash used in investing activities was $64.6 million in 2013, compared to $147.9 million in 2012. The $83.3 million decrease in cash used in investingactivities in 2013 as compared to 2012 is primarily due to a net decrease in purchases of marketable securities, including restricted investments, offset byslight increases in purchases of property and equipment and cash paid for business and asset acquisitions. Cash used in investing activities was $147.9million in 2012, compared to $201.7 million in 2011. The $53.8 million decrease in cash used in investing activities in 2012 as compared to 2011 isprimarily due to a decrease in cash paid for business and asset acquisitions, a decrease in purchases of property, plant and equipment, and a decrease ininvestment activity in marketable securities and restricted investments.Cash flows from financing activitiesCash used in financing activities was $52.5 million in 2013, compared to $22.6 million in 2012. The $29.9 million increase in cash used infinancing activities is primarily due the repayment of the 2013 Senior Convertible Notes of $74.3 million, offset by a decrease in cash paid for contingentconsideration of $29.7 million. Cash used in financing activities was $22.6 million in 2012, compared to cash provided by financing activities of $209.9million in 2011. The $232.4 million decrease in cash provided by financing activities in 2012 as compared to 2011 is primarily due to net proceeds totalingapproximately $205.0 million from the convertible debt financing activity which occurred in 2011, and an increase in 2012 in cash paid for contingentconsideration of $29.7 million.Contractual Obligations and CommitmentsContractual obligations and commitments represent future cash commitments and liabilities under agreements with third parties, including our 2017Notes, operating leases and other contractual obligations. The following summarizes our long-term contractual obligations and commitments as ofDecember 31, 2013 (in thousands): 50Table of Contents Payments Due by Period Total Less Than1 Year 1 to 3 Years 4 to 5 Years After 5 Years2017 Notes(1)$441,254 $11,083 $22,167 $408,004 $—Operating leases75,234 8,668 16,627 16,241 33,698Capital leases853 580 273 — —Royalty obligations600 120 240 240 —Clinical advisory agreements358 72 143 143 —Total$518,299 $20,523 $39,450 $424,628 $33,698 (1)See Note 6 to the consolidated financial statements included in this Annual Report for further discussion of the terms of the 2017 Notes.The following obligations and commitments are not included in the table above:In connection with several purchase and product development agreements, we are contingently obligated to make additional payments up to $20.2million primarily upon the achievement of specified milestones that are expected to be met over the next five years.We have not included an amount related to uncertain tax benefits or liabilities in the table above because we cannot make a reasonably reliable estimateregarding the timing of settlements with taxing authorities, if any.The expected timing of payments of the obligations discussed above is estimated based on current information. Timing of payment and actual amountspaid may be different depending on the time of receipt of services or changes to agreed-upon amounts for some obligations. Amounts disclosed as contingent ormilestone-based obligations depend on the achievement of the milestones or the occurrence of the contingent events and can vary significantly.Off-Balance Sheet ArrangementsWe have not engaged in any off-balance sheet activities.Item 7A. Quantitative and Qualitative Disclosures About Market Risk.Interest Rate Sensitivity and Risk. Our exposure to interest rate risk at December 31, 2013 is related to our investment portfolio which consists largelyof debt instruments of high quality corporate issuers and the U.S. government and its agencies. Due to the short-term nature of these investments, we haveassessed that there is no material exposure to interest rate risk arising from our investments. Fixed rate investments and borrowings may have their fair marketvalue adversely impacted from changes in interest rates. At December 31, 2013, we do not hold any material asset-backed investment securities and in 2013,we did not realize any losses related to asset-backed investment securities. Based upon our overall interest rate exposure as of December 31, 2013, a change of10 percent in interest rates, assuming the amount of our investment portfolio remains constant, would not have a material effect on interest income. Further,this analysis does not consider the effect of the change in the level of the overall economic activity that could exist in such an environment.Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. The primary objective of our investment activitiesis to preserve the principal while at the same time maximizing yields without significantly increasing the risk. To achieve this objective, we maintain ourportfolio of cash equivalents and investments in instruments that meet high credit quality standards, as specified in our investment policy. None of ourinvestments are held for trading purposes. Our policy also limits the amount of credit exposure to any one issue, issuer and type of instrument.The following table presents the carrying value and related weighted-average rate of return for our investment portfolio as of December 31, 2013 (dollarsin thousands): 51Table of Contents CarryingValue Weighted AverageRate of ReturnMoney market funds$72,514 0.1%Certificates of deposit1,116 0.4%Corporate notes103,946 0.3%Commercial paper19,973 0.2%U.S. government treasury securities52,390 0.2%Securities of government-sponsored entities118,250 0.3%Total interest bearing instruments$368,189 As of December 31, 2013, the stated maturities of our available-for-sale securities are $167.3 million within one year and $128.4 million from one totwo years. These investments are recorded on the balance sheet at fair market value with unrealized gains or losses reported as a separate component ofaccumulated other comprehensive income.Market Price Sensitive Instruments. In order to reduce the potential equity dilution, we entered into a convertible note hedge transaction (the 2017Hedge) in connection with the issuance of the 2017 Notes entitling us to purchase our common stock. Upon conversion of the 2017 Notes, the 2017 Hedge isexpected to reduce the equity dilution if the daily volume-weighted average price per share of our common stock exceeds the strike price of the 2017 Hedge. Wealso entered into warrant transactions with the counterparties of the 2017 Hedge entitling them to acquire shares of our common stock. The warrant transactioncould have a dilutive effect on our earnings per share to the extent that the price of our common stock during a given measurement period (the quarter or year todate period) at maturity of the warrants exceeds the strike price of the warrants. These transactions are more fully discussed in Note 6 to the consolidatedfinancial statements.Foreign Currency Exchange Risk. A substantial portion of our operations are located in the United States, and the majority of our sales sinceinception have been made in U.S. dollars. Accordingly, we have assessed that we do not have any material exposure to foreign currency rate fluctuations.However, as our business in markets outside of the United States continues to increase, we will be exposed to foreign currency exchange risk related to ourforeign operations. Fluctuations in the rate of exchange between the U.S. dollar and foreign currencies, primarily the euro, the Australian dollar and the yen,could adversely affect our financial results, including our revenues, revenue growth rates, gross margins, income and losses as well as assets and liabilities.We translate the financial statements of each foreign subsidiary with a functional currency other than the United States dollar into the United Statesdollar for consolidation using end-of-period exchange rates for assets and liabilities and average exchange rates during each reporting period for results ofoperations. Net gains or losses resulting from the translation of foreign financial statements and the effect of exchange rate changes on intercompany receivablesand payables of a long-term investment nature are recorded as a separate component of stockholders’ equity. These adjustments will affect net income onlyupon sale or liquidation of the underlying investment in foreign subsidiaries. Exchange rate fluctuations resulting from the translation of the short-termintercompany balances between NuVasive, Inc., our U.S. entity, and our foreign subsidiaries, are recorded as foreign currency transaction gains or losses andare included in other income (expense) in the consolidated statement of operations.We do not currently engage in hedging activities with respect to our foreign currency exchange risk.Item 8.Financial Statements and Supplementary Data.The consolidated financial statements and supplementary data required by this item are set forth at the pages indicated in Item 15.Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.NoneItem 9A.Controls and ProceduresDisclosure Controls and Procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to bedisclosed in our reports under the Securities Exchange Act of 1934, as amended (Exchange Act) is recorded, processed, summarized and reported within thetimelines specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our Management, including our ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating thedisclosure controls and procedures, Management recognized that any controls and procedures, no matter how well designed and operated, can only providereasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, Management necessarily was required toapply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.52Table of ContentsUnder the supervision and with the participation of our Management, including our Chief Executive Officer and our Chief Financial Officer, we carriedout an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in SEC Rules 13a — 15(e) and 15d —15(e)) as of December 31, 2013. Based on such evaluation, our Management has concluded as of December 31, 2013, the Company’s disclosure controls andprocedures are effective.Management’s Report on Internal Control over Financial Reporting. Our Management is responsible for establishing and maintaining adequateinternal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting refers to the processdesigned by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our board of directors, Management andother personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposesin accordance with U.S. generally accepted accounting principles.Management has used the framework set forth in the report entitled Internal Control — Integrated Framework published by the Committee ofSponsoring Organizations of the Treadway Commission (1992 framework) to evaluate the effectiveness of the Company’s internal control over financialreporting. Management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2013. Ernst & YoungLLP, the Company’s independent registered public accounting firm, has issued an attestation report on the Company’s internal control over financial reportingwhich is included herein.Changes in Internal Control over Financial Reporting. We are involved in ongoing evaluations of internal controls. In anticipation of the filing ofthis Form 10-K, our Chief Executive Officer and Chief Financial Officer, with the assistance of other members of our Management, performed an evaluationof any change in internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is likely to materiallyaffect, our internal controls over financial reporting. There has been no change to our internal control over financial reporting during our most recent fiscalquarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.53Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of Directors and Stockholders ofNuVasive, Inc.We have audited NuVasive, Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control —Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria).NuVasive, Inc.’s Management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness ofinternal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibilityis to express an opinion on the Company’s internal control over financial reporting based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of Management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluationof effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.In our opinion, NuVasive, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based onthe COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balancesheets of NuVasive, Inc. as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), equity, andcash flows for each of the three years in the period ended December 31, 2013 of NuVasive, Inc. and our report dated March 3, 2014 expressed an unqualifiedopinion thereon./s/ Ernst & Young LLPSan Diego, CaliforniaMarch 3, 201454Table of ContentsItem 9B.Other InformationNone.PART IIICertain information required by Part III is omitted from this report because the Company will file a definitive proxy statement within 120 days after theend of its fiscal year pursuant to Regulation 14A (the Proxy Statement) for its annual meeting of stockholders to be held on May 14, 2014, and certaininformation included in the Proxy Statement is incorporated herein by reference.Item 10.Directors, Executive Officers and Corporate Governance.We have adopted a Code of Ethical Business Conduct for all officers, directors and shareowners. The Code of Ethical Business Conduct is available onour website, www.nuvasive.com, and in our filings with the Securities and Exchange Commission. We intend to disclose future amendments to, or waiversfrom, provisions of our Code of Ethical Business Conduct that apply to our Principal Executive Officer, Principal Financial Officer, Principal AccountingOfficer, or Controller, or persons performing similar functions, within four business days of such amendment or waiver.The other information required by this Item 10 will be set forth in the Proxy Statement and is incorporated in this report by reference.Item 11.Executive Compensation.The information required by this item will be set forth in the Proxy Statement and is incorporated in this report by reference.Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.The information required by this item will be set forth in the Proxy Statement and is incorporated in this report by reference.Item 13.Certain Relationships and Related Transactions, and Director Independence.The information required by this item will be set forth in the Proxy Statement and is incorporated in this report by reference.Item 14.Principal Accountant Fees and Services.The information required by this item will be set forth in the Proxy Statement and is incorporated in this report by reference.PART IV Item 15.Exhibits and Financial Statement Schedules.(a)The following documents are filed as a part of this report:(1)Report of Independent Registered Public Accounting FirmConsolidated Balance Sheets as of December 31, 2013 and 2012Consolidated Statements of Operations for the years ended December 31, 2013, 2012 and 2011Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2013, 2012 and 2011Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2013, 2012 and 2011Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011Notes to Consolidated Financial Statements(2)Financial Statement Schedules: Schedule II — Valuation AccountsAll other financial statement schedules have been omitted because they are not applicable, not required or the information required is shown in thefinancial statements or the notes thereto.55Table of Contents(3)Exhibits. See subsection (b) below.(b)Exhibits. The following exhibits are filed as part of this report:ExhibitNumber Description3.1 Restated Certificate of Incorporation (incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-50744) filed withthe Commission on August 13, 2004) 3.2 Certificate of Amendment to the Restated Certificate of Incorporation (incorporated by reference to our Current Report on Form 8-Kfiled with the Commission on September 28, 2011) 3.3 Restated Bylaws (incorporated by reference to our Current Report on Form 8-K filed with the Commission on January 6, 2012) 4.1 Specimen Common Stock Certificate (incorporated by reference to our Annual Report on Form 10-K (File No. 000-50744) filed withthe Commission on March 16, 2006) 4.2 Certificate of Designations of Series A Participating Preferred Stock filed with the Delaware Secretary of State on June 28, 2011(incorporated by reference to our Current Report on Form 8-K filed with the Commission on June 29, 2011) 4.3 Indenture dated as of June 28, 2011 between the Company and the Trustee (incorporated by reference to our Current Report onForm 8-K filed with the Commission on June 29, 2011) 4.4 Form of 2.75% Convertible Senior Note due 2017 (incorporated by reference to our Current Report on Form 8-K filed with theCommission on June 29, 2011) 10.1# 2004 Amended and Restated Equity Incentive Plan (incorporated by reference to Quarterly Report on Form 10-Q filed with theCommission on July 26, 2012) 10.2# Amendment No. 1 to the 2004 Amended and Restated Equity Incentive Plan (filed herewith) 10.3# Form of Stock Option Award Notice under our 2004 Equity Incentive Plan (incorporated by reference to Amendment No. 1 to ourRegistration Statement on Form S-1 (File No. 333-113344) filed with the Commission on April 8, 2004) 10.4# Form of Option Exercise and Stock Purchase Agreement under our 2004 Equity Incentive Plan (incorporated by reference toAmendment No. 1 to our Registration Statement on Form S-1 (File No. 333-113344) filed with the Commission on April 8, 2004). 10.5# Form of Restricted Stock Unit Award Agreement under our 2004 Equity Incentive Plan (incorporated by reference to our AnnualReport on Form 10-K filed with the Commission on February 26, 2010) 10.6# Form of Restricted Stock Grant Notice and Restricted Stock Agreement under 2004 Amended and Restated Equity Incentive Plan(incorporated by reference to Amendment No.1 to the Registrant’s Registration Statement on Form S-1 (File No. 333-113344) filedwith the Commission on April 8, 2004) 10.7# 2004 Employee Stock Purchase Plan (incorporated by reference to Amendment No. 1 to our Registration Statement on Form S-1 (FileNo. 333-113344) filed with the Commission on April 8, 2004) 10.8# Amendment No. 1 to the 2004 Employee Stock Purchase Plan (incorporated by reference to our Quarterly Report on Form 10-Q (FileNo. 000-50744) filed with the Commission on November 7, 2008) 10.9# Amendment No. 2 to the 2004 Employee Stock Purchase Plan (incorporated by reference to our Annual Report on Form 10-K filedwith the Commission on February 25, 2011) 10.10# Amendment No. 3 to the 2004 Employee Stock Purchase Plan (incorporated by reference to our Annual Report on Form 10-K filedwith the Commission on February 26, 2013) 56Table of ContentsExhibitNumber Description10.11# Amendment No. 4 to the 2004 Employee Stock Purchase Plan (filed herewith) 10.12# Executive Employment Agreement, dated as of January 2, 2011, by and between NuVasive, Inc. and Alexis V. Lukianov(incorporated by reference to our Current Report on Form 8-K filed with the Commission on January 6, 2011) 10.13# Offer Letter Agreement, dated October 19, 2009, by and between NuVasive, Inc. and Michael Lambert (incorporated by reference toour Annual Report on Form 10-K filed with the Commission on February 26, 2010) 10.14# Employment Agreement by and between NuVasive, Inc. and Matthew Link, dated January 2, 2013 (incorporated by reference to ourAnnual Report on Form 10-K filed with the Commission on February 26, 2013) 10.15# Employment Agreement by and between NuVasive, Inc. and Russell Powers, dated October 4, 2012 (incorporated by reference to ourAnnual Report on Form 10-K filed with the Commission on February 26, 2013) 10.16# Offer Letter Agreement, dated December 22, 2013, by and between NuVasive, Inc. and Michael Paolucci (filed herewith) 10.17# Form of Compensation Letter Agreement dated March 4, 2011 between NuVasive, Inc. and each of the following: Keith C. Valentine,Patrick Miles, Michael J. Lambert, Jason M. Hannon and Craig E. Hunsaker (incorporated by reference to our Quarterly Report onForm 10-Q filed with the Commission on May 6, 2011) 10.18# Form of Compensation Letter Agreement dated December 18, 2013, between NuVasive, Inc. and Michael Paolucci (filed herewith) 10.19# Separation Letter Agreement dated December 13, 2013 between NuVasive, Inc. and Craig Hunsaker (filed herewith) 10.20# Form of Indemnification Agreement between NuVasive, Inc. and each of our directors and officers (incorporated by reference to ourRegistration Statement on Form S-1 (File No. 333-113344) filed with the Commission on March 5, 2004) 10.21# Non-Employee Director Cash Compensation Plan (filed herewith) 10.22# Lease Agreement for Sorrento Summit, entered into as of November 6, 2007, between the Company and HCPI/Sorrento, LLC.(incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-50744) filed with the Commission on November 8,2007) 10.23 Confirmation for base call option transaction dated as of June 22, 2011, between Bank of America, N.A. and the Company(incorporated by reference to our Current Report on Form 8-K filed with the Commission on June 29, 2011) 10.24 Confirmation for additional call option transaction dated as of June 24, 2011, between Bank of America, N.A. and the Company(incorporated by reference to our Current Report on Form 8-K filed with the Commission on June 29, 2011) 10.25 Confirmation for base call option transaction dated as of June 22, 2011, between Goldman, Sachs & Co. and the Company(incorporated by reference to our Current Report on Form 8-K filed with the Commission on June 29, 2011) 10.26 Confirmation for additional call option transaction, dated as of June 24, 2011, between Goldman, Sachs & Co. and the Company(incorporated by reference to our Current Report on Form 8-K filed with the Commission on June 29, 2011) 57Table of ContentsExhibitNumber Description10.27 Confirmation for base warrant transaction, dated as of June 22, 2011, between Bank of America, N.A. and the Company(incorporated by reference to our Current Report on Form 8-K filed with the Commission on June 29, 2011) 10.28 Confirmation for additional warrant transaction, dated as of June 24, 2011, between Bank of America, N.A. and the Company(incorporated by reference to our Current Report on Form 8-K filed with the Commission on June 29, 2011) 10.29 Confirmation for base warrant transaction, dated as of June 22, 2011, between Goldman, Sachs & Co. and the Company(incorporated by reference to our Current Report on Form 8-K filed with the Commission on June 29, 2011) 10.30 Confirmation for additional warrant transaction, dated as of June 24, 2011, between Goldman, Sachs & Co. and the Company(incorporated by reference to our Current Report on Form 8-K filed with the Commission on June 29, 2011) 10.31 Preferred Stock Purchase Agreement, dated January 13, 2009, among the Company, Progentix Orthobiology, B.V. and the sellerslisted on Schedule A thereto (incorporated by reference to our Annual Report on Form 10-K filed with the Commission onFebruary 26, 2010) 10.32† Option Purchase Agreement, dated January 13, 2009, among the Company, Progentix Orthobiology, B.V. and the sellers listed onSchedule A thereto (incorporated by reference to our Annual Report on Form 10-K filed with the Commission on February 26, 2010) 10.33† Exclusive Distribution Agreement, dated January 13, 2009, between the Company and Progentix Orthobiology, B.V. (incorporated byreference to our Quarterly Report on Form 10-Q filed with the Commission on May 8, 2009) 10.34† Settlement and License Agreement, dated as of April 25, 2013, by and among the Company, Medtronic Sofamor Danek USA, Inc.,Warsaw Orthopedic, Inc., Medtronic Puerto Rico Operations Co. and Medtronic Sofamor Danek Deggendorf, GmbH (incorporatedby reference to our Quarterly Report on Form 10-Q filed with the Commission on July 30, 2013) 21.1 List of subsidiaries of NuVasive, Inc. 23.1 Consent of Independent Registered Public Accounting Firm 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, asamended 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, asamended 32.1* Certification of the Chief Executive Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and18 U.S.C. section 1350 32.2* Certification of the Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and18 U.S.C. section 1350 101 XBRL Instance Document 101 XBRL Taxonomy Extension Schema Document 101 XBRL Taxonomy Calculation Linkbase Document 101 XBRL Taxonomy Label Linkbase Document 101 XBRL Taxonomy Presentation Linkbase Document58Table of ContentsExhibitNumber Description 101 XBRL Taxonomy Definition Linkbase Document†Certain confidential information contained in this exhibit was omitted by means of redacting a portion of the text and replacingit with an asterisk. We have filed separately with the Commission an unredacted copy of the exhibit. #Indicates management contract or compensatory plan. *These certifications are being furnished solely to accompany this annual report pursuant to 18 U.S.C. Section 1350, and arenot being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by referenceinto any filing of NuVasive, Inc., whether made before or after the date hereof, regardless of any general incorporation languagein such filing.59Table of ContentsSUPPLEMENTAL INFORMATIONCopies of the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 14, 2014, and copies of the form of proxy to beused for such Annual Meeting, will be furnished to the SEC prior to the time they are distributed to the Registrant’s Stockholders.60Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized. NUVASIVE, INC. Date:March 3, 2014 By: /s/ Alexis V. Lukianov Alexis V. LukianovChairman and Chief Executive Officer(Principal Executive Officer) Date:March 3, 2014 By: /s/ Michael J. Lambert Michael J. LambertExecutive Vice President andChief Financial Officer(Principal Financial Officer)61Table of ContentsPOWER OF ATTORNEYKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Alexis V. Lukianov andMichael Lambert, jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign anyamendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities andExchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes may do or cause to bedone by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated. Signature Title Date /s/ Alexis V. Lukianov Chairman and Chief Executive Officer(Principal Executive Officer) March 3, 2014Alexis V. Lukianov /s/ Michael J. Lambert Executive Vice President and ChiefFinancial Officer (Principal Financial andAccounting Officer) March 3, 2014Michael J. Lambert /s/ Jack R. Blair Director March 3, 2014Jack R. Blair /s/ Peter C. Farrell Director March 3, 2014Peter C. Farrell /s/ Robert J. Hunt Director March 3, 2014Robert J. Hunt /s/ Lesley H. Howe Director March 3, 2014Lesley H. Howe /s/ Eileen M. More Director March 3, 2014Eileen M. More /s/ Richard W. Treharne Director March 3, 2014Richard W. Treharne /s/ Peter M. Leddy Director March 3, 2014Peter M. Leddy /s/ Gregory T. Lucier Director March 3, 2014Gregory T. Lucier 62Table of ContentsNUVASIVE, INC.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm64Consolidated Balance Sheets as of December 31, 2013 and 201265Consolidated Statements of Operations for the years ended December 31, 2013, 2012 and 201166Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2013, 2012 and 201167Consolidated Statements of Equity for the years ended December 31, 2013, 2012 and 201168Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 201169Notes to Consolidated Financial Statements7063Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of Directors and Stockholders ofNuVasive, Inc.We have audited the accompanying consolidated balance sheets of NuVasive, Inc. as of December 31, 2013 and 2012, and the related consolidatedstatements of operations, comprehensive income (loss), equity, and cash flows for each of the three years in the period ended December 31, 2013. Our auditsalso included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of theCompany’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe thatour audits provide a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of NuVasive, Inc. atDecember 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31,2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered inrelation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), NuVasive, Inc.’s internalcontrol over financial reporting as of December 31, 2013, based on criteria established in Internal Control — Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (1992 framework) and our report dated March 3, 2014 expressed an unqualified opinion thereon./s/ Ernst & Young LLPSan Diego, CaliforniaMarch 3, 201464Table of ContentsNUVASIVE, INC.CONSOLIDATED BALANCE SHEETS(In thousands, except par value) December 31, 2013 2012ASSETS Current assets: Cash and cash equivalents$102,825 $123,299Short-term marketable securities143,449 138,405Accounts receivable, net of allowances of $3,481 and $2,780, respectively104,774 88,958Inventory136,937 126,364Deferred tax assets, current37,076 28,236Prepaid expenses and other current assets10,947 8,487Total current assets536,008 513,749Property and equipment, net128,064 125,123Long-term marketable securities79,829 84,412Intangible assets, net93,986 101,362Goodwill154,944 154,106Deferred tax assets42,863 40,575Restricted cash and investments119,195 118,995Other assets24,679 25,463Total assets$1,179,568 $1,163,785LIABILITIES AND EQUITY Current liabilities: Accounts payable and accrued liabilities$86,057 $62,048Accrued payroll and related expenses31,095 27,916Senior Convertible Notes, current— 74,311Total current liabilities117,152 164,275Senior Convertible Notes346,060 332,404Deferred tax liabilities2,934 3,129Litigation liability93,700 101,200Other long-term liabilities14,844 15,199Commitments and contingencies Noncontrolling interests— 10,003Stockholders’ equity: Preferred stock, $0.001 par value; 5,000 shares authorized, none outstanding— —Common stock, $0.001 par value; 120,000 shares authorized at December 31, 2013 and 2012,respectively, 44,943 and 43,686 issued and outstanding at December 31, 2013 and 2012,respectively45 44Additional paid-in capital769,203 714,865Accumulated other comprehensive (loss) income(3,238) 786Accumulated deficit(170,218) (178,120)Total Nuvasive, Inc. stockholders’ equity595,792 537,575Noncontrolling interests9,086 —Total equity604,878 537,575Total liabilities and equity$1,179,568 $1,163,785See accompanying notes to consolidated financial statements.65Table of ContentsNUVASIVE, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share amounts) Year Ended December 31, 2013 2012 2011Revenue$685,173 $620,255 $540,506Cost of goods sold (excluding amortization of purchased technology)180,484 153,409 112,111Gross profit504,689 466,846 428,395Operating expenses: Sales, marketing and administrative420,064 372,416 349,052Research and development32,209 35,296 38,408Amortization of intangible assets19,326 12,430 6,609Impairment of goodwill and intangible assets— 9,700 18,167Litigation award— — 101,200Total operating expenses471,599 429,842 513,436Interest and other expense, net: Interest income755 915 832Interest expense(27,178) (27,710) (17,933)Other income, net3,101 1,047 2,078Total interest and other expense, net(23,322) (25,748) (15,023)Income (loss) before income taxes9,768 11,256 (100,064)Income tax expense (benefit)2,783 8,814 (29,043)Consolidated net income (loss)$6,985 $2,442 $(71,021)Net loss attributable to noncontrolling interests$(917) $(702) $(1,172)Net income (loss) attributable to NuVasive, Inc.$7,902 $3,144 $(69,849) Net income (loss) per share attributable to NuVasive, Inc.: Basic$0.18 $0.07 $(1.73)Diluted$0.17 $0.07 $(1.73)Weighted average shares outstanding: Basic44,461 43,328 40,372Diluted46,786 44,272 40,372 See accompanying notes to consolidated financial statements.66Table of ContentsNUVASIVE, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)(In thousands, except per share amounts) Year Ended December 31, 2013 2012 2011Consolidated net income (loss)$6,985 $2,442 $(71,021)Other comprehensive income (loss): Unrealized (loss) gain on marketable securities, net of tax(27) 4 60Translation adjustments, net of tax(3,997) 305 (199)Other comprehensive (loss) income:(4,024) 309 (139)Total consolidated comprehensive income (loss)2,961 2,751 (71,160)Plus: Net loss attributable to noncontrolling interests917 702 1,172Comprehensive income (loss) attributable to NuVasive, Inc.$3,878 $3,453 $(69,988)See accompanying notes to consolidated financial statements.67Table of ContentsNUVASIVE, INC.CONSOLIDATED STATEMENTS OF EQUITY(In thousands) Common Stock AdditionalPaid-inCapital AccumulatedOtherComprehensiveIncome (Loss) AccumulatedDeficit TotalNuvasive, Inc.Stockholders’Equity NoncontrollingInterests TotalEquity Shares Amount Balance at December 31, 201039,528 $40 $545,114 $616 $(111,415) $434,355 $— $434,355Issuance of common stock underemployee and director stockaward and purchase plans591 — 6,852 — — 6,852 — 6,852Issuance of common stock inconnection with acquisitions2,336 2 39,246 — — 39,248 — 39,248Stock-based compensation expense— — 32,070 — — 32,070 — 32,070Sale of warrants— — 47,898 — — 47,898 — 47,898Equity component of SeniorConvertible Notes— — 49,390 — — 49,390 — 49,390Convertible Note Hedge, net— — (46,243) — — (46,243) — (46,243)Tax benefits related to stock-basedcompensation awards— — 463 — — 463 — 463Net loss attributable to NuVasive,Inc.— — — — (69,849) (69,849) — (69,849)Other comprehensive loss— — — (139) — (139) — (139)Balance at December 31, 201142,455 42 674,790 477 (181,264) 494,045 — 494,045Issuance of common stock underemployee and director stockaward and purchase plans756 1 4,883 — — 4,884 — 4,884Issuance of common stock inconnection with assetacquisitions475 1 7,559 — — 7,560 — 7,560Stock-based compensation expense— — 26,312 — — 26,312 — 26,312Tax benefits related to stock-basedcompensation awards— — 1,321 — — 1,321 — 1,321Net income attributable toNuVasive, Inc.— — — — 3,144 3,144 — 3,144Other comprehensive income— — — 309 — 309 — 309Balance at December 31, 201243,686 44 714,865 786 (178,120) 537,575 — 537,575Issuance of common stock underemployee and director stockaward and purchase plans1,257 1 8,421 — — 8,422 — 8,422Stock-based compensation expense— — 33,240 — — 33,240 — 33,240Tax benefits related to stock-basedcompensation awards— — 12,677 — — 12,677 — 12,677Reclassification of noncontrollinginterest from mezzanine toequity— — — — — — 9,489 9,489Net income attributable toNuVasive, Inc.— — — — 7,902 7,902 — 7,902Net loss attributable tononcontrolling interests— — — — — — (403) (403)Other comprehensive loss— — — (4,024) — (4,024) — (4,024)Balance at December 31, 201344,943 $45 $769,203 $(3,238) $(170,218) $595,792 $9,086 $604,878See accompanying notes to consolidated financial statements.68Table of ContentsNUVASIVE, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) Year Ended December 31, 2013 2012 2011Operating activities: Consolidated net income (loss)$6,985 $2,442 $(71,021)Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization63,106 51,909 36,242Deferred income tax (benefit) expense(11,341) 4,525 (30,967)Amortization of debt discount13,656 12,697 6,108Amortization of debt issuance costs1,680 1,872 1,816Stock-based compensation33,240 26,312 32,070Impairment of goodwill and intangible assets— 9,700 18,167Loss on repurchase of Senior Convertible Notes, net— — 332Gain recognized on change in fair value of derivatives— — (2,387)Allowance for doubtful accounts and sales return reserves959 103 1,345Allowance for excess and obsolete inventory, net of write-offs6,509 5,475 6,028Other non-cash adjustments7,116 7,283 6,227Changes in operating assets and liabilities, net of effects from acquisitions: Accounts receivable(17,384) (2,005) (9,929)Inventory(21,002) (11,022) (17,170)Prepaid expenses and other current assets(3,608) 12,725 (14,396)Accounts payable and accrued liabilities21,803 2,938 (3,385)Litigation liability(7,500) — 101,200Accrued payroll and related expenses3,220 5,128 2,685Net cash provided by operating activities97,439 130,082 62,965Investing activities: Cash paid for business and asset acquisitions(14,818) (11,088) (37,574)Purchases of property and equipment(47,597) (41,189) (53,370)Purchases of marketable securities(218,454) (235,919) (253,210)Sales of marketable securities216,299 246,504 151,966Purchases of restricted investments— (113,281) (4,536)Sales of restricted investments— 7,079 —Payment for specific rights in connection with supply agreement, net of refund received— — (5,000)Net cash used in investing activities(64,570) (147,894) (201,724)Financing activities: Proceeds from the sale of warrants— — 47,898Proceeds from the issuance of convertible debt, net of issuance costs— — 391,445Purchase of convertible note hedges— — (80,097)Principal payment of 2013 Senior Convertible Notes(74,311) — —Repurchase of 2013 Senior Convertible Notes— — (154,164)Tax benefits related to stock-based compensation awards13,569 3,003 463Proceeds from the issuance of common stock8,422 4,884 6,852Payment of contingent consideration— (29,722) (1,800)Other assets(162) (721) (718)Net cash (used in) provided by financing activities(52,482) (22,556) 209,879Effect of exchange rate changes on cash(861) 175 (225)(Decrease) increase in cash and cash equivalents(20,474) (40,193) 70,895Cash and cash equivalents at beginning of year123,299 163,492 92,597Cash and cash equivalents at end of year$102,825 $123,299 $163,492Supplemental disclosure of non-cash transactions: Issuance of common stock in connection with business and asset acquisitions$— $7,560 $39,248Acquisition of property and equipment under capital leases$325 $60 $1,386Supplemental cash flow information: Interest paid$12,035 $12,741 $9,466Income taxes paid$3,196 $2,934 $2,082See accompanying notes to consolidated financial statements.69Table of ContentsNUVASIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. Organization and Significant Accounting PoliciesDescription of Business. NuVasive, Inc. (the Company or NuVasive) was incorporated in Delaware on July 21, 1997, and began commercializingits products in 2001. The Company is focused on developing minimally disruptive surgical products and procedurally integrated solutions for the spine.NuVasive's principal product offering includes a minimally disruptive surgical platform called Maximum Access Surgery, or MAS®, as well as an offering ofbiologics, cervical and motion preservation products. The MAS platform combines three categories of solutions that collectively minimize soft tissuedisruption during spine fusion surgery, provide maximum visualization and are designed to enable reproducible outcomes for the surgeon. The platformincludes a proprietary software-driven nerve detection and avoidance systems, NVM5 and NVJJB, and Intra-Operative Monitoring (IOM) support;MaXcess®, an integrated split-blade retractor system; and a wide variety of specialized implants. The individual components of NuVasive's MAS platform,and many of the Company's products, can also be used in open or traditional spine surgery. The Company continues to focus significant research anddevelopment efforts to expand its MAS product platform and advance the applications of its unique technology into procedurally integrated surgical solutions.The Company dedicates significant resources toward training spine surgeons on its unique technology and products.The Company’s primary business model is to loan its MAS systems to surgeons and hospitals who purchase implants, biologics and disposables foruse in individual procedures. In addition, for larger customers, the Company’s proprietary nerve monitoring systems, MaXcess and surgical instrument setsare placed with hospitals for an extended period at no up-front cost to them. The Company also offers a range of bone allograft in patented saline packaging,disposables and spine implants, which include its branded CoRoent® products and fixation devices such as rods, plates and screws. Implants, biologics anddisposables are shipped from the Company’s inventories. The Company sells an immaterial quantity of MAS instrument sets, MaXcess and nervemonitoring systems to hospitals.On October 7, 2011, the Company completed the acquisition of Impulse Monitoring, Inc. (Impulse Monitoring), a company which provides IOMservices of the nervous system during spine and other surgeries. The acquisition complemented the Company’s existing nerve monitoring systems, which aredesigned for discreet and directional nerve avoidance and detection, making lateral access to the spine during the eXtreme lateral interbody fusion (XLIF®)procedure more safe and reproducible.Basis of Presentation and Principles of Consolidation. The accompanying consolidated financial statements include the accounts of the Companyand its wholly owned subsidiaries. Additionally, the consolidated financial statements for all periods presented include the accounts of a variable interestentity, Progentix Orthobiology, B.V. (Progentix), which is consolidated pursuant to existing guidance issued by the Financial Accounting Standards Board(FASB).As a result of the October 2011 acquisition of Impulse Monitoring, the Company maintains a contractual relationship with several physician practices(PCs) whereby the PCs provide the physician oversight service associated with the IOM services. Pursuant to such contractual arrangements, the Companyprovides management services to the PCs. As of December 31, 2013 and 2012, the associated PCs are American Neuromonitoring Associates, P.C.; PacificNeuromonitoring Associates, Inc.; Keystone Neuromonitoring Associates, P.C.; North Pacific Neuromonitoring Associates, P.C.; and MidwestNeuromonitoring Associates, Inc. Under the management services agreements, the Company provides all non-medical services to the PCs in return for amanagement fee that is settled on a monthly basis. The management services include management reporting, billing and collections of all charges for medicalservices provided and all administrative support to the PCs. Pursuant to existing guidance issued by the FASB, the accompanying consolidated financialstatements include the accounts of the PCs from the date of acquisition.All significant intercompany balances and transactions have been eliminated in consolidation. Use of Estimates. To prepare financial statements in conformity with generally accepted accounting principles accepted in the United States ofAmerica, management must make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actualresults could differ from those estimates.Concentration of Credit Risk and Significant Customers. Financial instruments, which potentially subject the Company to concentrations of creditrisk, consist primarily of cash and cash equivalents, short-term and long-term marketable securities and accounts receivable. The Company limits itsexposure to credit loss by placing its cash and investments with high credit quality financial institutions. Additionally, the Company has establishedguidelines regarding diversification of its investments and their maturities, which are designed to maintain principal and maximize liquidity. No singlecustomer represented greater than ten percent of sales or accounts receivable for any of the periods presented.70Table of ContentsFair Value of Financial Instruments. The Company’s financial instruments consist principally of cash and cash equivalents, short-term and long-term marketable securities, accounts receivable, accounts payable, accrued expenses, and Senior Convertible Notes. In addition, during the year endedDecember 31, 2011, financial instruments included a derivative liability and asset related to its Senior Convertible Notes.The carrying amounts of financial instruments such as cash equivalents, accounts receivable, accounts payable and accrued expenses approximate therelated fair values due to the short-term maturities of these instruments. Marketable securities consist of available-for-sale securities that are reported at fairvalue with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholders’ equity. Theestimated fair value of the Senior Convertible Notes is determined by using available market information as of the reporting date.In June 2011, the Company issued $402.5 million principal amount of 2.75% Senior Convertible Notes due 2017 (the 2017 Notes). Prior toSeptember 28, 2011, the 2017 Notes could only be settled in cash. On September 28, 2011, stockholder approval was obtained to increase the number of theCompany’s authorized shares of common stock from 70 million to 120 million. Prior to obtaining stockholder approval, in accordance with authoritativeguidance, the cash conversion feature of the 2017 Notes (the 2017 Notes Embedded Conversion Derivative) required bifurcation from the 2017 Notes and wasaccounted for as a derivative liability.In connection with the issuance of the 2017 Notes, the Company entered into convertible note hedge transactions (the 2017 Hedge) entitling the Companyto purchase up to 9,553,096 shares of the Company’s common stock at an initial stock price of $42.13 per share, each of which is subject to adjustment.Prior to obtaining the stockholder approval to increase the number of the Company’s authorized shares of common stock discussed above, the 2017 Hedgecould only be settled in cash. In accordance with authoritative guidance, the 2017 Hedge was accounted for as a derivative asset.Upon obtaining stockholder approval to increase the number of authorized shares of the Company’s common stock, the Company can now settle the2017 Notes in cash, stock, or a combination thereof, solely at the Company’s election. In accordance with authoritative guidance, the derivative liability andasset were marked to fair value and reclassified to stockholders’ equity.During the year ended December 31, 2011, the Company recognized non-cash income of approximately $2.4 million related to the net change in the fairvalues of the derivative liability and asset. This $2.4 million consists of a $39.5 million gain related to the change in the fair value of the derivative liabilityand a loss of $37.1 million related to the change in the fair value of the derivative asset. Gains and losses were recorded in the statement of operations as acomponent of other expense, net. Cash and Cash Equivalents. The Company considers all highly liquid investments that are readily convertible into cash and have an originalmaturity of three months or less at the time of purchase to be cash equivalents.Marketable Securities. The Company defines marketable securities as income yielding securities that can be readily converted into cash. Marketablesecurities consist of certificates of deposit, corporate notes, commercial paper, U.S. government treasury securities, and securities of government-sponsoredentities.Revenue Recognition. In accordance with the Securities and Exchange Commission's guidance, the Company recognizes revenue when all four of thefollowing criteria are met: (i) persuasive evidence that an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price isfixed or determinable; and (iv) collectability is reasonably assured. Specifically, revenue from the sale of implants, biologics and disposables is generallyrecognized upon acknowledgment of a purchase order from the hospital indicating product use or implantation or upon shipment to third-party customers whoimmediately accept title. Revenue from the sale of instrument sets is recognized upon receipt of a purchase order and the subsequent shipment to customerswho immediately accept title.Monitoring service revenue consists of hospital based revenues and net patient service revenues and is recorded in the period the service is provided.Hospital based revenues are recorded based upon contracted billing rates. Net patient services are billed to various payers, including Medicare, commercialinsurance companies, other directly billed managed healthcare plans, employers, and individuals. The Company reports revenues from contracted payers,including Medicare, certain insurance companies and certain managed healthcare plans, based on the contractual rate, or in the case of Medicare, thepublished fee schedules. The Company reports revenues from non-contracted payers, including certain insurance companies and individuals, based on theamount expected to be collected. The difference between the amount billed and the amount expected to be collected from non-contracted payers is recorded as acontractual allowance to arrive at net revenues. The expected revenues from non-contracted payers are based on the historical collection experience of each payeror payer group, as appropriate. In each reporting period, the Company reviews the historical collection experience for non-contracted payers and adjusts theexpected revenues for current and subsequent periods accordingly.71Table of ContentsAccounts Receivable and Related Valuation Accounts. Accounts receivable in the accompanying consolidated balance sheets are presented net ofallowances for doubtful accounts and sales returns.The Company performs credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers. The Companymakes judgments as to its ability to collect outstanding receivables and provides an allowance for specific receivables if and when collection becomes doubtful.Provisions are made based upon a specific review of all significant outstanding invoices as well as a review of the overall quality and age of those invoices notspecifically reviewed. In determining the provision for invoices not specifically reviewed, the Company analyzes historical collection experience and currenteconomic trends.In addition, the Company establishes a reserve for estimated sales returns that is recorded as a reduction to revenue. This reserve is maintained toaccount for the future return of products sold in the current period. Product returns were not material for the years ended December 31, 2013, 2012 and 2011. Inventory. Inventory consists primarily of purchased finished goods, which includes specialized implants and disposables, and is stated at the lowerof cost or market determined by a weighted average cost method. Approximately $5.9 million and $7.4 million of inventory was held at consigned locations atDecember 31, 2013 and 2012, respectively. The Company reviews the components of its inventory on a periodic basis for excess and obsolescence and recordsa reserve for the identified items. At December 31, 2013 and 2012, the balance of the allowance for excess and obsolete inventory is $21.9 million and $16.9million, respectively.Goodwill and Intangible Assets. Goodwill represents the excess of the aggregate purchase price over the fair value of the tangible and identifiableintangible assets acquired by the Company. Intangible assets are initially measured at their fair value, determined either by the fair value of the considerationexchanged for the intangible asset, or the estimated discounted cash flows expected to be generated from the intangible asset.The goodwill recorded as a result of the business combinations in the years presented is not deductible for tax purposes. Goodwill and indefinite livedintangible assets, which consists of in-process research and development acquired, are not amortized. The Company assesses goodwill and indefinite livedintangible assets for impairment using fair value measurement techniques on an annual basis or more frequently if facts and circumstance warrant such areview. For purposes of assessing the impairment of goodwill, the Company estimates the value of its primary reporting unit using its market capitalization asthe best evidence of fair value. For other reporting units, the Company estimates the fair value using the income approach valuation methodology based ondiscounted cash flows. If the carrying amount of a reporting unit exceeds its fair value, then a goodwill impairment test is performed to measure the amount ofthe impairment loss, if any. During 2013, consistent with the continued integration of Impulse Monitoring into the Company's core business, discrete financialinformation for Impulse Monitoring is no longer available which resulted in the combination of the former Impulse Monitoring reporting unit into theCompany's primary reporting unit. As such, in 2013, the Company had two reporting units; the Progentix reporting unit and the remainder of the Company.During the years ended December 31, 2013 and 2011, the Company did not record any impairment charges related to goodwill. During the fourth quarter of2012, the Company updated its discounted cash flow valuation model for Impulse Monitoring and based on management's current estimates of revenues andexpenses, related cash flows and the discount rate used in the model, the estimated fair value of the then Impulse Monitoring's reporting unit was less than itscarrying value. Management's estimates of revenues and related cash flows reflected the impacts of the significant coding changes for IOM services which tookeffect in 2013 and resulted in reduced reimbursement for IOM services. In accordance with the authoritative guidance, the Company recorded an impairmentcharge to Impulse Monitoring's goodwill of $8.3 million.During the years ended December 31, 2012 and 2011, the Company recorded impairment charges of $1.4 million and $17.6 million, respectively,related to the in process research and development recorded for the PCM® device acquired from Cervitech in 2009. The primary factor contributing to thisimpairment charge was the reduction in management’s revenue estimate and the related decrease to the estimated cash flows for this device. The PCM devicereceived U.S. Food and Drug Administration (FDA) approval in late 2012.Intangible assets with a finite life, such as acquired technology, customer relationships, manufacturing know-how, licensed technology, supplyagreements and certain trade names and trademarks, are amortized on a straight-line basis over their estimated useful life, ranging from one to 17 years.Intangible assets with a finite life are tested for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable.In determining the useful lives of intangible assets, the Company considers the expected use of the assets and the effects of obsolescence, demand,competition, anticipated technological advances, changes in surgical techniques, market influences and other economic factors. For technology basedintangible assets, the Company considers the expected life cycles of products which72Table of Contentsincorporate the corresponding technology. Trademarks and trade names that are related to products are assigned lives consistent with the period in which theproducts bearing each brand are expected to be sold.Property and Equipment. Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is computed usingthe straight-line method over the estimated useful lives of the assets, ranging from three to 20 years. Maintenance and repairs are expensed as incurred. TheCompany amortizes leasehold improvements over their estimated useful lives or the term of the applicable lease, whichever is shorter.The Company reviews property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying value of anasset may not be recoverable. An impairment loss would be recognized when estimated future undiscounted cash flows relating to the asset are less than itscarrying amount. An impairment loss is measured as the amount by which the carrying amount of an asset exceeds its fair value.Research and Development. Research and development costs are expensed as incurred. Product Shipment Costs. Amounts billed to customers for shipping and handling of products are reflected in revenues and are not significant for anyperiod presented. Product shipment costs are included in sales, marketing and administrative expense in the accompanying consolidated statements ofoperations and were $21.7 million, $17.6 million, and $18.8 million for the years ended December 31, 2013, 2012, and 2011, respectively.Income Taxes. A deferred tax asset or liability is determined based on the difference between the financial statement and tax basis of assets andliabilities as measured by the enacted tax rates which will be in effect when these differences reverse. The Company provides a valuation allowance against netdeferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax assets will be realized.Loss Contingencies. The Company is involved in a number of legal actions arising out of the normal course of our business. The outcomes of theselegal actions are not within the Company's complete control and may not be known for prolonged periods of time. In some actions, the claimants seek damagesas well as other relief, including injunctions barring the sale of products that are the subject of the lawsuit, that could require significant expenditures or resultin lost revenues. In accordance with authoritative guidance, the Company discloses information regarding each material claim where the likelihood of a losscontingency is probable or reasonably possible. An estimated loss contingency is accrued in the Company's financial statements if it is both probable that theliability has been incurred and the amount of the loss can be reasonably estimated. If a loss is reasonably possible and can be reasonably estimated, theestimated loss or range of loss is disclosed in the notes to the consolidated financial statements. In most cases, significant judgment is required to estimate theamount and timing of a loss to be recorded.Net Income (Loss) Per Share. The Company computes basic net income (loss) per share using the weighted-average number of common sharesoutstanding during the period. Diluted net income (loss) assumes the conversion, exercise or issuance of all potential common stock equivalents, unless theeffect of inclusion would be anti-dilutive. For purposes of this calculation, common stock equivalents include the Company’s stock options, unvestedrestricted stock units (RSUs), including those with performance and market conditions, warrants, and the shares to be issued upon the conversion of theSenior Convertible Notes. No shares related to the assumed conversion of the Senior Convertible Notes were included in the diluted net income (loss)calculation for the years ended December 31, 2013, 2012 and 2011 because the inclusion of such shares would have had an anti-dilutive effect. The shares tobe issued upon exercise of all outstanding warrants were excluded from the diluted net income (loss) calculation for all years presented because the inclusion ofsuch shares would have had an anti-dilutive effect.73Table of ContentsThe following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands, except share data): Year Ended December 31, 2013 2012 2011Numerator: Net income (loss) attributable to NuVasive, Inc.$7,902 $3,144 $(69,849)Denominator for basic and diluted net income (loss) per share: Weighted average common shares outstanding for basic44,461 43,328 40,372Dilutive potential common stock outstanding: Stock options and Employee Stock Purchase Plan (ESPP)416 177 —Restricted stock units1,909 767 —Weighted average common shares outstanding for diluted46,786 44,272 40,372Basic net income (loss) per share attributable to NuVasive, Inc.$0.18 $0.07 $(1.73)Diluted net income (loss) per share attributable to NuVasive, Inc.$0.17 $0.07 $(1.73) The following weighted outstanding common stock equivalents were not included in the calculation of net income (loss) per diluted share because theireffects were anti-dilutive (in thousands): Year Ended December 31, 2013 2012 2011Stock options, ESPP shares and unvested restricted stock units5,015 6,592 8,091Warrants12,709 14,694 10,009Senior Convertible Notes9,890 11,214 8,948Total27,614 32,500 27,048 Comprehensive Income (Loss). Comprehensive income (loss) is defined as the change in equity during a period from transactions and other eventsand circumstances from non-owner sources. Comprehensive income (loss) includes unrealized gains or losses on the Company’s marketable securities andforeign currency translation adjustments. The cumulative translation adjustments included in accumulated other comprehensive income (loss) were a netcumulative loss of $3.3 million at December 31, 2013 and a net cumulative gain of $0.7 million at December 31, 2012.Recently Adopted Accounting Standards. Effective January 1, 2013, the Company adopted the FASB's requirements for improved transparency ofreporting reclassifications out of accumulated other comprehensive income (AOCI). The guidance requires companies to report, in one place, information aboutreclassifications out of AOCI and to present reclassifications by component when reporting changes in AOCI balances. The adoption of this authoritativeguidance did not have an impact on the Company's financial position or results of operations.Change in Accounting Estimate. During the first quarter of 2011, the Company completed a review of the estimated useful life of its surgicalinstrument sets. Based on historical useful life information, as well as forecasted product life cycles and demand expectations, the useful life of certainsurgical instrument sets was extended from three to four years. In accordance with authoritative guidance, this was accounted for as a change in accountingestimate and was made on a prospective basis effective January 1, 2011. For the year ended December 31, 2013, depreciation expense, which is included insales, marketing and administrative expenses, was higher by approximately $4.6 million than it would have been had the useful life of these assets not beenextended. For the years ended December 31, 2012 and 2011, depreciation expense was lower by approximately $1.2 million and $5.9 million, respectively,than it would have been had the useful life of these assets not been extended. The effect of this change on net income for the years ended December 31, 2013,2012, and 2011 was $3.3 million, $0.7 million, and $4.2 million, respectively. The effect of this change on both basic and diluted earnings per share for theyear ended December 31, 2013 was a decrease of $0.07 per share. The effect of this change on both basic and diluted earnings per share for the years endedDecember 31, 2012 and 2011 was an increase of $0.02, and $0.10 per share, respectively.74Table of ContentsReclassifications and Adjustments. Certain reclassifications have been made to the prior year consolidated financial statements and notes to conformto the current year presentation.During the year ended December 31, 2011, the Company identified an immaterial error in the consolidated financial statements for the year endedDecember 31, 2010 related to the accrual of payroll expenses. Based on a quantitative and qualitative analysis of the error as required by authoritativeguidance, management concluded that the correction, which increased expenses by approximately $1.3 million for the year ended December 31, 2011, had nomaterial impact on any of the Company’s previously issued financial statements, was immaterial to the full year results for 2011 and had no effect on thetrend of financial results. Of the $1.3 million, approximately $1.0 million and $0.3 million was charged to sales, marketing and administrative expenses andresearch and development expenses, respectively.2. Business CombinationsImpulse Monitoring, Inc. AcquisitionOn October 7, 2011 (the Closing Date), the Company completed the purchase of all of the outstanding shares of Impulse Monitoring pursuant to anAgreement and Plan of Merger dated September 28, 2011 for the aggregate purchase price of approximately $80.9 million, consisting of cash totalingapproximately $41.7 million and the issuance of 2,336,200 shares of NuVasive common stock to certain stockholders of Impulse Monitoring. ImpulseMonitoring provides IOM services for insight into the nervous system during spine and other surgeries. The acquisition complemented the Company’s existingnerve monitoring systems, which are designed for discreet and directional nerve avoidance and detection, making lateral access to the spine during the XLIFprocedure more safe and reproducible. The Company allocated the purchase price to the assets acquired and liabilities assumed at estimated fair values as ofthe closing date. The excess of the purchase price over the aggregate fair values of approximately $57.7 million was recorded as goodwill.During the fourth quarter of 2012, the Company updated its discounted cash flow valuation model for Impulse Monitoring and based on management'scurrent estimates of revenues and expenses, related cash flows and the discount rate used in the model, the estimated fair value of the then Impulse Monitoringreporting unit was less than its carrying value. Management's estimates of revenues and related cash flows reflect the impacts of the significant coding changesfor IOM services which took effect in 2013 and resulted in reduced reimbursement for IOM services. In accordance with the authoritative guidance, theCompany recorded an impairment charge to Impulse Monitoring's goodwill of $8.3 million.As a result of the acquisition, the Company maintains a contractual relationship with several PCs whereby the PCs provide the physician oversightservice associated with the IOM services. Pursuant to such contractual arrangements, the Company provides management services to the PCs in return for amanagement fee that is settled on a monthly basis. Pursuant to existing guidance issued by the FASB, the accompanying consolidated financial statementsinclude the accounts of the PCs from the date of acquisition. The liabilities recognized as a result of consolidating the PCs, which are not material, do notrepresent additional claims on the Company’s general assets. The creditors of the PCs have claims only on the assets of the PCs, which are not material, andthe assets of the PCs are not available to the Company.Results of OperationsThe accompanying consolidated statement of operations reflects the operating results of Impulse Monitoring since the date of the acquisition. Therevenues and amount of loss attributable to Impulse Monitoring included in the Company’s consolidated statement of operations from the acquisition date toDecember 31, 2011 was $8.5 million and $1.0 million, respectively. For the year ended December 31, 2011, the Company’s consolidated results of operationsinclude acquisition-related expenses of $1.5 million which are included in sales, marketing and administrative expenses.The Company has prepared the following unaudited pro forma financial statement information to compare results of the periods presented assuming theImpulse Monitoring acquisition had occurred as of January 1, 2010. These unaudited pro forma results have been prepared for comparative purposes onlyand do not purport to be an indicator of the results of operations that would have actually resulted had the acquisition occurred at the beginning of each of theperiods presented, or of future results of operations. Assuming the Impulse Monitoring acquisition occurred as of January 1, 2010, the pro forma unauditedresults of operations would have been as follows for the year ended December 31, 2011 (in thousands, except per share data): 75Table of ContentsNUVASIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Year EndedDecember 31, 2011Revenue$570,410Net (loss) income attributable to NuVasive, Inc.$(67,176)Net (loss) income per share — basic$(1.59)Net (loss) income per share — diluted$(1.59)The above pro forma unaudited results of operations do not include pro forma adjustments relating to costs of integration or post-integration costreductions that may have been incurred or realized by the Company.Investment in Progentix Orthobiology, B.V.In 2009, the Company completed the purchase of forty percent (40%) of the capital stock of Progentix, a company organized under the laws of theNetherlands, from existing shareholders (the Progentix Shareholders) pursuant to a Preferred Stock Purchase Agreement for $10 million in cash (the InitialInvestment). Concurrent with the Initial Investment, NuVasive and Progentix also entered into a Senior Secured Facility Agreement, whereby Progentix mayborrow up to $5.0 million from NuVasive to fund ongoing clinical and regulatory efforts (the Loan). At December 31, 2013, the Company had advancedProgentix the full $5.0 million in accordance with the loan agreement. The Loan accrues interest at a rate of six percent (6%) per year. Other than its obligationsunder the Loan, NuVasive is not obligated to provide additional funding.Also concurrent with the Preferred Stock Purchase Agreement, NuVasive, Progentix and the Progentix Shareholders entered into an Option PurchaseAgreement, as amended (the Option Agreement), whereby NuVasive was obligated under certain circumstances, and had the option under other circumstances,to purchase the remaining sixty percent (60%) of capital stock of Progentix (Remaining Shares) from its shareholders for an amount up to $35.0 million,subject to certain reductions. The Option Agreement expired unexercised on June 13, 2013. NuVasive and Progentix also entered into a Distribution Agreement,as amended, whereby Progentix appointed NuVasive as its exclusive distributor for certain Progentix products. The Distribution Agreement will be in effect fora term of ten years unless terminated earlier in accordance with its terms. In accordance with authoritative guidance, the Company has determined that Progentix is a variable interest entity as it does not have the ability tofinance its activities without additional subordinated financial support and its equity investors will not absorb their proportionate share of expected losses andwill be limited in the receipt of the potential residual returns of Progentix. Additionally, pursuant to this guidance, NuVasive is considered its primarybeneficiary as NuVasive has both (1) the power to direct the economically significant activities of Progentix and (2) the obligation to absorb losses of, or theright to receive benefits from, Progentix. Accordingly, the financial position and results of operations of Progentix have been included in the Company’sconsolidated financial statements from the date of the Initial Investment. The liabilities recognized as a result of consolidating Progentix do not representadditional claims on the Company’s general assets. The creditors of Progentix have claims only on the assets of Progentix, which are not material, and theassets of Progentix are not available to NuVasive.Pursuant to authoritative guidance, the equity interests in Progentix not owned by the Company, which includes shares of both common and preferredstock, are reported as noncontrolling interests on the consolidated balance sheet of the Company. The preferred stock represents 18% of the noncontrollingequity interests and provides for a cumulative 8% dividend, if and when declared by Progentix’s Board of Directors. As the rights of the preferred stock aresubstantially the same as those of the common stock, the preferred stock is classified as noncontrolling interest and shares in the allocation of the lossesincurred by Progentix. Losses incurred by Progentix are charged to the Company and to the noncontrolling interest holders based on their ownership percentage.The Remaining Shares and the Option Agreement that was entered into between NuVasive, Progentix and the Progentix Shareholders were not considered to befreestanding financial instruments during the Option Period as defined by authoritative guidance. Therefore, during the Option Period, the Remaining Sharesand the Option Agreement were accounted for as a combined unit on the consolidated financial statements as a redeemable noncontrolling interest that wasinitially recorded at fair value and classified as mezzanine equity. Upon the expiration of the Option Agreement on June 13, 2013, the noncontrolling interestwas no longer redeemable and therefore, pursuant to the authoritative guidance, the noncontrolling interest was reclassified out of mezzanine equity to its owncomponent of total equity within the Company's consolidated balance sheet.76Table of ContentsNUVASIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Total assets and liabilities of Progentix included in the accompanying consolidated balance sheet are as follows (in thousands): December 31, 2013 2012Total current assets$580 $657Identifiable intangible assets, net14,403 14,871Goodwill12,654 12,654Other long-term assets7 15Accounts payable & accrued expenses403 230Deferred tax liabilities, net2,770 2,890Noncontrolling interests9,086 10,003 The following is a reconciliation of equity (net assets) attributable to the noncontrolling interests (in thousands): Year EndedDecember 31, 2013 2012Noncontrolling interests at beginning of period$10,003 $10,705Less: Net loss attributable to the noncontrolling interests prior to reclassification from mezzanine to equity514 702Less: Net loss attributable to the noncontrolling interests subsequent to reclassification from mezzanine toequity403 —Noncontrolling interests at end of period$9,086 $10,0033. Marketable SecuritiesMarketable securities consist of certificates of deposit, corporate notes, commercial paper, U.S. government treasury securities and securities ofgovernment-sponsored entities. The Company classifies all securities as available-for-sale, as the sale of such securities may be required prior to maturity toimplement management strategies. These securities are carried at fair value, with the unrealized gains and losses reported as a component of othercomprehensive income (loss) in stockholder’s equity until realized. A decline in the market value of any marketable security below cost that is determined to beother-than-temporary will result in a revaluation of its carrying amount to fair value. The impairment is charged to earnings and a new cost basis for thesecurity is established. No such impairment charges were recorded for any period presented.Realized gains and losses from the sale of marketable securities, if any, are determined on a specific identification basis. Realized gains and losses anddeclines in value judged to be other-than-temporary, if any, on available-for-sale securities are included in other income or expense on the consolidatedstatements of operations. Realized gains and losses during the periods presented were immaterial. Premiums and discounts are amortized or accreted over thelife of the related security as an adjustment to yield using the straight-line method and are included in interest income on the consolidated statements ofoperations. Interest and dividends on securities classified as available-for-sale are included in interest income on the consolidated statements of operations.77Table of ContentsNUVASIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The composition of marketable securities is as follows (in thousands, except years): ContractualMaturity(in Years) Amortized Cost GrossUnrealizedGains GrossUnrealizedLosses Fair ValueDecember 31, 2013: Classified as current assets Certificates of depositLess than 1 $833 $— $— $833Corporate notesLess than 1 71,611 23 (6) 71,628Commercial paperLess than 1 19,973 — — 19,973U.S. government treasury securitiesLess than 1 7,603 2 — 7,605Securities of government-sponsored entitiesLess than 1 43,405 14 (9) 43,410Short-term marketable securities 143,425 39 (15) 143,449Classified as non-current assets Certificates of deposit1 to 2 283 — — 283Corporate notes1 to 2 32,309 23 (14) 32,318U.S. government treasury securities1 to 2 1,500 1 — 1,501Securities of government-sponsored entities1 to 2 45,722 19 (14) 45,727Long-term marketable securities 79,814 43 (28) 79,829Classified as restricted investments U.S. government treasury securitiesLess than 2 43,274 16 (6) 43,284Securities of government-sponsored entitiesLess than 2 29,125 4 (16) 29,113Restricted investments 72,399 20 (22) 72,397Total marketable securities at December 31, 2013 $295,638 $102 $(65) $295,675 December 31, 2012: Classified as current assets Certificates of depositLess than 1 $998 $— $— $998Corporate notesLess than 1 19,169 3 (1) 19,171Commercial paperLess than 1 9,995 2 — 9,997U.S. government treasury securitiesLess than 1 17,055 6 — 17,061Securities of government-sponsored entitiesLess than 1 91,151 27 — 91,178Short-term marketable securities 138,368 38 (1) 138,405Classified as non-current assets Corporate notes1 to 2 23,293 — (17) 23,276U.S. government treasury securities1 to 2 7,619 4 — 7,623Securities of government-sponsored entities1 to 2 53,493 22 (2) 53,513Long-term marketable securities 84,405 26 (19) 84,412Classified as restricted investments U.S. government treasury securitiesLess than 2 31,784 5 (1) 31,788Securities of government-sponsored entitiesLess than 2 53,618 18 (1) 53,635Restricted investments 85,402 23 (2) 85,423Total marketable securities at December 31, 2012 $308,175 $87 $(22) $308,240As of December 31, 2013, the Company had no investments that were in a significant unrealized loss position. The Company reviews its investments toidentify and evaluate investments that have an indication of possible other-than-temporary impairment. Factors considered in determining whether a loss isother-than-temporary include the length of time and extent to which fair value78Table of ContentsNUVASIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)has been less than the cost basis, the financial condition and near-term prospects of the investee, and the Company’s intent and ability to hold the investmentfor a period of time sufficient to allow for any anticipated recovery in market value. The Company maintains an investment portfolio of various holdings,types and maturities. The Company does not hold derivative financial investments. The Company places its cash investments in instruments that meet highcredit quality standards, as specified in its investment policy guidelines. These guidelines also limit the amount of credit exposure to any one issue, issuer ortype of instrument.4. Fair Value MeasurementsThe Company measures certain assets and liabilities in accordance with authoritative guidance which requires fair value measurements be classifiedand disclosed in one of the following three categories:Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.Level 3: Unobservable inputs are used when little or no market data is available.Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fairvalue hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain assetsor liabilities within the fair value hierarchy. The Company did not have any transfers of assets and liabilities between Level 1 and Level 2 of the fair valuemeasurement hierarchy during the years ended December 31, 2013 and 2012. The Company had no transfers from Level 3 of the fair value measurementhierarchy during the year ended December 31, 2013 and two transfers from Level 3 of the fair value measurement hierarchy during the year endedDecember 31, 2012, both occurring as a result of the liabilities being paid or settled during the year.79Table of ContentsNUVASIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The fair values of the Company’s assets and liabilities, which are measured at fair value on a recurring basis, were determined using the followinginputs (in thousands): Total Quoted Price inActive Market(Level 1) Significant OtherObservable Inputs(Level 2) SignificantUnobservableInputs (Level 3)December 31, 2013: Cash Equivalents, Marketable Securities and RestrictedInvestments: Money market funds$72,514 $72,514 $— $—Certificates of deposit1,116 1,116 — —Corporate notes103,946 — 103,946 —Commercial paper19,973 — 19,973 —U.S. government treasury securities52,390 52,390 — —Securities of government-sponsored entities118,250 — 118,250 —Total cash equivalents, marketable securities and restrictedinvestments$368,189 $126,020 $242,169 $— Contingent Consideration: Acquisition-related liabilities, current$(616) $— $— $(616)Acquisition-related liabilities, non-current(596) — — (596)Total contingent consideration$(1,212) $— $— $(1,212) December 31, 2012: Cash Equivalents, Marketable Securities and RestrictedInvestments: Money market funds$89,101 $89,101 $— $—Certificates of deposit998 998 — —Corporate notes42,447 — 42,447 —Commercial paper9,997 — 9,997 —U.S. government treasury securities56,472 56,472 — —Securities of government-sponsored entities198,326 — 198,326 —Total cash equivalents, marketable securities and restrictedinvestments$397,341 $146,571 $250,770 $—Contingent Consideration: Acquisition-related liabilities, non-current$(1,074) $— $— $(1,074)The fair and carrying value of the Company’s Senior Convertible Notes is discussed in Note 6. The estimated fair value of our long-term capital leaseobligations approximated their carrying values as of December 31, 2013 and 2012.Contingent Consideration LiabilityIn connection with the acquisition of Cervitech in May 2009, the Company was required to pay an additional amount not to exceed $33.0 million in theevent that the PCM device received FDA approval. The fair value of the contingent consideration was determined using a probability-weighted discounted cashflow model, the significant inputs of which were not observable in the market. The key assumptions in applying this approach were the interest rate, thetiming of expected approval and the probability assigned to the milestone being achieved. During the fourth quarter of 2012, the PCM device was approved bythe FDA. Accordingly, the contingent consideration liability was accreted to $33.0 million. Changes in fair value were recorded in the statement of operations assales, marketing and administrative expenses.In connection with an immaterial acquisition in 2012, the Company is required to pay an amount not to exceed €2.0 million in the event two specifiedrevenue-based milestones are met. The fair value of the contingent consideration was determined using80Table of ContentsNUVASIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)a discounted cash flow model, the significant inputs of which are not observable in the market. The key assumptions in applying this approach are therevenue projections, the interest rate and the probabilities assigned to the milestones being achieved. Based on these assumptions, the estimated fair value of thecontingent consideration totaled $1.2 million at December 31, 2013 and is included in accrued liabilities in the December 31, 2013 consolidated balance sheet.Changes in fair value are recorded in the statements of operations as sales, marketing and administrative expenses.In addition, the Company paid approximately $0.5 million during the year ended December 31, 2012 related to contingent consideration recorded inconnection with an immaterial acquisition which occurred in 2010. The following table sets forth the changes in the estimated fair value of the Company’s liabilities measured on a recurring basis using significantunobservable inputs (Level 3) (in thousands): December 31, 2013 2012Fair value measurement at beginning of period$1,074 $32,221Contingent consideration liability recorded upon acquisition— 1,019Change in fair value measurement included in operating expenses138 1,364Contingent consideration paid or settled— (33,530)Fair value measurement at end of period$1,212 $1,074Non-financial assets and liabilities measured on a nonrecurring basisCertain nonfinancial assets and liabilities are measured at fair value on a nonrecurring basis in accordance with authoritative guidance. These includeitems such as nonfinancial assets and liabilities initially measured at fair value in a business combination and nonfinancial long-lived asset groups measuredat fair value for an impairment assessment. In general, nonfinancial assets including goodwill, intangible assets and property and equipment are measured atfair value when there is an indication of impairment and are recorded at fair value only when any impairment is recognized.During the fourth quarter of 2012, the Company updated its discounted cash flow valuation model for Impulse Monitoring and based on management'scurrent estimates of revenues and expenses, related cash flows and the discount rate used in the model, the estimated fair value of then the then ImpulseMonitoring reporting unit was less than its carrying value. Management's estimates of revenues and related cash flows reflected the impacts of the significantcoding changes for IOM services which took effect in 2013 and resulted in reduced reimbursement for IOM services. In accordance with the authoritativeguidance, the Company recorded an impairment charge to Impulse Monitoring's goodwill of $8.3 million.During the fourth quarter of 2012 and 2011, as a result of reductions in management’s estimates of revenues and related cash flows used in thevaluation models principally due to an updated view of the competitive and regulatory landscape in the cervical market, the carrying value of the IPR&D anddeveloped technology acquired from Cervitech in 2009 exceeded their estimated fair value. Accordingly, the Company recorded impairment charges totalingapproximately $1.4 million and $18.2 million during the years ended December 31, 2012 and 2011, respectively. The fair value of the IPR&D and developedtechnology acquired was determined using a discounted cash flow model, the significant inputs of which are not observable in the market. The PCM devicewas approved by the FDA in late 2012.81Table of ContentsNUVASIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)5. Balance Sheet DetailsProperty and Equipment, net. Property and equipment, net, consisted of the following (in thousands, except years): UsefulLife December 31, 2013 2012Instrument sets3 to 4 $171,454 $159,960Machinery and equipment5 to 7 21,722 17,719Computer equipment and software3 to 7 46,896 37,690Leasehold improvements2 to 15 21,825 20,735Furniture and fixtures3 to 7 7,510 7,744Building and improvements10 to 20 7,371 7,195Land— 541 541 277,319 251,584Less: accumulated depreciation and amortization (149,255) (126,461) $128,064 $125,123Depreciation expense was $43.8 million, $39.5 million, and $29.6 million for the years ended December 31, 2013, 2012 and 2011, respectively. AtDecember 31, 2013 and 2012, assets recorded under capital leases of $1.8 million and $1.4 million, respectively, are included in the machinery andequipment balance. Amortization of assets under capital leases is included in depreciation expense.Capitalized internal-use software costs include only those direct costs associated with the actual development or acquisition of computer software forinternal use, including costs associated with the design, coding, installation, and testing of the system. At December 31, 2013 and 2012, the Company had$16.2 million and $14.6 million in unamortized capitalized software costs, respectively. Amortization expense related to capitalized internal-use software costswas $4.5 million, $2.8 million and $1.8 million for the years ended December 31, 2013, 2012 and 2011, respectively.Goodwill and Intangible Assets. Goodwill and intangible assets as of December 31, 2013 consisted of the following (in thousands, except years): Weighted-AverageAmortizationPeriod(in years) GrossAmount AccumulatedAmortization IntangibleAssets, netIntangible Assets Subject to Amortization: Purchased technology: Developed technology10 $62,328 $(21,359) $40,969Manufacturing know-how and trade secrets12 21,997 (9,890) 12,107Trade name and trademarks11 9,500 (3,317) 6,183Customer relationships8 43,871 (19,784) 24,087 10 $137,696 $(54,350) $83,346Intangible Assets Not Subject to Amortization: In-process research and development 10,640Goodwill 154,944Total goodwill and intangible assets, net $248,930 82Table of ContentsNUVASIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Goodwill and intangible assets as of December 31, 2012 consisted of the following (in thousands, except years): Weighted-AverageAmortizationPeriod(in years) GrossAmount AccumulatedAmortization IntangibleAssets, netIntangible Assets Subject to Amortization: Purchased technology: Developed technology10 $55,178 $(14,966) $40,212Manufacturing know-how and trade secrets12 21,712 (7,996) 13,716Trade name and trademarks11 9,500 (2,333) 7,167Customer relationships9 39,330 (9,703) 29,627 10 $125,720 $(34,998) $90,722Intangible Assets Not Subject to Amortization: In-process research and development 10,640Goodwill 154,106Total goodwill and intangible assets, net $255,468Total expense related to the amortization of intangible assets was $19.3 million, $12.4 million and $6.6 million for the years ended December 31, 2013,2012 and 2011, respectively. In-process research and development will be amortized beginning on the approval date of the respective acquired products andwill be amortized over the estimated useful life determined at that time.Total future amortization expense related to intangible assets subject to amortization at December 31, 2013 is set forth in the table below (in thousands): 2014$14,343201513,254201612,776201710,42320189,905Thereafter through 202622,645Total future amortization expense$83,346The changes to goodwill are comprised of the following (in thousands): December 31, 2013 2012Balance at beginning of period$154,106 $159,349Impairment charge— (8,300)Additions recorded in connection with business acquisitions764 2,827Other74 230Balance at end of period$154,944 $154,106 83Table of ContentsNUVASIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Accounts Payable and Accrued Liabilities. Accounts payable and accrued liabilities consisted of the following (in thousands): December 31, 2013 2012Accounts payable$14,281 $9,040Accrued expenses19,078 20,880Royalties payable38,967 19,861Distributor commissions payable7,319 7,523Non-income taxes payable3,951 3,144Other2,461 1,600 $86,057 $62,048Other Long-Term Liabilities. Other long-term liabilities consisted of the following (in thousands): December 31, 2013 2012Deferred rent$12,883 $13,340Capital lease obligation, non-current223 426Contingent consideration, non-current596 1,074Other1,142 359 $14,844 $15,1996. Senior Convertible NotesThe carrying values of the Company’s Senior Convertible Notes are as follows (in thousands): December 31, 2013 20122.75% Senior Convertible Notes due 2017: Principal amount$402,500 $402,500Unamortized debt discount(56,440) (70,096) 346,060 332,4042.25% Senior Convertible Notes due 2013— 74,311Total Senior Convertible Notes$346,060 $406,7152.75% Senior Convertible Notes due 2017In June 2011, the Company issued $402.5 million principal amount of the 2017 Notes, which includes the issuance of $52.5 million principal amountfor the exercise of the initial purchasers’ option to purchase additional notes. The net proceeds from the offering, after deducting initial purchasers’ discountsand costs directly related to the offering, were approximately $359.2 million. The 2017 Notes have a stated interest rate of 2.75% and mature on July 1, 2017.Prior to September 28, 2011, the date on which stockholder approval to increase the number of the Company’s authorized shares of common stock from 70million to 120 million was obtained, the 2017 Notes were settleable only in cash. Subsequent to the receipt of this approval, the 2017 Notes may be settled incash, stock, or a combination thereof, solely at the Company’s election. It is the Company’s current intent and policy to settle all conversions throughcombination settlement, which involves repayment of an amount of cash equal to the principal amount and any excess of the conversion value over theprincipal amount in shares of common stock. The initial conversion rate of the 2017 Notes is 23.7344 shares per $1,000 principal amount, subject toadjustment (which represents an initial conversion price of approximately $42.13 per share).Interest on the 2017 Notes began accruing in June 2011 and is payable semi-annually each January 1st and July 1st, beginning January 1, 2012. Thefair value, based on a quoted market price, or Level 1, of the outstanding 2017 Notes at December 31, 2013 and 2012 is approximately $439.3 million and$361.3 million, respectively.84Table of ContentsNUVASIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Prior to January 1, 2017, holders may convert their notes only under the following conditions: a) During any calendar quarter beginning October 1,2011, if the reported sale price of the Company’s common stock for at least 20 days of 30 consecutive trading days ending on the last trading day of theimmediately preceding calendar quarter is greater than 130% of the conversion price on each applicable trading day; b) During the five business day period inwhich the trading price of the 2017 Notes falls below 98% of the product of (i) the last reported sale price of the Company’s common stock and (ii) theconversion rate on that date; and c) Upon the occurrence of specified corporate events, as defined in the 2017 Notes. From January 1, 2017 and until the closeof business on the second scheduled trading day immediately preceding the July 1, 2017, holders may convert their 2017 Notes at any time, regardless of theforegoing circumstances. The Company may not redeem the 2017 Notes prior to maturity. As of December 31, 2013, the “if-converted” value of the 2017Notes did not exceed its principal amount and none of the conditions allowing holders of the 2017 Notes to convert had been met.Other than restrictions relating to certain fundamental changes and consolidations, mergers or asset sales and customary anti-dilution adjustments, the2017 Notes do not contain any financial covenants and do not restrict the Company from paying dividends or issuing or repurchasing any of its othersecurities.In accordance with authoritative guidance, the cash conversion feature of the 2017 Notes (the 2017 Notes Embedded Conversion Derivative) requiredbifurcation from the 2017 Notes and was initially accounted for as a derivative liability. The fair value of the 2017 Notes Embedded Conversion Derivative atthe time of issuance of the 2017 Notes was $88.9 million, and was recorded as the original debt discount for purposes of accounting for the debt componentof the 2017 Notes. On September 28, 2011, upon obtaining stockholder approval of the additional authorized shares of the Company’s common stock, inaccordance with authoritative literature, the derivative liability was marked to fair value and reclassified to stockholders’ equity. The original debt discountwill be recognized as interest expense using an effective interest rate of 8.0% over the term of the 2017 Notes. At December 31, 2013 and 2012, the net carryingvalue of the equity component is $49.3 million.The interest expense recognized on the 2017 Notes during the year ended December 31, 2013 includes $11.1 million and $13.7 million for thecontractual coupon interest and the accretion of the debt discount, respectively. The interest expense recognized on the 2017 Notes during the year endedDecember 31, 2012 includes $11.1 million and $12.7 million for the contractual coupon interest and the accretion of the debt discount, respectively.In connection with the offering of the 2017 Notes, the Company entered into convertible note hedge transactions (the 2017 Hedge) with the initialpurchasers and/or their affiliates (the Counterparties) entitling the Company to purchase up to 9,553,096 shares of the Company’s common stock at aninitial stock price of $42.13 per share, each of which is subject to adjustment. Prior to obtaining the stockholder approval to increase the number of theCompany’s authorized common shares discussed above, the 2017 Hedge was settleable only in cash and was accounted for as a derivative asset. The cost ofthe 2017 Hedge was $80.1 million. On September 28, 2011, upon obtaining stockholder approval of the additional authorized shares of the Company’scommon stock, in accordance with authoritative literature, the derivative asset was marked to fair value and reclassified to stockholders’ equity. The 2017Hedge expires on July 1, 2017. The 2017 Hedge is expected to reduce the potential equity dilution upon conversion of the 2017 Notes if the daily volume-weighted average price per share of the Company’s common stock exceeds the strike price of the 2017 Hedge. In addition, the Company sold warrants to the Counterparties to acquire up to 477,654 shares of the Company’s Series A Participating Preferred Stock(the 2017 Warrants), at an initial strike price of $988.51 per share, subject to adjustment. Each share of Series A Participating Preferred Stock is initiallyconvertible into 20 shares of the Company’s common stock. The 2017 Warrants expire on various dates from September 2017 through January 2018 and maybe settled in cash or net shares. The Company received $47.9 million in cash proceeds from the sale of the 2017 Warrants, which has been recorded as anincrease in additional paid-in-capital. The 2017 Warrants could have a dilutive effect on the Company’s earnings per share to the extent that the price of theCompany’s common stock during a given measurement period (the quarter or year-to-date period) exceeds the strike price of the 2017 Warrants.2.25% Senior Convertible Notes due 2013In March 2008, the Company issued $230.0 million principal amount of 2.25% unsecured Senior Convertible Notes (the 2013 Notes). The net proceedsfrom the offering, after deducting the initial purchasers’ discounts and costs directly related to the offering, were approximately $208.4 million. During theyear ended December 31, 2011, the Company repurchased, in privately negotiated transactions, approximately $155.7 million in principal of its 2013 Notes.The aggregate purchase price totaled approximately $155.5 million (representing a price of approximately 99.0% of the principal face value of the 2013 Notes,plus accrued interest). The repurchases were made using a portion of the net proceeds from the issuance of the 2017 Notes. Including the write off of a portionof the deferred financing costs related to the 2013 Notes, during the year ended December 31, 2011, the Company recorded a loss on the extinguishment of debtof approximately $0.3 million. The remaining balance of the 2013 Notes85Table of ContentsNUVASIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)matured on March 15, 2013 and accordingly, during the first quarter of 2013, the Company repaid the total outstanding principal amount of 74.3 million incash.In connection with the offering of the 2013 Notes, the Company sold to the initial purchasers and/or their affiliates warrants to acquire up to 5.1 millionshares of the Company's common stock (the 2013 Warrants), at an initial strike price of $49.13 per share, subject to adjustment. All 2013 Warrants expiredunexercised on or before October 8, 2013.7. CommitmentsLeasesThe Company leases office facilities and equipment under various operating and capital lease agreements. The initial terms of these leases range fromtwo years to 15 years and generally provide for periodic rent increases and renewal options. Certain leases require the Company to pay taxes, insurance andmaintenance. In connection with certain operating leases, the Company has issued irrevocable transferable letters of credit totaling $5.6 million.For financial reporting purposes, rent expense is recognized on a straight-line basis over the term of the lease. Accordingly, rent expense recognized inexcess of rent paid is reflected as a liability in the accompanying consolidated balance sheets. Rent expense, including expenses directly associated with thefacility leases, was approximately $12.0 million, $10.8 million, and $9.9 million for the years ended December 31, 2013, 2012, and 2011, respectively.The Company’s future minimum annual lease payments under capital and operating leases, including payments for costs directly associated with thefacility leases, for years ending after December 31, 2013 are as follows (in thousands): CapitalLeases OperatingLeases2014$580 $8,6682015146 8,2802016127 8,3472017— 8,2202018— 8,021Thereafter— 33,698Total minimum lease payments853 $75,234Less amount representing interest, 14.6% weighted average interest rate(105) Present value of obligations under capital leases748 Less current portion(525) Long-term capital lease obligations$223 Other CommitmentsIn connection with several purchase and product development agreements, the Company is contingently obligated to make additional payments of up to$20.2 million primarily upon the achievement of specified milestones, which are expected to be met over the next five years. The Company also hasapproximately $1.0 million in obligations for minimum royalties and consulting arrangements to be paid over the next five years.8. Stockholders’ EquityPreferred Stock. There are 5,000,000 shares of preferred stock authorized and none issued or outstanding at December 31, 2013 and 2012.On June 28, 2011, in connection with the issuance of the 2017 Warrants, the Company amended its Restated Certificate of Incorporation to designate477,654 shares of the Company’s authorized preferred stock, par value $0.001 per share, as Series A Participating Preferred Stock (the Series A PreferredStock). The Series A Preferred Stock will automatically convert into shares of the Company’s common stock.86Table of ContentsNUVASIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The holders of Series A Preferred Stock (collectively, the Preferred Holders) are entitled to receive dividends when and if declared by the Board ofDirectors. The preferred dividends are payable in preference and in priority to any dividends on the Company’s common stock.Shares of Series A Preferred Stock are convertible into 20 shares of common stock, subject to certain antidilution adjustments. Preferred Holders vote onan equivalent basis with common stockholders on an as-converted basis.The Preferred Holders are entitled to receive liquidation preferences at the rate of $648.20 per share. Liquidation payments to the Preferred Holders havepriority and are made in preference to any payments to the holders of common stock.Stock-Based Compensation. The compensation cost that has been included in the statement of operations for all stock-based compensationarrangements was as follows (in thousands): Year Ended December 31, 2013 2012 2011Sales, marketing and administrative expense$31,425 $24,096 $29,583Research and development expense1,649 2,138 2,487Cost of goods sold166 78 —Total stock-based compensation expense$33,240 $26,312 $32,070The Company estimates the fair value of stock options and shares issued to employees under the ESPP using a Black-Scholes option-pricing model onthe date of grant. The Black-Scholes option-pricing model incorporates various and highly sensitive assumptions including expected volatility, expected termand risk-free interest rates. The expected volatility is based on the historical volatility of the Company’s common stock over the most recent periodcommensurate with the estimated expected term of the Company’s stock options. The expected term of the Company’s stock options is based on historicalexperience. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield in effect at the time of grant. TheCompany has never declared or paid dividends and has no plans to do so in the foreseeable future. The fair value of RSUs and Performance-Based RestrictedStock Units (PRSUs) is based on the stock price on the date of grant. The fair value of the performance based restricted stock units that are earned based onthe achievement of pre-defined market conditions for total stockholder return (TSR PRSUs) is estimated on the date of grant using a Monte Carlo valuationmodel. The key assumptions in applying this model are an expected volatility and a risk free interest rate. The fair value of equity instruments that areexpected to vest are recognized and amortized on an accelerated basis over the requisite service period. Stock Option and Restricted Stock Units. In October 1998, the Company adopted the 1998 Stock Incentive Plan (the 1998 Plan) to grant options topurchase common stock to eligible employees, non-employee members of the board of directors, consultants and other independent advisors who provideservices to the Company. Under the 1998 Plan, 4.3 million shares of common stock, as amended, were initially reserved for issuance upon exercise of optionsgranted by the Company. The Board of Directors determined the terms of the stock option agreements, including vesting requirements. Options under the1998 Plan have a 10-year term and generally vest over a period not to exceed 4 years from the date of grant. All options granted under the 1998 Plan allowedfor early exercise prior to the option becoming fully vested.In April 2004, the Board of Directors replaced the 1998 Plan with the 2004 Equity Incentive Plan (the 2004 Plan) under which 7 million shares (plus theremaining shares available for grant under the 1998 Plan) of the Company’s common stock were authorized for future issuance, and reserved for purchaseupon exercise of options granted. In addition, the 2004 Plan provides for automatic annual increases in the number of shares reserved for issuance thereunderequal to the lesser of (i) 4% of the Company’s outstanding shares on the last business day in December of the calendar year immediately preceding;(ii) 4,000,000 shares; or (iii) a number of shares determined by the Board of Directors. As of December 31, 2013, 1.3 million shares remained available forfuture grant under the 2004 Plan.The 2004 Plan provides for the grant of incentive and non-statutory stock options, restricted stock units (RSUs) and rights to purchase stock toemployees, directors and consultants of the Company. The 2004 Plan provides that incentive stock options will be granted only to employees and are subject tocertain limitations as to fair value during a calendar year. Under the 2004 Plan, the exercise price of incentive stock options must equal at least the fair value onthe date of grant and the exercise price of non-statutory stock options and the issuance price of common stock may be no less than 85% of the fair value on thedate of grant or issuance. The options are exercisable for a period of up to ten years after the date of grant and generally vest 25% one year from date of grantand ratably each month thereafter for a period of 36 months. RSUs granted to officers subject to time-based vesting requirements vest annually at 33% per yearbeginning one year from date of grant. The remaining RSUs subject to time-87Table of ContentsNUVASIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)based vesting requirements generally vest annually at 25% per year beginning one year from date of grant. In addition, the Board of Directors has provided forthe acceleration of 50% of the unvested options of all employees upon a change in control and the vesting of the remaining unvested options for those employeesthat are involuntarily terminated within a year of the change in control.Following is a summary of stock option activity for the year ended December 31, 2013 under all stock plans (in thousands, except years and pershare amounts): Shares WeightedAvg. ExercisePrice Weighted-AverageRemainingContractualTerm (Years) AggregateIntrinsicValue as ofDecember 31, 2013Outstanding at December 31, 20126,716 $30.44 Granted— $— Exercised(177) $19.03 Cancelled(177) $30.91 Outstanding at December 31, 20136,362 $30.75 4.71 $24,996Exercisable at December 31, 20136,040 $30.94 4.59 $23,264Vested or expected to vest at December 31, 20136,355 $30.75 4.71 $24,954The aggregate intrinsic value of options at December 31, 2013 is based on the Company’s closing stock price on December 31, 2013 of $32.33. TheCompany received $3.4 million, $0.5 million and $2.9 million in proceeds from the exercise of stock options during the years ended December 31, 2013,2012 and 2011, respectively. The total intrinsic value of options exercised was $2.0 million, $0.4 million, and $1.6 million during the years endedDecember 31, 2013, 2012 and 2011, respectively. The total fair value of options that vested during the year ended December 31, 2013, 2012 and 2011 was$6.8 million, $15.1 million, and $17.3 million, respectively. Restricted Stock Units. Following is a summary of RSU activity for the year ended December 31, 2013 (in thousands, except per share amounts): Number ofShares WeightedAverageGrant DateFair ValueNonvested at December 31, 20121,823 $21.15Granted1,179 $19.49Vested(548) $23.69Forfeited(150) $20.23Nonvested at December 31, 20132,304 $19.77The total fair value of RSUs that vested during the year ended December 31, 2013, 2012 and 2011 was $10.4 million, $5.6 million and $4.3 million,respectively.Performance Awards. During the first quarter of 2012, the Compensation Committee of the Board of Directors (the Compensation Committee) grantedPRSUs to certain senior Company executives that were earned based on the achievement of pre-defined Company-specific performance criteria (PerformanceConditions) for the year ended December 31, 2012. Each recipient was eligible to receive between 0% and 250% of the target number of shares of Companycommon stock subject to the applicable award based on the Company's actual performance in 2012 as measured against the Performance Conditions. Basedupon the actual performance against the Performance Conditions, approximately 117,000 shares of common stock vested on March 1, 2013. The remainingtwo-thirds vest equally on March 1, 2014 and March 1, 2015 as long as the recipient is employed by the Company on each such date.During the first quarter of 2013, the Compensation Committee granted TSR PRSUs to certain senior Company executives that were earned based on theachievement of pre-defined market conditions (Market Conditions) for the year ended December 31, 2013. The TSR PRSUs vest in two equal installments onFebruary 1, 2014 and February 1, 2015 so long as the recipient is employed by the Company on each such date. Each recipient was eligible to receive between0% and 350% of the target number of shares of Company common stock subject to the applicable award based on the Company's actual performance in 2013as measured88Table of ContentsNUVASIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)against the Market Conditions. Based upon the actual performance against the Market Conditions, approximately 470,000 shares of common stock vested onFebruary 1, 2014. The second half vests on February 1, 2015 as long as the recipient is employed by the Company on each such date.A summary of the Company's Performance Awards award activity for the year ended December 31, 2013 is as follows (in thousands, except per shareamounts): Shares Maximum Numberof Shares Eligible tobe Issued Average GrantDate Fair ValueOutstanding at December 31, 2012287 717 $15.61Awarded at target269 941 $19.24Achieved in excess of target64 (366) $15.61Vested(117) (117) $15.61Forfeited— — $—Outstanding at December 31, 2013503 1,175 $18.51The total fair value of Performance Awards vested during the year ended December 31, 2013 was $2.3 million.Employee Stock Purchase Plan. In 2004, the Board of Directors approved the Employee Stock Purchase Plan (ESPP). The ESPP initially allowed forthe issuance of up to 100,000 shares of NuVasive common stock, increasing annually on December 31 by the lesser of (i) 600,000 shares; (ii) 1% of theoutstanding shares of NuVasive common stock; or (iii) a lesser amount determined by the Board of Directors. Under the terms of the ESPP, employees canelect to have up to 15% of their annual compensation, up to a maximum of $21,250 per year withheld to purchase shares of NuVasive common stock. Thepurchase price of the common stock is equal to 85% of the lower of the fair market value per share of the common stock on the commencement date of the two-year offering period or the end of each semi-annual purchase period. In the years ended December 31, 2013, 2012 and 2011, 417,154, 368,639, and 228,091shares, respectively, were purchased under the ESPP and approximately 1.6 million shares remain available for issuance under the ESPP as of December 31,2013.The weighted average assumptions used to estimate the fair value of stock options granted and stock purchase rights under the ESPP are as follows: Year Ended December 31, 2013 2012 2011Stock Options Volatility—% —% 49%Expected term (years)0.0 0.0 5.4Risk free interest rate—% —% 2.1%Expected dividend yield—% —% —%ESPP Volatility55% 57% 57%Expected term (years)1.5 1.6 1.2Risk free interest rate0.2% 0.2% 0.2%Expected dividend yield—% —% —%The Company did not grant any stock options during the years ended December 31, 2013 and 2012. The weighted-average fair value of options grantedin the year ended December 31, 2011 was $12.31 per share. As of December 31, 2013, there was $0.6 million, $16.1 million and $4.7 million ofunrecognized compensation expense for stock options, RSUs and Performance Awards, respectively, which is expected to be recognized over a weighted-average period of approximately 0.7 years, 2.8 years and 1.1 years, respectively. In addition, as of December 31, 2013, there was $3.3 million of unrecognizedcompensation expense for shares expected to be issued under the ESPP which is expected to be recognized through October 2015.89Table of ContentsNUVASIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Common Stock Reserved for Future Issuance. The following table summarizes common shares reserved for issuance at December 31, 2013 onexercise or conversion of (in thousands): Common stock options: Issued and outstanding6,362Available for future grant1,286Available for issuance under the ESPP1,589Issued and outstanding RSUs and PRSUs3,4792017 Notes12,419Senior Convertible Note warrants19,106Total shares reserved for future issuance44,2419. Income TaxesThe income (loss) before income taxes by region is summarized as follows (in thousands): Year Ended December 31, 2013 2012 2011United States$8,818 $10,723 $(100,179)Foreign950 533 115Total income (loss) before income taxes$9,768 $11,256 $(100,064) The components of income tax expense (benefit) consist of the following (in thousands): Year Ended December 31, 2013 2012 2011Current income tax expense: Federal$10,484 $941 $300State2,718 3,235 1,524Foreign922 113 100Total current income tax expense14,124 4,289 1,924Deferred income tax expense (benefit): Federal(8,060) 6,551 (33,860)State(905) (1,588) 2,893Foreign(2,376) (438) —Total deferred income tax expense (benefit)(11,341) 4,525 (30,967)Total income tax expense (benefit)$2,783 $8,814 $(29,043)For the year ended December 31, 2013, the total income tax expense differs from the statutory federal income tax rate (35%) due to state income taxes netof federal benefit, foreign tax rates, general business credits, changes in valuation allowances and certain non-deductible expenses. In addition, in January2013, the research and development tax credit which had expired for 2012 was retroactively reinstated. The Company recognized a benefit of approximately$0.8 million in the first quarter of 2013 for the year ended December 31, 2012.For the year ended December 31, 2012, the total income tax expense differs from the statutory federal income tax rate (35%) due to the non-deductiblegoodwill impairment charge of $8.3 million, state income taxes, net of federal benefit, estimates for certain non-deductible expenses and certain foreign lossesincurred for which no benefit can be recorded.For the year ended December 31, 2011, the total income tax expense differs from the statutory federal income tax rate (35%) primarily due to state incometax expense, stock compensation expenses, and the write-off of deferred tax assets related to tax original issue discount on the convertible debt resulting fromthe debt repurchases which occurred in 2011. In 2011, the Company established a valuation allowance on the California deferred tax assets and accordingly,recorded income tax expense of $4.890Table of ContentsNUVASIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)million. The California deferred tax assets for which a valuation allowance has been established were primarily related to net operating loss carryforwards andcredits.These differences are the result of the following items (in thousands): Year Ended December 31, 2013 2012 2011Provision at statutory rate$3,419 $3,940 $(35,022)Foreign provision in excess of federal statutory rate205 37 32State income tax (benefit) expense, net of federal benefit(222) 2,189 (1,821)Stock based compensation887 1,561 2,131Meals & entertainment343 655 649Permanent differences27 54 483Impairment charges— 2,905 —Research and development credits(1,668) — (1,028)Other188 (374) 973Change in valuation allowance(396) (2,153) 4,560Total income tax expense (benefit)$2,783 $8,814 $(29,043)Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reportingpurposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows (inthousands): December 31, 2013 2012Deferred Tax Assets: Net operating loss carry-forwards$6,785 $7,018Stock based compensation37,192 31,804Original issue discount— 270General business credit carry-forwards3,215 4,692Litigation and related accrual49,779 44,796Other12,290 11,178Gross deferred tax assets109,261 99,758Valuation allowance(8,989) (8,275)Net deferred tax assets$100,272 $91,483Deferred Tax Liabilities: Capitalized assets$(4,277) $(5,507)Original issue discount(2,276) (2,767)Acquired intangibles(16,714) (17,476)Other— (51)Deferred tax liabilities(23,267) (25,801)Consolidated net deferred tax assets77,005 65,682Add: Deferred tax liability, net, attributable to noncontrolling interests1,681 1,753Net deferred tax assets$78,686 $67,435In assessing the realizability of deferred tax assets, the Company considered whether it is more likely than not that some portion or all of the deferred taxassets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in whichthose temporary differences become deductible. Based on all available evidence, the Company has concluded that it is more likely than not that it will be ableto realize the benefit of the federal deferred tax assets in the future.91Table of ContentsNUVASIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)At December 31, 2012, the Company maintained a full valuation allowance on the net deferred tax assets in certain foreign jurisdictions. The Companyanalyzes the realizability of the deferred tax assets each period. During the fourth quarter of 2013, the Company concluded that its foreign operations in therespective jurisdictions will generate sufficient taxable income in future periods to realize the tax benefit associated with the related deferred tax assets.Accordingly, we reversed a valuation allowance totaling approximately $2.2 million that was previously recorded against these deferred tax assets.During 2011, as a result of recording the $101.2 million litigation award and the application of the single sales factor election for California, theCompany concluded that it was no longer more likely than not that they would be able to realize the deferred tax assets attributable to the state of California. Asa result, the Company established a valuation allowance on the California net deferred tax assets and maintains that valuation allowance as of December 31,2013.At December 31, 2013, the Company has federal net operating loss carryforwards of $18.2 million that begin to expire in 2017. In addition, theCompany has California and foreign net operating loss carryforwards of approximately $13.1 million and $8.9 million, respectively. The California andforeign net operating loss carryforwards begin to expire in 2014 and 2018, respectively.During 2008, NuVasive elected the “with and without method — direct effects only”, prescribed in accordance with authoritative guidance, withrespect to recognition of stock option excess tax benefits within APIC and will utilize continuing operations net operating losses to offset taxable income beforeutilization of windfall tax benefits. Included in the aforementioned federal net operating loss carryforwards are $8.3 million of excess tax benefit carryforwardsrelated to stock option deduction windfalls that will be realized in APIC following utilization of all continuing operations tax attributes.At December 31, 2013, the Company has federal research and development (R&D) credit carryforwards of approximately $2.7 million that will begin toexpire in 2018. Additionally, the Company has California R&D credit carryforwards of approximately $6.8 million that can be carried forward indefinitely.IRC §382 limits the utilization of tax carryforwards that arise prior to certain cumulative changes in a corporation’s ownership. During 2012, theCompany completed a formal IRC §382 study with respect to potential ownership changes and additional limitations were not identified. Previous limitationsdue to §382 have been reflected in the deferred tax assets at December 31, 2013.In accordance with authoritative guidance, the impact of an uncertain income tax position on the income tax return must be recognized at the largestamount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it hasless than a 50% likelihood of being sustained.A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands): Year Ended December 31, 2013 2012 2011Unrecognized tax benefit at the beginning of the year$4,399 $4,279 $3,930Additions from tax positions taken in the current year13 100 178Additions from tax positions taken in prior years92 20 171Reductions from tax positions taken in prior years— — —Settlements of tax audits— — —Unrecognized tax benefit at the end of the year$4,504 $4,399 $4,279At December 31, 2013, 2012 and 2011, $3.2 million, $3.2 million and $3.1 million, respectively, of the Company’s total unrecognized tax benefits, ifrecognized, would affect the effective income tax rate. The Company does not anticipate there will be a significant change in unrecognized tax benefits withinthe next 12 months.The Company does not record U.S. income taxes on the undistributed earnings of its foreign subsidiaries based upon the Company's intention topermanently reinvest undistributed earnings to ensure sufficient working capital and further expansion of existing operations outside the United States. Theundistributed earnings of the foreign subsidiaries as of December 31, 2013 are immaterial. In the event the Company is required to repatriate funds fromoutside of the United States, such repatriation would be subject to local laws, customs, and tax consequences.92Table of ContentsNUVASIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. As the unrecognized tax benefits relate toun-utilized deferred tax assets and because the Company has generated net operating losses since inception for both federal and state income tax purposesthrough 2009, no additional tax liability, penalties or interest have been recognized for balance sheet or statement of operations purposes as of and for theperiod ended December 31, 2013 and 2012. The Company is subject to taxation in the U.S. and various foreign and state jurisdictions. All of the Company’s tax years are subject to examinationdue to the carry forward of un-utilized net operating losses and R&D credits.10. Business Segment, Product and Geographic InformationThe Company’s business operates in one segment based upon the Company’s organizational structure, the way in which the operations are managedand evaluated and the lack of availability of separate financial results.The Company’s spine surgery product line offerings, which include thoracolumbar product offerings, cervical offerings, and motion preservationproducts, are primarily used to enable access to the spine and to perform restorative and fusion procedures in a minimally disruptive fashion. The Company’sbiologic product line offerings includes allograft (donated human tissue), FormaGraft®, a collagen synthetic product, Osteocel Plus®, an allograft cellularmatrix containing viable mesenchymal stem cells, or MSCs, and AttraX®, a synthetic bone graft material, all used to aid the spinal fusion process. TheCompany’s monitoring service offering includes IOM services provided. Revenue by product line offerings was as follows (in thousands): Year Ended December 31, 201320122011Spine Surgery Products$530,370$471,186$430,970Biologics115,633110,17999,759Monitoring Service39,17038,8909,777Total Revenue$685,173$620,255$540,506Revenue and property and equipment, net, by geographic area were as follows (in thousands): Revenue Property and Equipment, Net Year Ended December 31, December 31, 2013 2012 2011 2013 2012United States$620,363 $575,255 $511,310 $109,458 $112,701International (excludes Puerto Rico)64,810 45,000 29,196 18,606 12,422Total$685,173 $620,255 $540,506 $128,064 $125,12311. Legal ProceedingsMedtronic Sofamor Danek USA, Inc. LitigationIn August 2008, Warsaw Orthopedic, Inc., Medtronic Sofamor Danek USA, Inc. and other Medtronic related entities (collectively, Medtronic) filed suitagainst NuVasive in the U.S. District Court for the Southern District of California (the Medtronic Litigation), alleging that certain of NuVasive’s productsinfringe, or contribute to the infringement of, twelve U.S. patents assigned or licensed to Medtronic. Three of the patents were later withdrawn by Medtronic,leaving nine patents. NuVasive brought counterclaims against Medtronic alleging infringement of certain of NuVasive’s patents. The case has beenadministratively broken into serial phases. The first phase of the case included three Medtronic patents and one NuVasive patent and on September 20, 2011,a jury from the U.S. District Court delivered an unfavorable verdict against NuVasive with respect to the three Medtronic patents and a favorable verdict withrespect to the one NuVasive patent. The jury awarded monetary damages of approximately $101.2 million to Medtronic, which includes lost profits and backroyalties (the 2011 verdict). Medtronic’s subsequent motion for a permanent injunction was denied by the District Court on January 26, 2012. On March 19,2012, the District Court issued an order granting prejudgment interest, and on June 11, 2013, the District Court ruled on the ongoing royalty rates (the June2013 ruling). On August 20, 2013, NuVasive and Medtronic filed their respective notices of appeal, and the appeal is now proceeding before the U.S. Court ofAppeals for the Federal Circuit. In addition, on March 19, 2012, the Company entered into an escrow arrangement and transferred $113.3 million of cash intoa restricted escrow account to secure the amount of judgment, plus93Table of ContentsNUVASIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)prejudgment interest, during pendency of the appeal. These funds are included in restricted cash and investments on the Company's December 31, 2013consolidated balance sheet.In accordance with the authoritative guidance on the evaluation of loss contingencies, during the year ended December 31, 2011, the Company recordedan accrual of $101.2 million for the 2011 verdict. In addition, on sales subsequent to the 2011 verdict and through March 31, 2013, the Company accruedroyalties at the royalty rates stated in the 2011 verdict. Upon receiving the District Court ruling in June 2013, the Company began accruing ongoing royaltieson sales at the royalty rates stated in the June 2013 ruling, and recorded a charge of approximately $7.9 million to account for the difference between using theroyalty rates stated in the 2011 verdict and those in the June 2013 ruling on sales through March 31, 2013. As a result of the June 2013 ruling, the Companywill be required to escrow funds to secure accrued royalties, estimated at $21 million to date, and ongoing royalties. The Company is also accruing post-judgment interest. With respect to the prejudgment interest award, the Company, based on its own assessment, as well as that of outside counsel, believes areversal of the prejudgment interest award on appeal is probable, and therefore, in accordance with authoritative guidance on the evaluation of losscontingencies, the Company has not recorded an accrual for this amount, which is estimated to approximate $13.0 million. Additional damages, includinginterest may still be awarded, and at December 31, 2013, the Company cannot estimate a range of additional potential loss.With respect to the favorable verdict delivered regarding the one NuVasive patent, the jury awarded the Company monetary damages of approximately$0.7 million for reasonable royalty damages. In accordance with the authoritative guidance on the evaluation of gain contingencies, this amount has not beenrecorded at December 31, 2013. Additionally, the June 2013 ruling determined the ongoing royalty rate to be paid to the Company by Medtronic for its post-verdict sales of the one NuVasive patent. Consistent with the treatment afforded the $0.7 million damage award, no amount has been recorded for royaltyrevenue as of December 31, 2013.The second phase of the case pending in the Southern District of California involved one Medtronic cervical plate patent. On April 25, 2013, NuVasiveand Medtronic entered into a settlement agreement fully resolving the second phase of the case. The settlement also removes from the case the cervical platepatent that was part of the first phase. As part of the settlement, NuVasive received a broad license to practice (i) the Medtronic patent that was the sole subjectof the second phase of the litigation, (ii) the Medtronic patent that was part of the first phase of the litigation, and (iii) each of the Medtronic patent families thatcollectively represent the vast majority of Medtronic's patent rights related to cervical plate technology. In exchange for these license rights, NuVasive made aone-time payment to Medtronic of $7.5 million, which amount will be fully offset against any damage award ultimately determined to be owed by NuVasivein connection with a final resolution of the first phase of the litigation. In addition, Medtronic will receive a royalty on certain cervical plate products sold byNuVasive, including the Helix® and Gradient® lines of products. As a result of this settlement, all current patent disputes between the parties related to cervicalplate technology have been resolved.In August 2012, Medtronic filed additional patent claims in the U.S. District Court for the Northern District of Indiana alleging that various NuVasivespinal implants (including its CoRoent® XL family of spinal implants) and NuVasive's Osteocel® Plus bone graft product infringe two additional MedtronicPatents not asserted in the Southern District of California and that NuVasive's XLIF procedure and use of MaXcess IV retractor during the XLIF procedureinfringe methodology claims of another Medtronic patent. The case was later transferred to the Southern District of California and on March 7, 2013, theCompany counterclaimed to allege infringement by Medtronic of eight NuVasive patents not asserted in the first or second phases of the litigation. On June 27,2013, NuVasive filed an inter partes review petition with the U.S. Patent Office challenging U.S. patent No. 8,444,696, ("the '696 patent"), which issued toMedtronic on May 21, 2013. On July 25, 2013, Medtronic amended its complaint to add a charge of infringement of the '696 patent. The District Court hasyet to determine which patents are to be tried in this phase of the case, and a trial readiness conference is scheduled for November 2014. Trial of this thirdphase of the case is currently scheduled to begin in December 2014. At December 31, 2013, the probable outcome of this litigation cannot be determined, norcan the Company estimate a range of potential loss. In accordance with the authoritative guidance on the evaluation of loss contingencies, the Company has notrecorded an accrual related to this litigation.Trademark Infringement LitigationIn September 2009, Neurovision Medical Products, Inc. (NMP) filed suit against NuVasive in the U.S. District Court for the Central District ofCalifornia (Case No. 2:9-cv-6988-R-JEM) alleging trademark infringement and unfair competition. NMP sought cancellation of NuVasive’s “NeuroVision”trademark registrations, injunctive relief and damages based on NMP’s common law use of the “Neurovision” mark. On November 23, 2009, the Companydenied the allegations in NMP’s complaint. After trial of the matter, on October 25, 2010 an unfavorable jury verdict was delivered against the Companyrelating to its use of the NeuroVision trade name. The verdict awarded damages to NMP of $60.0 million. The Company appealed the judgment and onSeptember 10, 2012, the Court of Appeals reversed and vacated the District Court judgment and ordered the case back to the District Court for a new trialbefore a different judge. On October 5, 2012, the case was reassigned to a new District Court judge94Table of ContentsNUVASIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)and re-trial of the matter is currently scheduled to begin in the District Court in Spring 2014. During pendency of the appeal, the Company was required toescrow funds totaling $62.5 million to secure the amount of the judgment, plus interest, attorneys’ fees and costs. As a result of the reversal of the judgment,the full $62.5 million was released from escrow and returned to the Company. At December 31, 2013, the probable outcome of this litigation cannot bedetermined, nor can the Company estimate a range of potential loss. In accordance with the authoritative guidance on the evaluation of loss contingencies, theCompany has not recorded an accrual related to this litigation.Securities LitigationOn August 28, 2013, a purported securities class action lawsuit was filed by Danny Popov in the United States District Court for the Southern Districtof California naming NuVasive and certain of its current and former executive officers for allegedly making false and materially misleading statementsregarding the Company's business and financial results, specifically relating to the purported improper submission of false claims to Medicare and Medicaid.The complaint asserts a putative class period stemming from October 22, 2008 to July 30, 2013. The complaint alleges violations of Sections 10(b) and 20(a)of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder and seeks unspecified monetary relief, interest, and attorneys’fees. The Company intends to vigorously defend against this action. At December 31, 2013, the probable outcome of this litigation cannot be determined, norcan the Company estimate a range of potential loss. In accordance with authoritative guidance on the evaluation of loss contingencies, the Company has notrecorded an accrual related to this litigation.ContingenciesThe Company is party to certain claims and legal actions arising in the normal course of business. The Company does not expect any such claims andlegal actions to have a material adverse effect on its business, results of operations or financial condition.12. Regulatory MatterDuring the second quarter of 2013, the Company received a federal administrative subpoena from the Office of the Inspector General of the U.S.Department of Health and Human Services (OIG) in connection with an investigation into possible false or otherwise improper claims submitted to Medicareand Medicaid. The subpoena seeks discovery of documents for the period January 2007 through April 2013. The Company is working with the OIG tounderstand the scope of the subpoena and to provide the requested documents. The Company intends to fully cooperate with the OIG's request. AtDecember 31, 2013, the Company is unable to determine the potential financial impact, if any, that will result from this investigation.95Table of ContentsNUVASIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)13. Quarterly Data (unaudited)The following quarterly financial data, in the opinion of management, reflects all adjustments, consisting of normal recurring adjustments necessary,for a fair presentation of results for the periods presented (in thousands, except per share amounts): Year Ended December 31, 2013 FirstQuarter SecondQuarter (1) ThirdQuarter FourthQuarterTotal revenues$159,504 $165,698 $169,156 $190,815Gross profit120,408 116,954 125,865 141,462Consolidated net income (loss)596 (6,728) 7,280 5,837Net income (loss) attributable to NuVasive, Inc.851 (6,469) 7,511 6,009Basic net income (loss) per common share attributable toNuVasive, Inc.0.02 (0.15) 0.17 0.13Diluted net income (loss) per common share attributable toNuVasive, Inc.0.02 (0.15) 0.16 0.13 Year Ended December 31, 2012 FirstQuarter SecondQuarter ThirdQuarter FourthQuarter (2)Total revenues$151,691 $154,419 $148,391 $165,754Gross profit114,758 117,885 110,645 123,558Consolidated net income (loss)469 2,610 2,139 (2,776)Net income (loss) attributable to NuVasive, Inc.673 2,863 2,354 (2,746)Basic net income (loss) per common share attributable toNuVasive, Inc.0.02 0.07 0.05 (0.06)Diluted net income (loss) per common share attributable toNuVasive, Inc.0.02 0.06 0.05 (0.06) (1)Consolidated financial results include a one-time royalty expense charge of $7.9 million, accounting for the difference in using the Medtronic royalty ratesstated in the September 2011 verdict and those in the June 2013 ruling on sales through March 31, 2013.(2)Consolidated financial results include impairment charges of $8.3 million for Impulse Monitoring's goodwill and $1.4 million related to certain intangibleassets.96Table of ContentsNuVasive, Inc.Schedule II: Valuation Accounts(In thousands) Balance atBeginning of Period Additions(1) Deductions(2) Other(3) Balance atEnd of PeriodAccounts Receivable Valuation Accounts Year ended December 31, 2013$2,780 $753 $52 $— $3,481Year ended December 31, 2012$3,430 $107 $757 $— $2,780Year ended December 31, 2011$2,573 $2,328 $488 983 $3,430 Balance atBeginning of Period Additions(4) Deductions(5) Balance atEnd of PeriodInventory Reserve Year ended December 31, 2013$16,856 $10,003 $4,985 $21,874Year ended December 31, 2012$11,739 $9,324 $4,207 $16,856Year ended December 31, 2011$6,244 $9,438 $3,943 $11,739 (1)Amount represents customer balances deemed uncollectible.(2)Uncollectible accounts written-off.(3)Amount represents recoveries received.(4)Amount represents excess and obsolete reserve recorded to cost of sales.(5)Excess and obsolete inventory written-off against reserve.97Table of ContentsExhibitNumber Description3.1 Restated Certificate of Incorporation (incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-50744) filed withthe Commission on August 13, 2004) 3.2 Certificate of Amendment to the Restated Certificate of Incorporation (incorporated by reference to our Current Report on Form 8-Kfiled with the Commission on September 28, 2011) 3.3 Restated Bylaws (incorporated by reference to our Current Report on Form 8-K filed with the Commission on January 6, 2012) 4.1 Specimen Common Stock Certificate (incorporated by reference to our Annual Report on Form 10-K (File No. 000-50744) filed withthe Commission on March 16, 2006) 4.2 Certificate of Designations of Series A Participating Preferred Stock filed with the Delaware Secretary of State on June 28, 2011(incorporated by reference to our Current Report on Form 8-K filed with the Commission on June 29, 2011) 4.3 Indenture dated as of June 28, 2011 between the Company and the Trustee (incorporated by reference to our Current Report onForm 8-K filed with the Commission on June 29, 2011) 4.4 Form of 2.75% Convertible Senior Note due 2017 (incorporated by reference to our Current Report on Form 8-K filed with theCommission on June 29, 2011) 10.1# 2004 Amended and Restated Equity Incentive Plan (incorporated by reference to Quarterly Report on Form 10-Q filed with theCommission on July 26, 2012) 10.2# Amendment No. 1 to the 2004 Amended and Restated Equity Incentive Plan (filed herewith) 10.3# Form of Stock Option Award Notice under our 2004 Equity Incentive Plan (incorporated by reference to Amendment No. 1 to ourRegistration Statement on Form S-1 (File No. 333-113344) filed with the Commission on April 8, 2004) 10.4# Form of Option Exercise and Stock Purchase Agreement under our 2004 Equity Incentive Plan (incorporated by reference toAmendment No. 1 to our Registration Statement on Form S-1 (File No. 333-113344) filed with the Commission on April 8, 2004). 10.5# Form of Restricted Stock Unit Award Agreement under our 2004 Equity Incentive Plan (incorporated by reference to our AnnualReport on Form 10-K filed with the Commission on February 26, 2010) 10.6# Form of Restricted Stock Grant Notice and Restricted Stock Agreement under 2004 Amended and Restated Equity Incentive Plan(incorporated by reference to Amendment No.1 to the Registrant’s Registration Statement on Form S-1 (File No. 333-113344) filedwith the Commission on April 8, 2004) 10.7# 2004 Employee Stock Purchase Plan (incorporated by reference to Amendment No. 1 to our Registration Statement on Form S-1 (FileNo. 333-113344) filed with the Commission on April 8, 2004) 10.8# Amendment No. 1 to the 2004 Employee Stock Purchase Plan (incorporated by reference to our Quarterly Report on Form 10-Q (FileNo. 000-50744) filed with the Commission on November 7, 2008) 10.9# Amendment No. 2 to the 2004 Employee Stock Purchase Plan (incorporated by reference to our Annual Report on Form 10-K filedwith the Commission on February 25, 2011) 10.10# Amendment No. 3 to the 2004 Employee Stock Purchase Plan (incorporated by reference to our Annual Report on Form 10-K filedwith the Commission on February 26, 2013) 10.11# Amendment No. 4 to the 2004 Employee Stock Purchase Plan (filed herewith) 98Table of ContentsExhibitNumber Description10.12# Executive Employment Agreement, dated as of January 2, 2011, by and between NuVasive, Inc. and Alexis V. Lukianov(incorporated by reference to our Current Report on Form 8-K filed with the Commission on January 6, 2011) 10.13# Offer Letter Agreement, dated October 19, 2009, by and between NuVasive, Inc. and Michael Lambert (incorporated by reference toour Annual Report on Form 10-K filed with the Commission on February 26, 2010) 10.14# Employment Agreement by and between NuVasive, Inc. and Matthew Link, dated January 2, 2013 (incorporated by reference to ourAnnual Report on Form 10-K filed with the Commission on February 26, 2013) 10.15# Employment Agreement by and between NuVasive, Inc. and Russell Powers, dated October 4, 2012 (incorporated by reference to ourAnnual Report on Form 10-K filed with the Commission on February 26, 2013) 10.16# Offer Letter Agreement, dated December 22, 2013, by and between NuVasive, Inc. and Michael Paolucci (filed herewith) 10.17# Form of Compensation Letter Agreement dated March 4, 2011 between NuVasive, Inc. and each of the following: Keith C. Valentine,Patrick Miles, Michael J. Lambert, Jason M. Hannon and Craig E. Hunsaker (incorporated by reference to our Quarterly Report onForm 10-Q filed with the Commission on May 6, 2011) 10.18# Form of Compensation Letter Agreement dated December 18, 2013, between NuVasive, Inc. and Michael Paolucci (filed herewith) 10.19# Separation Letter Agreement dated December 13, 2013 between NuVasive, Inc. and Craig Hunsaker (filed herewith) 10.20# Form of Indemnification Agreement between NuVasive, Inc. and each of our directors and officers (incorporated by reference to ourRegistration Statement on Form S-1 (File No. 333-113344) filed with the Commission on March 5, 2004) 10.21# Non-Employee Director Cash Compensation Plan (filed herewith) 10.22# Lease Agreement for Sorrento Summit, entered into as of November 6, 2007, between the Company and HCPI/Sorrento, LLC.(incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-50744) filed with the Commission on November 8,2007) 10.23 Confirmation for base call option transaction dated as of June 22, 2011, between Bank of America, N.A. and the Company(incorporated by reference to our Current Report on Form 8-K filed with the Commission on June 29, 2011) 10.24 Confirmation for additional call option transaction dated as of June 24, 2011, between Bank of America, N.A. and the Company(incorporated by reference to our Current Report on Form 8-K filed with the Commission on June 29, 2011) 10.25 Confirmation for base call option transaction dated as of June 22, 2011, between Goldman, Sachs & Co. and the Company(incorporated by reference to our Current Report on Form 8-K filed with the Commission on June 29, 2011) 10.26 Confirmation for additional call option transaction, dated as of June 24, 2011, between Goldman, Sachs & Co. and the Company(incorporated by reference to our Current Report on Form 8-K filed with the Commission on June 29, 2011) 10.27 Confirmation for base warrant transaction, dated as of June 22, 2011, between Bank of America, N.A. and the Company(incorporated by reference to our Current Report on Form 8-K filed with the Commission on June 29, 2011) 99Table of ContentsExhibitNumber Description10.28 Confirmation for additional warrant transaction, dated as of June 24, 2011, between Bank of America, N.A. and the Company(incorporated by reference to our Current Report on Form 8-K filed with the Commission on June 29, 2011) 10.29 Confirmation for base warrant transaction, dated as of June 22, 2011, between Goldman, Sachs & Co. and the Company(incorporated by reference to our Current Report on Form 8-K filed with the Commission on June 29, 2011) 10.30 Confirmation for additional warrant transaction, dated as of June 24, 2011, between Goldman, Sachs & Co. and the Company(incorporated by reference to our Current Report on Form 8-K filed with the Commission on June 29, 2011) 10.31 Preferred Stock Purchase Agreement, dated January 13, 2009, among the Company, Progentix Orthobiology, B.V. and the sellerslisted on Schedule A thereto (incorporated by reference to our Annual Report on Form 10-K filed with the Commission onFebruary 26, 2010) 10.32† Option Purchase Agreement, dated January 13, 2009, among the Company, Progentix Orthobiology, B.V. and the sellers listed onSchedule A thereto (incorporated by reference to our Annual Report on Form 10-K filed with the Commission on February 26, 2010) 10.33† Exclusive Distribution Agreement, dated January 13, 2009, between the Company and Progentix Orthobiology, B.V. (incorporated byreference to our Quarterly Report on Form 10-Q filed with the Commission on May 8, 2009) 10.34† Settlement and License Agreement, dated as of April 25, 2013, by and among the Company, Medtronic Sofamor Danek USA, Inc.,Warsaw Orthopedic, Inc., Medtronic Puerto Rico Operations Co. and Medtronic Sofamor Danek Deggendorf, GmbH (incorporatedby reference to our Quarterly Report on Form 10-Q filed with the Commission on July 30, 2013) 21.1 List of subsidiaries of NuVasive, Inc. 23.1 Consent of Independent Registered Public Accounting Firm 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, asamended 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, asamended 32.1* Certification of the Chief Executive Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and18 U.S.C. section 1350 32.2* Certification of the Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and18 U.S.C. section 1350 101 XBRL Instance Document 101 XBRL Taxonomy Extension Schema Document 101 XBRL Taxonomy Calculation Linkbase Document 101 XBRL Taxonomy Label Linkbase Document 101 XBRL Taxonomy Presentation Linkbase Document 101 XBRL Taxonomy Definition Linkbase Document100Table of Contents†Certain confidential information contained in this exhibit was omitted by means of redacting a portion of the text and replacing it with an asterisk.We have filed separately with the Commission an unredacted copy of the exhibit. #Indicates management contract or compensatory plan. *These certifications are being furnished solely to accompany this annual report pursuant to 18 U.S.C. Section 1350, and are not being filed forpurposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of NuVasive, Inc., whethermade before or after the date hereof, regardless of any general incorporation language in such filing.101Exhibit 10.2Amendment No. 1To theAmended and Restated2004 Equity Incentive PlanofNuVasive, Inc.WHEREAS, effective as of May 23, 2013 (the “Effective Date”) the Board of Directors of NuVasive, Inc. (the “Company”)agreed to amend the 2004 Amended and Restated Equity Incentive Plan (the “2004 Plan”) pursuant to Section 14.1 of the 2004 Planwith respect to the 2004 Plan’s provisions relating to Awards granted to Non-Employee Directors.NOWTHEREFORE, the 2004 Plan shall be amended as of the Effective Date as follows:1.Section 11.1(a) is amended in its entirety to read as follows:11.1 Automatic Restricted Stock Unit Grants(a) Grant Dates. Stock Awards in the form of restricted stock units (“RSUs”) shall be granted to Non-EmployeeDirectors on the dates specified below:(i) Initial Grants. Each Non-Employee Director who is first elected or appointed to the Board at any time on orafter the Effective Date shall automatically be granted a RSU Award for the number of shares equal to the quotient of$200,000 divided by the 200 day moving average of the Company’s closing stock prices immediately preceding the dateof such individual’s appointment as Non-Employee Director (the “Initial RSU Grant”), rounded down to the nearestwhole share.(ii) Annual Grants. As of the Effective Date, on the date of each annual stockholders meeting each individualwho is to continue to serve as a Non-Employee Director shall automatically be granted on the date of such meeting aRSU Award for the number of shares equal to the quotient of $125,000 divided by the 200 day moving average of theCompany’s closing stock prices immediately preceding the date of such annual stockholders meeting (the “AnnualRSU Grant”), rounded down to the nearest whole share.(iii) Annual Grant Proration for New Non-Employee Directors. As of the Effective Date, with respectto a Non-Employee Director who is first elected or appointed after the commencement of the approximately twelve(12) month period beginning on the date of the annual stockholders meeting, such a Non-Employee Director shallreceive a prorated Annual RSU Grant determined by multiplying the most recently granted number of RSUs pursuantto Section 11.1(a)(ii), by a fraction, the numerator of which is the difference obtained by subtracting (A) the number ofwhole months that have elapsed from the date of the last annual meeting of stockholders from (B) twelve (12), and thedenominator of which is twelve (12), with the resulting product rounded down to the nearest whole share.2.Except as amended by this Amendment, the 2004 Plan shall remain in full force and effect.3.Except as otherwise provided in this Amendment, terms used herein shall have the meanings ascribed to suchterms in the 2004 Plan.Exhibit 10.11AMENDMENT NO. 4TO2004 EMPLOYEE STOCK PURCHASE PLANOF NUVASIVE, INC.WHEREAS, effective as of January 25, 2014 the Board of Directors of NuVasive, Inc. agreed to amend the 2004 Employee StockPurchase Plan, as previously amended (the “2004 ESPP”), pursuant to Section 26 of the 2004 ESPP.NOW THEREFORE, the 2004 ESPP shall be amended as of January 25, 2014 as follows:1.The last sentence of Section 22 of the 2004 ESPP is amended in its entirety to read as follows:“This Plan shall continue until the earlier to occur of (a) termination of this Plan by the Board (which terminationmay be effected by the Board at any time), (b) issuance of all of the shares of Common Stock reserved for issuanceunder this Plan, or (c) December 31, 2018.”2.Except as amended by this Amendment No. 4, the 2004 ESPP shall remain unchanged and in full force and effect.3.Except as otherwise provided in this Amendment No. 4, terms used herein shall have the meanings ascribed to such terms in the 2004 ESPP.Exhibit 10.16December 18, 2013Michael PaolucciPO Box XXXXXXXX, CA XXXXXDear Mike:NuVasive, Inc. (“the Company”) is pleased to offer you employment on the terms and conditions stated in this letter. The Company is offering you the fulltime, exempt position of Executive Vice President, Global Human Resources. As Executive Vice President, Global Human Resources, you will report to me.Your job duties will be further outlined upon your employment. I would like for you to begin work in this capacity on January 27, 2014 or within reasonableproximity of this date.Your initial rate of compensation will be $365,000 annually (“Base Salary”). You will be eligible for an annual non pro-rated Shareowner bonus for 2014,which is targeted at 70% of your base salary and depends upon the Company’s successful achievement of its operational goals, and your overall performanceagainst your Individual Performance Measures. This bonus requires that you be employed in good standing on the payout date (which is generally the firstweek of March, in the following year). You will receive a grant of Restricted Stock Units (“RSUs”), representing shares of NuVasive stock, in the targetamount of $700,000. The number of RSUs granted is determined by the 200-day trailing average share price, measured on the first day of the month in whichyou are hired. The RSUs will vest according to the following schedule: 50% time vested on the effective start date and 50% as defined by the 2014 ExecutiveCompensation Plan. In the event of Change in Control, you will receive 18 months’ salary and bonus, commensurate with the rest of the executive team(further information provided). Additionally, you will be eligible for MD VIP, medical, dental, life insurance, 401K, ESPP and vacation benefits. This offer iscontingent on successful background and reference checks.Your employment pursuant to this offer is contingent upon your execution of the attached Proprietary Information, and Inventions Agreement and upon yourcompliance with all contractual obligations that you may have with your former employer. You agree that during the course of performing your duties on behalfof NuVasive, you will not use or disclose to NuVasive any confidential or proprietary information that may belong to others. You have already indicated to usthat you have no such information in your possession.As a member of the Executive Committee, it will be your responsibility to lead across the entire organization. I know that you will quickly expand yourinfluence and lift the entire organization through your example. Our common goal is to advance NuVasive’s Top 3 Priorities, while demonstrating AbsoluteResponsiveness® in all of our interactions and exhibiting the unique combination of cultural attributes that will soon propel NuVasive to be the No. 3 spinecompany in the world and the first $1B Start-Up! It is an exciting, rewarding journey and I look forward to having you on the team. I wish you tremendous success in your new role!Very truly yours,/s/ Alex LukianovAlex LukianovPlease sign below indicating your understanding and acceptance of this new role and return the fully executed letter, along with the executed ProprietaryInformation and Inventions Agreement to Christian Zaal, Director, Corporate Affairs, Office of the Chair. A fully executed copy of this letter will be returned toyou upon commencement of your employment with NuVasive.December 22, 2013 /s/ Michael E. PaolucciDate Michael E. PaolucciExhibit 10.18December 18, 2013Michael PaolucciPO Box XXXXXXXX, CA XXXXXDear Mike:This letter agreement confirms the material compensation terms of your employment with NuVasive. This letter agreement supplements youroffer letter, which contains the full terms of your compensation arrangements and is in addition to any and all benefits that are made generally availableto NuVasive employees. It is also in addition to benefits available to you as an executive of NuVasive. Defined terms used herein have the meaningsset forth in the attached Appendix of Defined Terms.This letter agreement has no impact on other types of agreements or arrangements between you and NuVasive, including agreements related toconfidentiality, intellectual property ownership, non-solicitation or non-competition obligations, etc. You agree to continue abiding by all sucharrangements, as well as all NuVasive policies and procedures.Your annual Base Salary is $365,000, payable in installments in accordance with NuVasive’s regular payroll practices. Your Base Salary issubject to change and is reviewed at least annually. You are eligible to receive a performance bonus on an annual basis, targeted at 70% of your BaseSalary. The performance bonus is determined at the discretion of the Board of Directors and is based on a combination of company performance andyour individual performance. The bonus, if any, that is payable to you shall be paid in the calendar year following the calendar year in which it isearned, but no later than March 15th of that year. Additionally, you are eligible to receive, in the discretion of the Board of Directors, an annual grantof NuVasive equity securities pursuant to the 2004 Equity Incentive Plan.You also have the following benefits related to an Involuntary Termination of your employment or a Change of Control of NuVasive. In theevent of an Involuntary Termination of your employment, you shall be entitled to the Severance Benefit. In the event of a Change of Control ofNuVasive, you shall be entitled to the Change of Control Benefit. In addition, the Section 409A Terms shall be applicable to payments described inthat Section.We look forward to your continued success with NuVasive. Truly yours,NUVASIVE, INC./s/ Alexis V. Lukianov Alexis V. Lukianov I have read and accept the terms of this letter./s/ Michael Paolucci Michael PaolucciExhibit 10.18"Base Salary" means the executive’s then-current annual base salary."Change of Control Benefit" shall mean the: Company Acceleration Plan.“Severance Benefit” upon an Involuntary Termination at any time, severance is equal to eighteen (18) months of your then current Compensation,defined as your Base Salary plus your last year’s paid bonus (or no prior bonus has yet been paid, then your bonus Target). Such amount shall be dueand payable immediately upon any such termination and upon the condition that you execute NuVasive’s standard form of release of claims and thatsuch release of claims becomes effective in accordance with its terms on or prior to the 45th day following such termination."Change of Control" is defined as either a Change in Control or Fundamental Transaction as defined in the 2004 Equity Incentive Plan."equity compensation plans (including the 1998 Stock Option/Stock Issuance Plan and 2004 Equity Incentive Plan) immediately accelerate upon aChange of Control of the Company, and all remaining equity awards immediately accelerate upon an Involuntary Termination (except for death,disability or Cause) of service within 18 months following such an event."Involuntary Termination" means the termination of the executive’s employment, including a voluntary termination by the executive for GoodReason (as defined below), for reasons other than death, disability or Cause. "Cause" means any of the following: (i) the executive's repeated failureto satisfactorily perform the executive's job duties; (ii) the executive's refusal or failure to follow lawful directions of the Company's board ofdirectors; (iii) the executive's conviction of a crime involving moral turpitude; or (iv) the executive engaging or in any manner participating in anyactivity which is directly competitive or injurious to the Company. "Good Reason" means a voluntary resignation by the executive following any ofthe following: (i) a significant reduction of the executive's job responsibilities or title; (ii) a requirement (refused by the executive) that the executivemove for his/her principal place of employment more than 50 miles from the then-current principal place of employment (unless such requirementwas a condition of employment); or (iii) a reduction of greater than 15% in the executive's base pay or bonus opportunity (where not all executivesare similarly affected).“Section 409A Terms” - Notwithstanding anything in this letter agreement to the contrary, to the extent required to avoid the imposition of additionaltaxes and penalties under Section 409A of the Internal Revenue Code of 1986, as amended, and the guidance promulgated thereunder (collectively“Section 409A”), no Severance Benefit or similar payment which becomes payable pursuant to this Agreement on account of executive’s InvoluntaryTermination shall be paid until executive has incurred a “separation from service” within the meaning of Section 409A. Furthermore, to the extent thatsuch amount constitutes a “deferral of compensation,” the Severance Benefit shall be paid on the later of (i) the first payroll date occurring on or afterthe 45th day after the termination giving rise to such payment; and (ii) if executive is a “specified employee” (within the meaning of Section 409A),the date (the “Delayed Payment Date”) which is the first day of the seventh month after the date of Executive’s separation from service or, if earlier,the date of executive’s death following such separation from service. The Delayed Payment Date rule described in the second clause of the precedingsentence shall apply to all other payments of “deferred compensation” (as defined by Section 409A) to the extent required by Section 409A. All suchamounts that would, but for these provisions, become payable prior to the Delayed Payment Date will be accumulated and paid on the DelayedPayment Date. The Company intends that payments will not be subject to taxation under Section 409A. The provisions of this letter agreement shall beinterpreted and construed in favor of satisfying any applicable requirements of Section 409A. However, the Company does not guarantee anyparticular tax effect for income provided to executive pursuant to this letter agreement. In any event, except for the Company’s responsibility towithhold applicable income and employment taxes from compensation paid or provided to executive, the Company shall not be responsible for thepayment of any applicable taxes on compensation paid or provided to Executive pursuant to this letter agreement.Exhibit 10.19December 12, 2013Craig HunsakerXXXX Ave.XXXX, CA XXXXXDear Craig:This letter confirms your voluntary resignation from NuVasive, Inc., which you communicated today. You have been a valued member of the NUVALeadership Team, and we desire your continued employment during a transition period, as well as ongoing consulting services from you for a periodthereafter. This letter contains the general terms and conditions of your employment transition and consulting services (together, the “Services”).Continuing Employment:You will remain a full-time Shareowner through March 31, 2014 (“Employment Term”);During the Employment Term, you will retain your current title (Senior Vice President, Global Human Resources), and current rateof pay ($27,916.67 per month) and will continue to perform the full responsibilities of this role until a successor is identified andonboarded (at which time we will discuss a modification of your responsibilities);You will be eligible to participate in the 2013 Company/Corporate Bonus as currently contemplated and on par with otherExecutives;During the Employment Term, your duties will continue to include Shareowner engagement, HR team retention, managementtraining and development, and you will participate in the recruiting, hiring and onboarding of your replacement.Consulting Services: •After the Employment Term, you agree to provide consulting services through September 30, 2015 (“Consulting Term”);•The Services will be comprised of the following material terms:oScope of Services: As reasonably requested, but including Shareowner engagement, HR development/retention, etc.; also to include amonthly report regarding recent legal developments that impact employment, hiring/onboarding/terminations, and other topics of interestto NuVasive or hiring in general.oTime Commitment: Not to exceed 20 hours per month;oConsulting Fee: $43,000 per month (through 9/30/2015); COBRA coverage through 9/30/2015;oCompetitive Restriction: During the term of the Services, you agree not to compete with the Company (as generally set forth in theNuVasive Proprietary Information and Inventions Assignment Agreement (“PIIA”).The consulting term can be extended beyond 9/30/2015 at $10,000 per month at NuVasive’s election.This letter supersedes and replaces all other agreements containing the terms and conditions of your employment - whether written or verbal - with theexception of the PIIA. You will also promptly execute the Company’s standard form general release.Craig, you have been instrumental in helping NuVasive grow rapidly, deliver new and creative products, leverage resources for profitability andexercise Absolute Responsiveness® to the maximum level. I look forward to youExhibit 10.19continuing that contribution by providing the Services and assisting the Company with its march toward becoming a $1B start-up.Very truly yours,NUVASIVE, INC./s/ Alex LukianovAlex LukianovPlease sign below no later than Friday, December 13, 2013, indicating your understanding and acceptance of this transitional role and return the fullyexecuted letter to Jason Hannon. You should keep a copy of this letter for your records.Dated:December 13, 2013 /s/ Craig Hunsaker Craig HunsakerExhibit 10.21NuVasive, Inc.Non-Employee Director Cash CompensationNon-employee directors receive fees from the Company for their services as members of the Board and any committee of the Board. We pay our non-employee directors cash retainers and make equity award grants for their service on the Board. All directors own shares of our common stock. No directorcompensation is paid to any director who is also an employee of the Company. The following table sets forth the non-employee director compensation scheduleeffective July 1, 2013: Position AnnualRetainer Board$50,000Lead Independent Director*$15,000Audit Committee$15,000Chairperson of Audit Committee*$20,000Nominating and Governance Committee$5,000Chairperson of Nominating and Governance Committee*$10,000Compensation Committee$10,000Chairperson of the Compensation Committee*$15,000*Lead Independent Director and Committee Chair retainers are in addition to the member retainerExhibit 21.1Subsidiaries of NuVasive, Inc.The following is a list of subsidiaries of the Company as of December 31, 2013, omitting subsidiaries which, considered in the aggregate, wouldnot constitute a significant subsidiary as defined by Rule 1-02(w) of Regulation S-X. Name Jurisdiction of Incorporation Impulse Monitoring, Inc. DelawareCervitech, Inc. DelawareNuVasive Holdings, LLC CaliforniaNuVasive (AUS/NZ) Pty. Ltd. AustraliaNuVasive Europe, GmbH GermanyNuVasive Italia S.r.l. ItalyNuVasive Malaysia, Sdn, Bhd MalaysiaNuVasive PR, Inc. Puerto RicoNuVasive UK Limited United KingdomExhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in the following Registration Statements:(1) Registration Statement (Form S-3 Nos. 333-127634, 333-127842, 333-138047, 333-140432, 333-175045 and 333-177223) of NuVasive, Inc.,(2) Registration Statement (Form S-8 No. 333-116546) pertaining to the 1998 Stock Option/Stock Issuance Plan, 2004 Equity Incentive Plan, and 2004Employee Stock Purchase Plan of NuVasive, Inc., and(3) Registration Statement (Form S-8 Nos. 333-149478, 333-172465, 333-186896 and 333-193705) pertaining to the 2004 Equity Incentive Plan, as amendedand restated, and 2004 Employee Stock Purchase Plan of NuVasive, Inc.;of our reports dated March 3, 2014, with respect to the consolidated financial statements and schedule of NuVasive, Inc. and to the effectiveness of internalcontrol over financial reporting of NuVasive, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 2013./s/ ERNST & YOUNG LLPSan Diego, CaliforniaMarch 3, 2014Exhibit 31.1CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TOSECTION 302 OF SARBANES-OXLEY ACT OF 2002I, Alexis V. Lukianov, certify that:1.I have reviewed this Annual Report on Form 10-K of NuVasive, 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 oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those 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 and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’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: March 3, 2014/s/ Alexis V. Lukianov Alexis V. LukianovChairman and Chief Executive OfficerExhibit 31.2CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TOSECTION 302 OF SARBANES-OXLEY ACT OF 2002I, Michael J. Lambert, certify that:1.I have reviewed this Annual Report on Form 10-K of NuVasive, 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 oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those 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 and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’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: March 3, 2014/s/ Michael J. Lambert Michael J. LambertExecutive Vice President and Chief Financial OfficerExhibit 32.1CERTIFICATIONS OF CHIEF EXECUTIVE OFFICERPURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of NuVasive, Inc. (the Company) on Form 10-K for the annual period ended December 31, 2013, as filed with theSecurities and Exchange Commission on the date hereof (the Annual Report), I, Alexis V. Lukianov, Chairman and Chief Executive Officer of the Company,certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:1. The Annual Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and2. That information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of theCompany.Date: March 3, 2014 /s/ Alexis V. Lukianov Alexis V. Lukianov Chairman and Chief Executive OfficerExhibit 32.2CERTIFICATIONS OF CHIEF FINANCIAL OFFICERPURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of NuVasive, Inc. (the Company) on Form 10-K for the annual period ended December 31, 2013, as filed with theSecurities and Exchange Commission on the date hereof (the Annual Report), I, Michael J. Lambert, Chief Financial Officer of the Company, certify, pursuantto 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:1. The Annual Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and2. That information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of theCompany.Date: March 3, 2014 /s/ Michael J. Lambert Michael J. Lambert Executive Vice President and Chief Financial Officer

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