NuVasive
Annual Report 2017

Plain-text annual report

NuVasive, Inc. 2017 Annual Report nuvasive.com Dear Valued Shareholders, For NuVasive, 2017 was a milestone year where we surpassed the $1 billion revenue mark for the first time in our history. Our growth trajectory since our initial public offering in 2004 has been steep and transformative. We have evolved from a startup, introducing a minimally invasive lateral offering to the spine market through our XLIF® technology, into an international spine powerhouse with operations in more than 50 markets. Our global workforce of more than 2,400 people is delivering life-changing solutions to help our surgeon and hospital partners meet their patients’ needs. Looking to the future, I want to ensure we never lose sight of what empowered us to achieve $1 billion in revenue and improve the lives of so many patients suffering from debilitating back pain. Our roadmap for 2018 and beyond is based on our steadfast tenets of driving innovation, increasing market share and ensuring that our people and culture remain a competitive advantage. This is how we will succeed as we operate in a turbulent and dynamic healthcare landscape. We are building a global company focused on both short- and long-term success by creating a comprehensive platform of solutions and systems that not only deliver predictable clinical and economic outcomes, but also pull through implants and create a deeper permanency with our surgeon and hospital system partners. Even as we continue to scale the company, we never lose sight that what makes this business grow is the trust a surgeon places in us to conduct life-giving surgery. To earn that trust, we work hard every day to maintain the entrepreneurial zeal that launched this company, and have relationships be sincere, real and deeply dedicated. NuVasive will continue to deliver value and grow revenue while also expanding operating profitability. As we reach new levels of operational efficiencies, we will see improvement in our free cash flow, which, combined with the benefits of our lowered tax rate, will allow to reinvest in the business and further disrup our markets. urther disrupt the status quo in e, will allow us Global revenue (in millions) 2017 $1,029.5 2016 $962.1 2015 $811.1 $1.91 $1.50 $1.66 $1.26 $1.31 Non-GAAP* Earnings Per Share (EPS) GAAP Earnings Per Share (EPS) $0.69 2015 2016 2017 2015 2016 2017 16.6% 16.1% 17.1% Non-GAAP* Operating Profit Margin 15.4% GAAP Operating Profit Margin 12.8% 11.0% 2015 2016 2017 2015 2016 2017 Leadership and Culture Since being appointed CEO nearly three years ago, I have worked diligently with our Board of Directors to build a world-class leadership team. As we evolve from a company focused on doing one spine procedure really well to an enterprise driving the industry with technological solutions and thought leadership, our management team and Board are evolving in tandem. In 2017, we refined the Company’s operating structure to tightly align strategy, product development and marketing, and integrate our global commercial channels, while scaling global operations to best address the growing needs of our partners and patients. Today, we have senior leaders who bring decades of spine and orthopedic experience to NuVasive. At the next level of management, we have strong leaders who have spent their careers at NuVasive driving the development of our novel products, procedures, and systems. Our drive to innovate and continuously improve is contagious at all levels, which is a testament to the current state of the Company and our roadmap for the future. Financial Performance Thanks to our increasingly diversified portfolio, we continue to execute against our market share-taking strategies in the global spine industry. We made progress on our strategic plan in 2017, making NuVasive the leading pure-play global spine company with an estimated 11 percent market share of the approximately $9 billion global spine market. Our reported global revenue grew 7.0 percent, outpacing market growth and delivering record revenue of $1,030 million. These results were primarily driven by International sales growth in excess of 20 percent across key regions, strength in our U.S. hardware business, and the addition of strategic acquisitions. Domestically, we continued to take market share, but results were impacted by unexpected softness in the U.S. spine market beginning mid-year and competitive challenges and market dynamics in our Biologics business, which we are actively addressing with new leadership and a re-energized approach to our portfolio. Despite headwinds in the U.S., we made steady progress toward our profitability expansion goals and improved operational efficiencies. We delivered a GAAP operating profit margin of 11.0 percent and a non-GAAP operating profit margin* of 16.6 percent for the year. We delivered GAAP earnings per share of $1.50 for the year, and non-GAAP earnings* grew more than twice the rate of revenue growth at 15 percent to $1.91 per share, a record for NuVasive. Business and Innovation Highlights Innovation is in our DNA—it not only drives us to do what we do, it defines and distinguishes us. In 2017, we launched 18 new spine solutions including new platforms and expansion into new markets. We celebrated the 15th anniversary of the launch of our revolutionary XLIF lateral procedure and announced further development of this key portfolio. Lateral surgery is our proud history and our exciting future. As the gold standard for lateral, XLIF continues to transform patient lives, surgical practices, and hospitals’ ability to provide outstanding patient results. With the expansion of our lateral portfolio to enable Single-Position Surgery for Lateral from T6 to S1 through the launch of XLIF Crestline, Lateral ALIF and Lateral MAS Fixation, we are introducing new technologies to increase operating room (OR) efficiency. Reducing the number of times a patient has to be repositioned expands the benefits of lateral surgery to more spinal levels, and can decrease the amount of time a patient is under anesthesia. In September, we commercially unveiled our first-ever capital equipment platform, LessRay®, designed to help address over-exposure to radiation in hospital ORs, particularly in the case of minimally invasive surgery. We are pleased with the growing customer interest and pipeline resulting from our active trialing, and as the Company works through the capital sales process over the next few quarters, we believe there will be robust demand for the platform. Finally, we continued to expand our interbody portfolio with the full launch of our TLX and MLX expandable cages, and introduced Modulus XLIF, our first 3D-printed, porous titanium interbody. Looking ahead to 2018, we will redefine the experience for our surgeon partners and patients with the launch of Surgical Intelligence™—spine’s only integrated surgical platform connecting technology and tools to align the right patient TheThee Surgirg calcal InInttelligence platlatforfo m is intended td to bo e a concoco nnecnecteded sysyystestemm to bring togethether mr monitoring, planninning, g imaimaginging,g, nnavigation, automatioon, n andand insights to helplp delde iveiver ar an optimized OR and qualility t patpatient outcomes. with the right surgery for the right outcome. When NuVasive unveils its one-stop-shop for Surgical Intelligence in late 2018, the industry will experience a true paradigm shift in what defines an OR. At its core, the Surgical Intelligence platform is intuitive, flexible, scalable, and efficient, delivering a comprehensive solution composed of monitoring and surgical planning that leads to a better experience for hospitals, surgeons, and patients. Strategic Acquisitions We continued to expand our strategic portfolio by gaining unique and innovative assets with the acquisition of Vertera Spine, a privately held medical device company developing and commercializing interbody implants for spinal fusion using patented porous polyetheretherketone (PEEK) technology. By incorporating this proprietary technology into our broader interbody portfolio of PEEK and porous titanium, we continue to build out our Advanced Materials Science™ portfolio focused on delivering the highest level of scientifically driven properties for the best spinal fusion rates, including porosity, visualization, surface, and structure. This, in turn, helps create more predictable, improved outcomes for patients undergoing spine surgery. NuVasive is now the only medical device company to offer porous interbody technology across both PEEK and titanium materials. As the only spine company in the world with dedicated neuromonitoring services, NuVasive is positioned to deliver greater value across our procedurally-integrated portfolio and expand our ability to transform how spine procedures are approached, measured, and valued from a clinical and economic perspective. In early 2018, we invested further in building out our NuVasive Clinical Services (NCS) business with the acquisition of SafePassage™, a privately-held provider of intraoperative neurophysiological monitoring (IONM) services. With this acquisition, NuVasive solidified its leadership position as the largest provider of outsourced IONM services with more than 550 neurophysiologists and oversight physicians in the U.S., allowing for the delivery of services to over 1,000 customers and 3,000 surgeons. Expanding Surgeon Education Program During the year, we transformed our renowned surgeon education program into a global Clinical Professional Development (CPD) platform that integrates surgical training with professional growth. Surgeon training and education programs have always been a key differentiator for NuVasive and have enabled us to introduce less invasive approaches to spine surgery, while also adapting to surgeon needs in the changing industry landscape. We are again taking the lead by rolling out an expanded education program globally to better match the lifelong training challenges facing spine surgeons. Our goal is to make our CPD platform the most sought-after education and leadership program available to spine surgeons around the world. Operational Efficiencies and Margin Expansion We remain committed to improving our operational efficiencies as we meet evolving market demands. In 2017, we brought our new state-of-the-art, all digital, 180,000-square-foot manufacturing facility in West Carrollton, Ohio, fully online. This was an enormous team effort, which included hiring and training over 200 new employees on the advanced manufacturing skillsets required to produce sophisticated designs with novel materials, and installing and verifying new equipment. Over time, we anticipate self-manufacturing nearly 100 percent of the spinal implant and fixation products that we sell, providing greater control over our operations and driving increased efficiencies. In 2018, we will focus on delivering the productivity potential of our in-source manufacturing efforts, which should amount to about 400 basis points of operating profit margin expansion over the next several years. Dr. Ivan Cheng is a current faculty member in our Clinical Professional Development (CPD) Delta Program. Design rerendend rings of worrld-ld-d claaclassss inninnovovaation campus expansion an at St San Diego headquarters, featuring a neweweww suusurgeon expeririencence ce ccententente er.er.er. Optimizing Our Capital Structure Impact of Tax Reform We undertook significant efforts to improve our capital structure for future investment in both organic and inorganic growth initiatives. These efforts included amending and restating our existing credit agreement in June 2017 to expand our revolving line of credit from $150 million to $500 million and issuing $650 million in convertible notes due March 2021 in February 2017. We used the net proceeds to refinance our convertible notes due in 2017, which allowed us to extend the maturity at a lower interest rate. Additionally, our Board of Directors approved a share repurchase program, authorizing the purchase of up to $100 million of the Company’s common stock over a three-year period. The Board strongly believes in our ability to execute against our strategic roadmap, deliver long-term organic growth, and improve profitability. In late 2017, the U.S. Congress passed federal tax reform reducing the U.S. corporate tax rate from 35 percent to 21 percent. This is the largest tax overhaul in 30 years and is expected to reduce the future corporate tax rate for NuVasive from approximately 33 percent on a non-GAAP basis in 2018 to approximately 24 percent. We expect these savings to boost forward-looking free cash flow and non-GAAP earnings per share in excess of 10 percent per year beginning in 2018. These savings will deliver incredible incremental value-generating opportunities for the medical device industry and enable us to continue to invest in life-changing solutions by boosting our investments in R&D from today’s five percent of revenue to seven percent of revenue in the future. Dr.Dr. GGGreg eg gge MunMununu disdi withthth a paa atiatiat ent whwhoo undundunderwerwerwwentttte tte t sssuusus rgery on onon anan NSFSFFSF ssus ppopp rted dd ooontnto ererrrrrr ey, Meeexicxico, o in March 2017. mism sioon tn ttto MMoo NuVasive Product Specialist Kevin Moroney, and volunteer OR nurse Jan Steinsieck, on an NSF directed mission to Bridgetown, Barbados, in December 2017. develop sustainable spine treatment programs. Since its inception and through 2017, the Foundation has provided life-changing surgeries for more than 1,050 patients in over 30 countries, in addition to more than 600 hours spent training local surgeons so they can continue to serve their communities. Like any healthy organization, the Foundation continues to evolve and make great progress in re-energizing our direct mission efforts in two new locations, Monterrey, Mexico, and Tegucigalpa, Honduras. Giving Back At NuVasive, our core value of “Acting Like an Owner” compels us to inspire and motivate others. We strive to support the communities where we live and work, and collectively make an impact—whether it is providing surgery to individuals in disadvantaged communities or joining in the fight against cancer. For the second year in a row, NuVasive was proud to be a corporate sponsor for the San Diego Padres Pedal the Cause and fielded a team of more than 60 riders and volunteers to participate in their two-day cycling fundraiser. With the mission to create a world without cancer, NuVasive employee Shareowners did their part by raising funds that will go directly to cancer research grants in San Diego. In 2009, we founded the NuVasive Spine Foundation™ (NSF), a separate non-profit organization with a mission to support direct medical missions in disadvantaged communities outside of the United States, including training spine surgeons in these communities and working with local teams to Confident in Our Future We are excited about our portfolio of game-changing spine products and procedures, and the breakthrough surgical systems coming to market. When integrated together, we will be in the unique position to offer totally differentiated solutions. While the slowing U.S. market presented a challenge in the second half of 2017, it does not diminish our resolve to grow long-term market share as we invest in elevating our global franchise. We expect International revenue to grow greater than 20 percent for the foreseeable future and anticipate benefiting from the leverage this scale provides. Additionally, we are confident with our focus on new product introductions and increased rigor on day-to-day execution by our sales leaders, we can take share in this environment. From a profitability standpoint, we have multiple opportunities to continue to drive double-digit growth for both non-GAAP EPS and adjusted EBITDA. The Company’s prospects remain strong, and we are committed to delivering the best minimally invasive spine surgery solutions on the market. Gregory T. Lucier Chairman and Chief Executive Officer *Indicates non-GAAP financial information. Please refer to accompanying “Non-GAAP Information” included at the end of this Annual Report. “First, we want to be the best. Then we want to be first.” With Gratitude to Our Board of Directors At our upcoming Annual Meeting of Stockholders in May, our two longest-serving Board members, Lesley (“Les”) H. Howe and Peter C. Farrell, Ph.D., AM will retire from the NuVasive Board of Directors. Both Les and Peter have served on the Board for well over 10 years and provided invaluable support and advice to our management team and to their fellow Board members. Under their guidance, NuVasive has grown from a small start-up to a global player in spine, improving the lives of countless patients worldwide. We are grateful to both of them for their leadership and insights for without their help we could have never achieved the $1 billion mark. In support of strong corporate governance, we continue to diversify and expand the depth of experience of our Board, aligning it to our five-year strategic plan and positioning us well to execute against our short- and long-term initiatives. Since 2016, we have added four independent directors to the Board and fortified expertise in key areas including global operations, risk management, finance, and legal. We recently welcomed our newest Board member, John DeFord, who currently serves as senior vice president, Research and Development for BD (Becton, Dickinson and Company). He brings more than 25 years of experience in the medical device industry, with particular expertise overseeing clinical advancement through innovative R&D and technology-based initiatives. I am confident the expertise of John and the other talented members of our Board will help guide our next phase of growth as we continue to expand our global footprint and focus on being the premier spine technology company. Lesley H. Howe Peter C. Farrell, Ph.D., AM UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One)  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2017 OR  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 000-50744 NUVASIVE, INC. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 7475 Lusk Boulevard San Diego, California (Address of principal executive offices) 33-0768598 (I.R.S. Employer Identification No.) 92121 (Zip Code) (858) 909-1800 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act Title of Class: Common Stock, par value $0.001 per share Name of Exchange on which Registered: The NASDAQ Stock Market LLC (NASDAQ Global Select Market) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933, as amended. YES  NO  Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended. YES  NO  Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period than the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES  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 submitted and 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 was required to submit and post such files). YES  NO  u Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 Non-accelerated filer  Accelerated filer  (Do not check if a smaller reporting company) Smaller reporting company   Emerging growth company  If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES  NO  The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $4.1 billion as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2017), based upon the closing sale price for the registrant’s common stock on that day as reported by the NASDAQ Global Select Market. Shares of common stock held by each officer and director on June 30, 2017 have been excluded in that such persons may be deemed to be affiliates. As of February 22, 2018, there were 51,256,545 shares of the registrant’s common stock issued and outstanding. Part III of this Form 10-K incorporates information by reference to portions of the definitive Proxy Statement for the registrant’s 2018 Annual Meeting of Stockholders, which will be filed with the U.S. Securities and Exchange Commission not later than 120 days after December 31, 2017. DOCUMENTS INCORPORATED BY REFERENCE Annual Report on Form 10-K for the Fiscal Year ended December 31, 2017 NuVasive, Inc. Table of Contents PART I Item 1. Business ........................................................................................................................................................................... Item 1A. Risk Factors ..................................................................................................................................................................... Item 1B. Unresolved Staff Comments............................................................................................................................................ Item 2. Properties ......................................................................................................................................................................... Legal Proceedings............................................................................................................................................................ Item 3. Item 4. Mine Safety Disclosures .................................................................................................................................................. PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities....... Item 6. Selected Financial Data ................................................................................................................................................... Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations .......................................... Item 7A. Quantitative and Qualitative Disclosures About Market Risk ......................................................................................... Financial Statements and Supplementary Data................................................................................................................ Item 8. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures .................................................................................................................................................. Item 9B. Other Information ............................................................................................................................................................ Item 10. Directors, Executive Officers and Corporate Governance............................................................................................... Item 11. Executive Compensation ................................................................................................................................................. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ........................ Item 13. Certain Relationships and Related Transactions, and Director Independence................................................................. Item 14. Principal Accounting Fees and Services.......................................................................................................................... PART III Item 15. Exhibits, Financial Statement Schedules ......................................................................................................................... Item 16. Form 10-K Summary....................................................................................................................................................... SIGNATURES................................................................................................................................................................................. Index to Consolidated Financial Statements .................................................................................................................................... PART IV 2 15 38 38 38 38 38 41 42 59 60 60 60 62 63 63 63 63 63 64 68 69 71 1 PART I Thisii Annual Repoe rt on Form 10-K (“An“ nual Report”)” contains forward-ldd ooking stattt ementstt assumptions and other factors which, if they do not materialize or prove correct, could cause our results to differ from results or those expressed or implied by such forward-ldd ooking stattt ements. In some cases, you can identify these forward-ldd ook statements by words likekk “may”, “will”, “shou “potential”, “intends”, or “continues” (or the negative of those words and other comparable words).dd include, but are not limited to, statementstt about: that involve risks, uncertainties, rical ing ct”, “pl“ an”, “anticipate”, “believes”, “estimates”, “predicts”, Forward-looking statementstt ld”, “could”, “expex histoii l “ i  our intentions, beliefs and expectations regardi gg ng our expenx ses, sales, operations and future financial performance;  our operating results;  our planll s for future productdd stt and enhancementstt of existing products;tt  anticipated growthtt and trendsdd in our business;  the timing of and our ability to maintain and obtain regulatory clearances r or approvals;  our belief that our cash and cash equivalents and investmett ff ntstt will be suffu icient to satisfy our anticipated cash requirements;  our expectations regae rding our revenues, customers and distribut ii ors;rr  our beliefs and expectations regardi e ng our market penetratt x tion and expansion effoff rts;  our expectations regarding the benefits and i e ntegration of recently-acquired businesses and our ability to make future acquisiii tions and successfully integrate any e such future-acquired businesses;  our anticipated trends and challenges in the markerr ts in which we operate; and  our expectations and beliefs regarding and the impact of investigat i ions, clail ms and litigai tion. These statements are not guarantees of tt discussed in this Annual Report and the documents incorporated by referff ence to this Annual Repor uncertainties that could cause actual results to differ ma under the heading “Risk Factors Operations” and elsewhere throughout this Annual Report and in anyn other do Report. Readersrr are cautioned not to place unduedd any forward-looking statements to reflect new informarr future performance or events. Our actual results may differ materially from those t. The potential risks and terially include, but are not limited to, those set forth in Part I, Item 1(A) of Financial Condition and Results of ence to thitt sii Annual reliance on such forward-looking stattt ements. We assume no obligation to update tion, future events or circumstances or otherwise, except as required by law. i ” ”, Part II, Item 7 and Analysis ll cumentstt incorporated by refere gement’s Discussion “ “Mana “ e ’ tt e aa and the documentstt This Annual Report incorporated by refere ence into this Annual Report refere to trademarks, such as Absolute ini®, Better Back Alliance®, Better Insight. Better Responsiveness®, Acuity®, Affix®, Armada®, AttraX®, Back Pact®, Bend Decisions. Better Medicine®, Brigade®, CerPass®, COALESCE ™, COHERE®, CoRoent®, Creative Spine Technology®, DBR®, a iGA™, ILIF®, InStim®, LessRass y®, Leverage®, Embody®, Embrace®, ExtenSure®, Formagragg ft®, Gradie ess®, Modulus®, NeoDisc™, Nerve Avoidance Leader™, NuvaMap™, NuvaLine™, MAGEC®, MAGEC-EOS™, MAS®, MaXcaa NuvaMapMM ™ O.R., NuVasVV ive®, NVM5®,MM Osteocel®, Precept®, PRECICE®, PROPEL®, Radian®, Reline™, Speed of Innovation®, SpheRx®, The Better Way Back®, TraTT verse®, Triad®, VuePoint®, X-CorCC e®, and XLIF®, which are protected under applicab ele intellectual property laws and are our property or the propeo rtytt of our subsidiaries. Solely for co nvenience, our trademarks and d rt maya appear without the ® or ™ symbols, but such referff ences are not intended to indicatee tradenames referff in any waya that we will not assert, to the fullest extent under appl dd icable law, our rights to these trademarks and trad red to in this Annual Repoe nt Plus®, Halo®, enames. OO a a kk Item 1. Business Overview tive We are a leading medical device company in the global spine surgeryrr market, focused on developing minimally-disruprr surgical products and procedurally-integrated solutions for spine surgery. Our currently-marketed producd t portfolio is focused on applications for spine fusion surgery, including ancillary products and services used to aid in the surgical procedure. For the year ended December 31, 2017, we generated global revenues of $1.03 billion, including sales in over 50 countries. 2 visualization and are designed to enabla e safe and reproducid Our principal product offering includes a minimally-disruptive surgical platforff m called Maximum Access Surgery,rr or MAS. The MAS platform combim nes three categories of solutions that collectively minimize soft tissue disruptu ion during spine fusion surgery, provide maximumm ble outcomes for the surgeon and the patient. The platform includes our proprietary software-driven nerve detection and avoidance systems, NVM5, and Intraoperative Monitoring, or IOM, services and support offered or system; and a wide variety of specialized implanmm ts and biologics. Many of our products, including the individual components of our MAS platform can also be used in open or traditional spine surgery. Our spine surgery product line offerings, which include products for the thoracolumbar and the cervical spine, are primarily used to enabla e surgeon access to the spine to perform restorative and fusion procedures in a minimally-disruptive fashion. To assist with surgical procedures we offer a platform called Integrated Global Alignment, or iGA, in which products and computer assisted technology under our MAS platform help achieve more precise spinal alignment. by our NuVasive Clinical Services division, or NCS; MaXcess, an integrated split-blade retract ff tt ff Our MAS platform and its related offeri ngs are designed to provide a unique and comprehensive solution for the safe and reproducible minimally-disruptive surgical treatment of spine disorders by enabla ing surgeons to access the spine in a manner that afford s both direct visualization and detection and avoidance of critical nerves along with intraoperative reconciliation. The ff fundamental difference between our MAS platform, which is sometimes referred to in the industry as “minimally invasive surgery” or “MIS”, is the ability to customize safe and reproducible access to the spine while allowing surgeons to continue to use instruments that are familiar to them and effective during surgery. Accordingly, the MAS platform does not force surgeons to reinvent or learn new . We have dedicated and continue to dedicate approaches that add complm exity and undermine safety, ease of use and/or efficacy significff ant resources toward training spine surgeons around the world; both those who are new to our MAS and other product platforms, as well as ongoing educad tive of ours has been to maintain a leading position in access and nerve avoidance, as well as to pioneer and remain the ongoing leader in minimally invasive spine surgery. Our MAS platform, with the unique advantages provided by our nerve monitoring systems, enables an innovative lateral procedure known as eXtreme Lateral Interbody Fusion, or XLIF, in which surgeons access the spine forff a fusion r than froff m the front or back. It has been demonstrated clinically that XLIF and procedure from the side of the patient’s body, rathet other procedures facilitated by our MAS platform decrease trauma and blood loss, and lead to faster overall patient recovery times compamm red to open spine surgery. tion for MAS-trained surgeons attending advanced courses. An importm ant ongoing objecb ff t r mm ff We offer a co mprehensive portfolio of implant s and fixation devices designed to be used with the MAS platform. r Our portfolio of restoration include implants made from allograft, titanium, and polyetheretherketone, or PEEK. implmm ants used for interbody disc height Our fixation products include specialized pedicle screws, rods and plates. Our biologics products, which are used to aid in the spinal fusion process or bone healing process, include allograft (donated human tissue) and synthetic offerings. We also design and sell expandable growing rod implant syste ms that can be non-invasively lengthened following implantation with precise, incremental ents via an external remote controller using magnetic technology called MAGnetic External Control, or MAGEC, which allows adjustmd for the minimally invasive treatment of early-onset and adolescent scoliosis. This technology is also the basis for our PRECICE limbm lengthening system, which allows for the correction of long bone limb length discrepancy, as well as enhanced bone healing in patients that have experienced traumatic injury. The PRECICE limb lengthening system is sold by our NuVasive Specialized Orthopedics division, or NSO. mm n We intend to continue development on a wide variety of projects intended to broaden surgical applications for greater procedural integration of our MAS techniques and additional applications of the MAGEC technology. Such applications include tumor, trauma, and deformity, as well as increased fixation options, sagittal alignment products, imaging and navigation. We also expect to continue expanding our other product and services offerings as we execute on our strategy to offer customers an end-to-end, integrated procedural solution for spine surgery. We expect to continue to pursue business and technology acquisitions targets, strategic partnett rships and out‐of‐ff the‐box thinking to identify opportunities to broaden participation along the spine care continuum. Top priorities include opportunities that complement c expansion, technology that makes procedures even safer, as well as our technology leadership position in spine, targeted geographi opportuni ties for imaging and navigation. a tt ff Our corporate headquarters is located in San Diego, California where we occupy approximately 145,000 square feet, including a adaver operating theatre designed to accommodate the training of spine surgeons. In August 2017, we six-suite state-of-the-art c our corporate headquarters located in entered into a 17 year operating lease agreement forff San Diego, Californirr a, from approximately 145,000 square feet to approximately 252,000 square feet. Our location in Amsterdam, the Netherlands, serves as our international headquarters. We also have office locations in Aliso Viejo, Californi a, Columbia, Marylrr and and Ann Arbor, Michigan. Our primary distribution and warehousing operations are located in our facility in Memphis, Tennessee. Our business is facilitated by rapid delivery of products and surgical instruments for surgeries involving our products. Because of its location and proximity to overnight third-party transporters, our Memphm is facility enhances our ability to meet demanding delivery schedules and provide a greater level of customer service. Additionally, our primary self-manufacturing facility which produces spinal implants is located in West Carrollton, Ohio. the purpose of expanding and restrut cturing q ff t 3 Our Strategy We are a leading provider of innovative medical productd s that provide comprmm ehensive solutions for the surgical treatment of spine disorders. We continue to pursue the following business strategies in order to improve our competitive position:  Establish our MAS Platfot rm as the Standard of Care. We believe our MAS platform has the potential to become the standard and adopt our of care for spine surgery as hospitals, providers and spine surgeons continue to recognize its many benefitsff s. We also believe our MAS platform has the potential to dramatically improve the clinical results of products and procedured spine surgery. Because of this belief, we dedicate significant resources to researching clinical outcomes data as well as educating spine surgeons, hospitals, and other providers and their patients on the clinical and financial benefits of our productd s, and we intend to capia talize on the growing demand for minimally-disruptive surgical procedures. a  Continue to Develop and Introduce Procedurally-Integre ated Solutions and New Innovative Products.tt One of our core competencies is our ability to rapidl y develop and commercialize innovative spine surgery products and procedures to fulfill an unmet clinical need. In the past several years, we have introducdd ed a continual flow of new products and product enhancements. We have additional products and procedural offerings currently under development that should expand our presence in fusion surgery. With our comprehensive portfolio of product and service offerings, we believe that we can offer our customers a comprehensive procedural solution for spine surgery that distinguishes us from traditional spine implant companies. We intend to continue to build upon our procedural solution with new and enhanced technology offerings, as well as producd t expansions. We believe through continued innovation and a focus on providing comprehensive procedural solutions for our customers, we will increase our market share while at the same time improvi ng patient care. As part of this strategy, the Company must continue to protect and defend its intellectual property related to our innovative products. m ff  Expand the Reach of Our Exclusive Sales Force. We believe having a sales force dedicated to selling only our products is critical to achieving continued growth acro ss our various product lines, driving greater market penetration and increasing our revenues. In the United States, we have a sales force consisting of a mix of directly-employed sales representatives and exclusive sales agents that are responsible for particular geographic regions of the country. Outside of the United States, our sales force consists of directly-employed sales representatives, independent sales agents and territory-based distrit butors. Continuing to expand the range of such teams should allow us to increase our market share and drive adoption of our products and procedures. t  Provide Tailored Solutions in Response to Surgeon Needs. Responding quickly to the needs of spine surgeons is central to our corporate culture, critical to our success, and we believe differentiates us from our compem tition. We solicit information and feedbad ck from our surgeon customers and clinical advisors regarding the utility of, and potential improvements to, our products. For example, we have an on-site machine shop to allow us to rapidly manufacture product prototypes and a state- of-the-art cadaver operating theatre in San Diego, California to provide clinical training and validate new ideas through prototype testing. We also maintain regional training facilities and centers for excellence in strategic locations around the globe. Responding quickly goes beyond product development to include active support in all areas, including clinical research and payer relations. Continuing to remain connected and responsive to the collective voices of the surgeon community should allow us to increase our market share and drive adoption of our procedurally-integrated spine solutions. ff tt ties that allow us to expand our presence in emerging geographi  Selectively License or Acquire Complementary Products and Technologies and Drive our International Presence. In addition to building our company through internal product development and global expansion efforts, we intend to selectively license or acquire complementary products and technologies that should keep us on the forefront of innovation and to pursue ties. With our 2016 acquisition of opportuni Ellipse Technologies, we offer innovative products based on the MAGEC technology platform. With this acquisition, we accelerated our entry into the pediatric and idiopathic spine deformity segment and expanded our international presence. With our 2016 acquisition of the LessRay software technology suite, we now help surgeons and hospital staff manage radiation exposure, without compromising intra-operative images or visual accuracy. Most recently, with our 2017 acquisition of Vertera Spine, which developed patented porous PEEK technology, we now offer po hboth PEEK and titanium materials, thereby addressing the spectrum of surgeons’ needs and preferences for interbody implm an By ties, we believe acquiring complementary products and executing on domestic and internar or we can leverage our expertise of bringing new products to market that are intended to improve patient outcomes, simplifym better integrate techniques, reduce hospitalization and rehabilitation times across the globe, and, as a result, reducdd e overall costs to the healthcare system and continue to grow our global presence. tional footprint expansion opportuni rous interbody technology across cal opportuni ts. a ff tt tt 4  Provide Intraoperative Monitoring Capaa bilities. Monitoring the health of the nervous system during spinal surgery has been a key component of our strategy of product differff entiation since early in our development. Over time, surgeon and hospital demand for nerve monitoring has increased along with the advancement of technologies and techniques used in IOM. We believe our proprietary NVM5 platform is a differentiator in the market and is unique in its ability to provide information about the directionality and proximity of nerves. With our acquisitions of Biotronic NeuroNetwork in 2016 and SafePassage in 2018, we have expanded the scale of our IOM services business and solidified our position as the largest provider of outsourced IOM services and are driving increased utilization of our NVM5 platform. We intend to continue to expand the utility of such platforms and broaden our IOM producd t and services offerings to furthet r our value to our customers and increase adoption and usage. ff Industry Background and Market The spine is the core of the human skeleton, and provides a crucr ial balance between structural support and flexibility. It consists of 33 separate bones called vertebrae that are connected together by connective tissue (defined as bone, muscle, or ligament) to form a column and to permit a normar l nerve system, is enclosed within the spinal column. Vertebrae are paired into what are called motion segments that move by means of three joints: two facet joints and one spine disc. The four majoa r categories of spine disorders are degenerative conditions, deforff mities, trauma and tumors. The largest market and the focus of our business historically are degenerative conditions of the facet joints and the intervertebral disc space. These two conditions can result in instability and pressure on the nerve roots as they exit the spinal column, causing back or neck pain or radiating pain in the arms or legs. l range of motion. The spinal cord, the body’s centratt The prescribed treatment for back or neck pain depends on the severity and duration of the disorder. Initially, physicians will prescribe non-operative, conservative procedures including bed rest, medication, lifestyle modification, exercise, physical therapy, chiropractic care and steroid injections. In many cases, non-operative treatment options are effective; however, some patients eventually require spine fusi on surgery. The vast majoa rity of spine fusion surgeries are done using traditional open surgical techniques from either the front or back of the patient. These traditional open surgical approaches generally requiq re a large incision in the patient’s abdomen or back in order to enable the surgeon to access and see the spine and surrounding area. These open procedures are invasive, in significant blood loss, extensive tissue damage and lengthy patient hospitalization and rehabilitation. lengthy and complex, and typically result ff We believe the market for procedurally-integrated spine surgery solutions will continue to grow over the long term, and we also believe that our market share will increase, because of the following ff market dynamics:  Demand for Surgical Alternatives with Less Tissue Disruption. As has been proven in other surgical markets, we anticipate the broader acceptance of surgical treatments with less tissue disruption and patient trauma will result in increased demand.  Favorable Domestic Demogragg phic s. The population segment most likely to experience back pain is expected to increase as a result of aging “baby boomers” (people born between 1946 and 1965). This large population segment is expected to increasingly demand a quicker return to activities of daily living following surgery than prior generations. a  Access to Care in Emerging Markets. Healthct are reforms in many emerging markets are expanding access to treatments to a greater proportion of their populations, which is expected to continue to drive strong increases in demand for healthcare- related product volumes. Increasing economic affluff ence in key developing regions will further drive demand for healthcare treatments. Although the market for procedurally-integrated spine surgery solutions should continue to grow over the long term, economic, political and regulatory influences are subjecting our industry to significant changes that may slow the growth rate of the spine surgery market. Surgical Alternatives with Less Tissue Disruption The benefitff s of minimally invasive surgery proceduredd s in other areas of orthopedics have significantly contributed to the strot ng and growing demand for surgical alternatives with less tissue disruption of the spine. Surgeons and hospitals seek spine procedures that result in fewer operative and postoperative complications and decreased patient hospitalization periods. At the same time, patients r mes and result in more favorabla e clinical outcomes. Despite patient and ery ti seek procedures that reduce doctor demands, the rate of adoption of alternative surgical procedures with less tissue disruption has been relatively slow with respect to the spine. Currently, the majority of spine surgery patients are treated with traditional open and invasive techniques. trauma, allow for faster recov d ff 5 tt A principal factor contributin ents that have been required to perform these procedurd es. Most traditional minimally invasive spine surgeryr g to spine surgeons’ slow adoption of traditional minimally invasive spine alternatives has been inconsistent outcomes driven by the limited or lack of direct access to and visibility of the surgical anatomy, and the associated systems complmm ex instrumr do not allow the surgeon to directly view the spine and the relevant pathology point and, as such, provide only restrictive visualization through a camera system or endoscope, while also requiring the use of complex surgical techniques. In addition, most traditional minimally invasive spine surgery systems use complmm ex or highly customized surgical instruments that require special training and the nt using the system, which is an impedm iment and/or complm etion of a large number of trial cases beforff e the surgeon becomes proficie deterrent to their adoption. ff Our Commercial Products Our MAS platform allows surgeons to perforff mr ve spine procedures in all regions of the spine and from various surgical approaches, while overcoming the shortcomings of traditional minimally invasive spine surgical techniques. The MAS platform is designed to treat a wide range of spinal pathologies while accommodating a surgeon’s preferred surgical technique. We believe our approach improve s clinical results and should continue to drive an expanded number of minimally- disruptive procedures performed, lead the market movement away from open surgery and make less invasive techniques the standard of care in spine fusion and non-fusff a wide range of minimally-disrupti ion surgery. m r Our products facilitate minimally-disruptu ive applications of the following spine surgery procedures, among othet rs:  Lumbam r and thoracic fusion procedures in which the surgeon approaches the spine through the patient’s back, side or abdomen;  Cervical fusion procedures for either the posterior occipito-cervico-thoracic region or the anterior cervical region; and  Decompremm ssion, which is removal of a portion of bone or disc from over or under the nerve root to relieve pinching of the rr nerve. Our MAS platform combim nes three product categories: our MaXcess retractors, our specialized implm ants and fixation products, rings that collectively enabla e surgeons to detect and navigate around nerves while spine for implant delivery. Biologics are used to complement procedures by assisting in the bone and our nerve monitoring systems and servirr ce offeff directing customized access to thet healing process. MaXcess MaXcess retractors have a split-blade design consisting of three blades that can be positioned to customize the surgical exposure in the shape and size specific to the surgical requirements rather than the more traditional fixed tube or two-blade designs of traditional minimally invasive spine surgical systems. This split-blade design also provides customizable access to the spine, which allows surgeons to perform surgical procedures using instruments that are similar to those used in open procedures but with a smaller incision and less tissue disruption. The ability to use familiar instruments reduces the learning curve for our proceduredd s and facilitates the adoption of our products. Our system’s illumination of the operative corridor aids in providing surgeons with better direct visualization of the patient’s anatomy, without the need for additional technology or other special equipment such as endoscopes. Over the years, several improm vements to our MaXcess systems have been made, including incorporating integrated neuromonitoring technology and impromm ving the blade systems, and the MAS approach has broadened from the lumbarm to the thoracic region. Our MaXcess products are used in the cervical spine for posterior application and anterior retraction, the lumbar spine for decomprm essions, transforaminal lumbar interbody fusions, or TLIFs, and posterior lumbar interbody fusions, or PLIFs, the thoracolumbar spine for eXtreme Lateral Interbody Fusion, or XLIFs, and the thoracic region for tumors and trauma, as well as in adult degenerative scoliosis procedures. Implantstt and Fixatiott n Productstt We have many implanm ts and fixation devices designed to be used with our MAS platform. Our portfolio of implant s used for interbody disc height restoration include implm ants made from allograft, titanium, and PEEK. Our titanium and PEEK implm ants are s and sizes to accommodate specific approach, available in both porous and non-porous formats and come in a variety of shapea pathology and anatomical requirements of the patient and the particular fusion procedure. Our implant s are designed for insertion into the smallest possible space while maximizing surface area contact for fusion. Our fixation products, including pedicle screws, rods and plates, have been uniquely designed and include a highly differentiated percutaneous minimally invasive solution with advanced guide technology, superior rod insertion options, and multiple reduction capabilities to be delivered through our procedures to provide stabilization of the spine. Our fixation offerings include our Armada, Precept and Reline posterior fixation portfolios. mm m 6 Nerve Monitoring Our nerve monitoring systems utilize electromyography, or EMG, as well as proprietary software hunting algorithms and grapha ical user interfaces to provide surgeons with an enhanced and intuitive nerve avoidance system. Our systems function by monitoring changes in electrical signals across muscle groups, which allows us to detect underlying changes in nerve activity. Through the NVM5 platform, we give surgeons the option to connect their instruments to a computer system that provides discrete, real-time, surgeon directed and surgeon controlled feedbad ck about the directionality and relative proximity of nerves during surgery.rr We believe our proprietary NVM5 platform is a differentiator in the market and is unique in its ability to provide information about the directionality and proximity of nerverr s. Our systems analyze and then translate complex neurophysiologic data into simple, usefulff information to assist the surgeon’s clinical decision-making process. The health and integrity of the spinal cord and related nerves can also be assessed using motor evoked potentials, or MEPs, and somatosensory evoked potentials, SSEPs. Both of these methods of IOM involve applying stimulatm ion and recording the response that must travel along the motor or sensory paths of the spinal cord. Surgeons can connect certain instruments to our nerve monitoring systems, thus creating an interactive set of instruments that better enable the safe navigation through the body’s nerverr anatomy during surgery. The connection is accomplm ished using a clip that is attached to thet ively providing the benefits of our nerverr monitoring systems through an instrument already familiar to the surgeon. The system’s proprietary software and easy to use graphical user interface allows the surgeon to make critical decisions in real time enabling safer, faster, and more reproducd ible procedures with the design for improvm ed patient outcomes. ff instrument, eff ect r ff We also offer designed to help surgeons and hospital staff manage radiation exposure, without comprm omising intraoperative images or visual accuracy. This is achieved through digital imaging processing technology that generates high resolution images of the surgical field from low resolution fluoroscopy (or x-ray) images. the LessRay system which is a software technology platforff mr In addition to our MAS platform, our comprehensive procedural solution includes our biologics products, IOM services, and Integrated Global Alignment, or iGA, platform. o Biologics Biologics are used to aid in the spinal fusion process or bone healing process. The global biologics market in spine surgery ng of synthetic products and factors. Our allograftff biologics product offerings include Osteocel Plus and Pro – a cellular bone matrix designed to mimic the including mesenchymal stem cells and osteoprogenitor cells to aid in spinal fusion. Our synthetic etic bone substitute), AttraX (synthetic bone graft material consists of autograftff (autologous human tissue), allograft (donated human tissue), and a varied offeri growtht biologic profile of autograftff biologics product offeri ngs include Formagraft (collagen-based synthyy delivered in putty form), and Propel DBM (highly moldable demineralized bone matrix putty). ff ff Intraopeo rative Monitoring Services Monitoring the health of the nervous system during spinal surgery has been a key component of our strategy of product differentiation since early in our development. Over time, surgeon and hospital demand for nerverr monitoring has increased along with the advancement of technologies and techniques used in IOM. Through our IOM services business, we provide onsite and remote monitoring of the neurological systems of patients undergoing spinal and brain-related surgeries. Our neurophysiologists are present in supervising physicians who remotely oversee and interpret the operating room during procedures and work in partnership witht neurophysiological data gathered via broadbad nd transmission over the internet. Through this servirr ce, data can be analyzed in real time by healthcare professionals for additional interpretation of intraoperative information and oversight, which we believe further improves the safety and reproducibility of the vast array of our spine procedures. Integtt rated Globll al Alignment gg Current and emerging data illustrates a direct correlation between proper spinal alignment and long-term clinical outcomes. Our iGA platform offers a global approach for assessing, preserving, and restoring spinal alignment in an effort to promote surgical effectiveness and efficiencies, lasting patient outcomes, and improvm io of three ., surgeons can preoperatively calculate software products for integrated operative solutions, NuvaMap, NuvaLine and NuvaMap O.R and evaluate alignment parameters and implm ant integration by accurately modeling surgery to create a reliable plan with clear results, and then conduct a real-time interoperative assessment in order to correct the anterior and posterior column alignment in line with the surgical plan. Following a procedure, surgeons can use our solutions to confirm the success of the procedure and effect on alignment by reviewing surgical results and easily compam ring those results to the surgical plan. In addition to our software solutions, we also offer specific products that are designed to restore alignment, including our Reline posterior fixation portfolio and our Bendini spinal rod bending system. ed quality of life. Using our NuvaPlanning portfolff a 7 CC MAGEC-EOS Sp inal Bracingii and Distractiott n System Early onset scoliosis, or EOS, refers to severely deformed curvatures of the spine diagnosed before the age of ten. EOS is a challenging health issue and can lead to more severe progressive deformities. Surgical treatments forff EOS include the use of surgically adjustabla e expandable rods to control the spine deformity while still allowing the spine to grow until a child reaches an appropriate size or age for a more permanent solution, such as spinal fusion. Surgeries to adjud st spinal rods are highly invasive and associated with significant scarring, long recovery times, high infection rates, post-operative pain and impam ired mobility as the child heals from six to nine months to accommodate the growth of surgery. Surgical adjustments to traditional growing rods are typically made everyrr the spine, which can lead to complications and involve repetitive exposure to general anesthesia. The MAGEC-EOS system is designed to overcome the limitations of conventional adjud stable rod treatmet nts for EOS and reduce the number of surgical procedures required throughout childhood. Once our MAGEC growing rods are surgically implanted in a patient, they can be adjud sted non- invasively using the external remote controller. The ability to adjust growing rods without surgical intervention means that EOS patients can be treated with fewer surgeries. Our non-invasive adjusd tment technology enables physicians to perform more frequent adjustments in a non-surgical outpatient setting, thereby improving deformity correction and allowing forff optimal spinal growth. PRECICE Limb Lengtheningii System Limb length discrepancies, or LLDs, refer to a congenital deformity or injury resulting in one leg being shorter than the other. Large LLDs often require complmm ex treatments including limb lengthening surgery to create equal limb length. The traditional limbm lengthening surgical procedurd e includes the creation of a gap in the bone, or osteotomy,m the attachment of wires or pins to the fracturt ed bones, and the passing of the wires or pins through the skin to an external fixator, a scaffold-like frame that surrounds the l fixator distracts the bone when the patient or a family member manually turns the knobs on the fixator. These limb. The externarr adjustments must be performed several times each day such that the bone is lengthet ned approximately one millimeter per day. Adjustments of the external fixator are very painful and associated with soft tissue disruption, disturbanc e of the wound healing process of the skin and soft tissue and high rates of infection. In addition, traditional externar l fixation can result in significant psychosocial comorbidities that reduce quality of life for patients undergoing treatment, including anxiety, social disengagement, sleep disorders, depression and addiction to pain medication. The PRECICE LLD system uses the MAGEC technology to enabla e non- nts using a pre-programmed external remote controller. As a result, PRECICE LLD enables physicians invasive and painless adjud stmet to customize therapy to the needs of the patient over time without the need forff quality d satisfaction for patients in need of surgical limb lengthening. ff of life an surgical re-intervention and provides improved m t Research and Development Our research and development effoff rts are primarily focused on developing further enhancements to our existing products and improving and further integrating our procedural solutions to address unmet clinical needs while improvi ng patient and economic outcomes. Our research and development group has extensive experience in developing products to treat spine pathologies. This group continues to work closely with our clinical advisors and spine surgeon customers to design products and procedural solutions designed to imprm ove patient outcomes, simplm ify techniques, and reduce patient trauma including subsequent hospitalization and rehabilitation times; and as a result reduce overall costs to patients and the healthcare system. mm International As the spine market shifts towards minimally invasive surgery and international access to healthcare increases, it should provide us with an opportunity for accelerated growtht outside the United States. Because our procedurally-integrated solutions and technologies treat similar pathologies around the world, we are focused on expanding our operations in select developed and emerging internarr tional markets. We are investing to tailor our products and technologies to meet varying international patient, surgeon and market requirements. We are also investing in expanding our global infrastructure to adapt to alternative distribution channels, to support differing language and customer service requirements, and to provide training and surgeon education in our MAS surgical techniques, our surgical instruments and our implant s to our international customers. During 2017, we expanded our geographical and direct sales force as part of our focus on increasing our commercial reach outside the United States. Our international ff footprint revenue, which excludes Puerto Rico, was $176.3 million or 17% of total revenue for the year ended Decemberm 31, 2017. m Sales and Marketing In the United States, we currently sell our procedurally-integrated solutions through a combinam tion of exclusive and non- exclusive independent sales agents and directly-employed sales force. Each member of our United States sales force is responsible for a defined territory, with our independent sales agents acting as our sole representative in their respective territories. The determination -territory basis, of whether to engage a directly-employm e is ff with a focus comprised of directly-employm ed sales representatives, as well as exclusive distributors and independent sales agents. Directly- employed sales representatives make up the majority of our overall sales force. on aligning the sales team with the best skills and experience with local surgeons’ needs. Our international sales forcff ed sales representative or an independent sales agent is made on a territory–yy by– 8 Surgeon Training and Education We devote significant resources to training and educating surgeons regarding the safety and reproducibility of our MAS surgical techniqueq s and our complementary instruments and implant s. We maintain state-of-tff he-art cadaver operating rooms and training facilities to help educate surgeons regarding our producdd ts at our corporate headquarters in San Diego, California. We continue to train surgeons on the XLIF technique and our other MAS platform products including: our proprietary nerverr monitoring systems, MaXcess, biologics, and specialized implant ion program into a Clinical Professional Development global platform, which integrates surgical training with professional development. s. In 2017, we announced the expansion of our surgeon educat mm m d Manufacturing and Supply tt tt t a We rely on third parties for the manufacture of a majori ty of our products, their components and servirr cing. We maintain sources for many of our finished goods products. As our business has continued to scale, we significantly alternative manufacturing capabilities in 2017 as we increased producd tion at our approximately 180,000 square foot expanded our self-manufacturing facility in West Carrollton, Ohio. As we increase our self-manufacturing capabilities, we will look to maintain adequate manufacturing y to support our operations. We have identified or are in the process raw materials suppliers, sourcing alternatives and adequate suppl our highest volume products to best enabla e us to be able of identifying and qualifying additional suppliers, on a per product basis, forff to maintain consistent supply to our customers. Our outsourcing strategy is targeted at compam nies that meet FDA, International Organization for Standardization (ISO), and quality standards suppor ted by internal policies and procedures. Supplier performance is maintained and managed through a supplier qualification, performance management and corrective action program intended to ensure that all of our product requirements are met or exceeded. u u Our producdd ts are inspected, packaged and labeled, as needed, at our San Diego headquarters, our Memphis distribution facility rs, we reserve the exclusive right to inspect and hird-party manufacturett or our Aliso Viejo facility. Under our existing contracts with t assure conformance of each produc t and product compomm nent to our specifications. ff t We currently rely on several tissue banks as our suppliers of allograft tissue implm ants, including two for our Osteocel Plus and Osteocel Pro product lines. Like our relationships witht our device manufacturing suppliers, we subject our tissue processing suppu liers to the same quality criteria in terms of selection, qualification, and verification of processed tissue quality upon receipt of goods, as well as hold them accountablea as those put forward by the American Association of Tissue Banks). to complm iance with FDA regulations, state requirements, and as-voluntary industry standards (such u rr We rely on two suppliers for PEEK, which comprm ises many of our partial vertebral body replacement and interbody product lines. We rely on one, exclusive supplier for our NVM5 neuromonitoring system, and rely on one, exclusive supplier for our neuromonitoring equipment that is used outside of the NVM5 platform. We, and our third-party manufacturers, are subjeb ct to the quality system regulations of the U.S. Food and Drug Administration (FDA), state regulations (such as the regulations promulgated by the California Department of Health Services), and regulations promulgated by foreign regulatory bodies (such as in the European Union). For tissue products, we are FDA registered and licensed in the States of California, New York, F ts and instruments, we are FDA registered, ff California licensed, CE marked and ISO certified. CE is an abbreviation for “Conformité Européenne” or European Conformity, and is the registration marking designating that a device can be commercially distributed throughout Europe. Our facilities and the facilities of our third-party manufacturers ar periodic announced and unannounced inspections by regulatory authorities, and may undergo complmm iance inspections conducted by the FDA, state, and/or international regulatory agencies. lorida, Maryland and Oregon. For our device implanm e subject to u ff Surgical Instrument, Implant Sets and Equipment Sales For many of our customers, we provide surgical instrutt mentation sets, including both implm ants and instruments, as well as our nerve monitoring systems in a manner tailored to fulfill our customer’s obligations to meet surgery schedules. We do not generally receive separate economic value specific to the surgical instrument sets from the surgeons or hospitals that utilize them. In many cases, once the surgery is finished, the surgical instrument sets are returned to us, and we prepare them for shipment to meet future surgeries. We complement this implant and instrument shipment model with field-based instrument assets. This hybrid strategy is freight costs, and maximize cash flow. Our designed to improve customer service, minimize backlogs, increase asset turns, optimize pool of surgical equipment that we loan to or place with hospitals continues to increase as we increase our product offering, expand our distribution channels and increase the market penetration of our products. These surgical instrumentation and implant sets are important to the growth of our business, and we anticipate additional investments in such assets going forward. t In certain cases we will sell either surgical instruments, implm ant sets or both to our customers. While this does not constitute a material component of our business, as customer penetrat ion and volume increases, these sales of sets allows our customers to increase the amount of surgical volume performed locally. Additionally, LessRay units are sold as a capital sale or lease purchase. We do not have a long history of selling, leasing or servicing capital equipment, and we intend to invest in building resources and expertise in this area. t 9 Intellectual Property We rely on a combination of patent, trademark, copyright, trade secret and other intellectual property laws, nondisclosure l property rights. In order to have a competitive advantage, we must develop agreements and other measures to protect our intellectuat to as “shareowners”), consultants and maintain the proprietary aspects of our technologies. We require our emplom yees (who we referff and advisors to execute confidentiality agreements in connection with their employm ent, consulting or advisory relationships with us. We also require our shareowners, consultants and advisors who we expect to work on our producdd ts to agree to disclose and assign to us all inventions conceived using our property or which relate to our business. Despite any measures taken to protect our intellectual property, unauthorized parties may attempt to copy aspects of our productd s or to obtain and use information that we regard as proprietary. m Patents As of December 31, 2017, we had over 1,082 issued and pending patents world-wide, including over 509 U.S. issued patents. Our issued and pending patents cover, among other things:  MAS surgical access instrumentation and methodology, including our XLIF procedure and aspects thereof;  Neurophysiology enabla ed instrumentation and methodology, including pedicle screw test systems, softwff are hunting algorithms, navigated guidance, rod bending and surgical access systems;  Implm ants and related instrumentation and targeting systems;  Biologics, including Osteocel Plus and Osteocel Pro, Formagraftff and AttraX;  Magnetic technology for non-invasive distraction of an implmm anted device, including the MAGEC technology platform;  Digital imaging processing technology that generates high resolution images of the surgical field from low resolution scans, including the LessRay technology platform;  Porous PE KEK technology, included in our Cohere, Coalesce and Coalesce Straight interbody implm ants. 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 intellectual propertytt position. The medical device industry is characterized by the existence of a large numbem r of patents and frequent litigation based on allegations of patent infringement. Patent litigation can involve complex factual and legal questions and its outcome is uncertain. Our success will depend in part on our not infringing patents issued to others, including our competitors and potential competimm tors. As the number of entrants into our market increases, the possibility of future patent infringement claims against us grows. While we make extensive efforts to ensure that our products do not infriff nge other parties’ patents and proprietary rights, our producd ts and methods may be covered by patents held by our competitors. There are numerous risks associated with our intellectual property. For a complete discussion of these risks, please see the “Risk Factors” section of this Annual Report. Trademarkskk As of December 31, 2017, we had over 228 trademark registrations in both domestic and foreign regions. Competition Competition within the industry is primarily based on technology, innovation, quality, reputation and customer service. Our significant competitors are Medtronic Sofamor Danek, or Medtronic, DePuy/Synthes, a Johnson & Johnson company, Stryker Spine, Globus Medical, and Zimmer Biomet Spine, which together represent a significant portion of the spine market. We also face ngs and geographic reach than our larger competition from a significant number of smaller companies with more limited product offeri fix International N.V., Alphatec competitors. These companies, who represent intense competition in specific markets, include Orthot Spine, K2M and others. With respect to our nerve monitoring systems, we compete with Medtronic, and Vyaire Medical (formerly VIASYS Healthcare, a division of Becton, Dickinson and Compam ny). Our IOM services business competes with SpecialtyCare and numerous smaller and regional nerve monitoring companies. We also face competition from physician owned distributorships, or PODs, which are medical device distributors that are owned, directly or indirectly, by physicians. However, these PODs have come under scrutiny by the Office of Inspector General, or OIG as the associated physicians derive a portion of their revenue from selling or arranging for the sale of medical devices for use in procedures they perforff mr on their own patients. The prevalence of these PODs may impact our ability to grow. ff ff The United States Government Regulation Our products are medical devices and human tissue products subject to extensive regulation by the FDA and other regulatory bodies both inside and outside of the United States. Each of these agencies requires us - to varying degrees - to complm y with laws and regulations governing the development, testing, manufacturing ing, marketing and distribution of our products. , storage, label a tt 10 FDA’s’ Premarket Clear ll ance and Approval Requireii ments Unless an exemptionm applies, each medical device that we market and sell in the United States must first receive either premarket clearance (by submitting a 510(k) notification) or premarket approval (by filing a premarket approval application, or PMA) from the FDA. In addition, certain modifications to marketed devices may require 510(k) clearance or approval of a PMA supplement. The FDA’s 510(k) clearance process usually takes between three and six months from the date the application is completed, but may last longer. The process of obtaining PMA approval is much more costly, lengthy and uncertain than the 510(k) clearance process and generally takes between one and three years, or even longer, from the time the application is submitted to the FDA until any approval is obtained. In addition, a clinical trial is almost always required to support a PMA application and may be required for a 510(k) premarket notification. There are numerous risks associated with conducting clinical trials, including high costs and uncertain outcomes. For a complm ete discussion of these risks, please see the “Risk Factors” section of this Annual Report. Human Cell, Tissue, and Cellular and Tissue Based Products Our allograft products, including our Triad and ExtenSure, and our Osteocel Plus and Osteocel Pro products, are regulated by the FDA as Human Cell, Tissue, and Cellular and Tissue Based Products. FDA regulations do not currently require these minimally ed to a premarket approval or pre-market notification process beforff e they are manipulated human tissue-based products to be subject marketed if they are deemed to meet the requirements of a “361” product under the Public Health Safetytt Act. u q We are, however, required to register with the FDA as a provider of such producd ts and to list these products with the FDA and comply with its Current Good Tissue Practices for Human Cell, Tissue, and Cellular- and Tissue-Based Producd t Establishments. The FDA periodically inspects tissue facilities to determine compliance with these requirements. Entities that provide us with allograft bone tissue are responsible for performing donor recovery, donor screening, donor testing, processing, and packaging and our complm iance with those aspects of the Current Good Tissue Practices regulations that regulate those functions are dependent upon the actions of these independent entities. The procurement and transplantation of allograft bone tissue is subject to United States federal law pursuant to the National Organ Transplant Act (NOTA), a criminal statute that prohibits the purchase and sale of human organs used in human transplantation - including bone and related tissue - for “valuable consideration” (as defined in the NOTA). The NOTA permits reasonable payments associated with the removal, transportation, processing, preservation, quality control, implantation and storage of human bone tissue. ation, we provide servirr ces, directly or indirectly, in all of these areas. We make payments With the exception of removal and implant to vendors in consideration for the servirr ces they provide in connection with the recovery and screening of donors. Failure to comply with the requirements of NOTA could result in enforcement action against us. m The procurement of human tissue is also subject to state anatomical gift acts and some states have statutes similar to NOTA. In addition, some states require that tissue processors be licensed by that state. Failure to comply with state laws could also result in enforcement action against us. Continuing FDA Regul DD atll iontt After a device is placed on the market, numerous regulatory requirements continue to apply. These regulatory requirements include, but are not limited to, the following:  product listing and establishment registration;  adherence to the Quality System Regulation which requires stringent design, testing, control, docu t mentation and other quality assurance procedures;  labeling requirements and FDA prohibitions against the promotion of off-label a 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 productd s 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 impact our business. We are also subject to announced and unannounced inspections by the FDA, the California Food and Drug Branch, American ation and adherence of applicable state Association of Tissue Banking, as well as other regulatory agencies overseeing the implement and fedff eral device and tissue licensing regulations. These inspections may include our manufacturing and subcu ontractors’ facilities. mm 11 Pursuant to FDA regulations, we can only market our products for cleared or approved uses. Although surgeons are permitted to use medical devices for indications other than those cleared or approved by the FDA based on their medical judgment, we are prohibited from promoting products for such “off-label ” uses. a Healthcare Regue lation and Commercialii Compliance The healthcare industry is highly regulated and changes in laws and regulations can be significant. The federal governmrr ent and all states in which we currently operate regulate various aspects of our business. Changes in the law or new interpretation of existing laws can have a material effect on our permissible activities, the relative costs associated with doing business and the amount of reimbursement by government and other third-party payers. Anti-kickback Statute We are subject to the federal anti-kickback statute which, among other things, prohibits the knowing and willfulff solicitation, offer, payment or receipt of any remuneration, direct or indirect, in cash or in kind, in return for, or to induce the referral of patients for, items or services covered by Medicare, Medicaid and certain other governmental health programs. Under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (ACA), neither knowledge of the q ment for being found in violation of such laws. Violation of anti-kickbak ck statute nor the specific intent to violate the law is a require the anti-kickbak ck statute may result in civil or criminal penalties and exclusion from Medicare, Medicaid and other federal healthcare programs, and - according to ACA - now provides a basis for liability under the False Claims Act. Many states have enacted similar statutes, which are not limited to items and services paid for under Medicare or a federally funded healthcare program. We believe our ed broadly by regulatory operations materially comply with the anti-kickbak ck statutes; however, because these provisions are interpret authorities, we cannot be assured that law enforcement officials or others will not challenge our operations under these statutt es. ff r Federal False Cl dd aims Act mm The Federal False Claims Act (in particular -its “qui tam” or “whistleblower” provisions) allow(s) private individuals to bring actions in the name of the United States government alleging that a defendant has made false claims for payment from federal funds. In addition, various states are considering enacting or have enacted laws modeled after the Federal False Claims Act, penalizing false claims against state funds. In 2013, we received a federal administrative subpoena from the OIG in connection with an investigation into possible false or otherwise imprope r claims submitted to Medicare and Medicaid. The subpoena sought discovery of documents for the period January 2007 through April 2013. In July 2015, we entered into a definitive settlement agreement with the U.S. Department of Justice, or DOJ, to settle this matter. Under the terms of the agreement, we agreed to pay $13.5 million plus fees and accrued interest of approximately $0.3 million to resolve this matter. The settlement was not an admission of liability or wrongdoing by us, and we were not required to enter into a corporate integrity agreement with the OIG as part of the settlement. In August 2015, we received a civil investigative demand, or CID, issued by the DOJ pursuant to the federal False Claims Act. The CID requires the delivery of a wide range of documents and information related to an investigation by the DOJ concernirr ng allegations that we assisted a physician group customer in submitting imprm oper claims for reimbursm er payments to the physician group in violation of the Anti-Kickback Statute. We are cooperating with the DOJ in regards to this matter. Additionally, in June 2017, we received a subpoena from the OIG in connection with an investigation into possible false or otherwise improper claims submitted to Medicare and Medicaid. The subpoena seeks discovery of do cuments for the period January 2014 through June 2017, primarily associated with sales to a particular customer and relationships related to that customer account. We are working with the OIG to understand the scope of the subpoena and its request for documents, and we intend to fulff ly cooperate with the OIG’s request. Any adverse findings related to these investigations could result in material financial penalties against the Company. ement and made impropm r Health Insurance Portabi tt lity and Accountability Act Under the Health Insurance Portability and Accountability Act of 1996, as was amended in 2005 and in 2009, or HIPAA, a Covered Entity, as furthet r defined under HIPAA, is required to adhere to certain requirements regarding the use, disclosure and security of protected health information, or PHI. In the past, HIPAA has generally affected us indirectly, as NuVasive is generally neither a Covered Entity nor a Business Associate, as furff ther defined under HIPAA, to Covered Entities, except that our provision of IOM services through various subsidiaries may create a Business Associate relationship; additionally, we treat our Puerto Rico subsidiary as a Covered Entity. Regardless of Covered Entity statust under HIPAA, in those cases where patient data is received, NuVasive is committed to maintaining the security and privacy of PHI. The potential for enforcement action against us is now greater, as the U.S. Department of Health and Human Servirr ces (HHS) can take action directly against Business Associates. Thus, while we believe we are and will be in compliance with all required HIPAA standards, there is no guarantee that the government will agree. Enforff cement actions can be costly and interrupt regular operations of our business. 12 Foreign Corrupt Practices Act The United States and foreign government regulators have increased regulation, enforcement, inspections and governmrr ental investigations of the medical device industry, including increased United States governmr ent oversight and enforcement of the Foreign Corrupt Practices Act. If the United States or another foreign governmental authority were to conclude that we are not in compliance delay or suspend regulatory clearances, institute with applicabla e laws or regulations, such governmental authority can impose fines, proceedings to detain or seize our products, issue a recall, impose operating restrictions, enjoin n future violations and assess civil penalties against us or our officers or em ees, and can recommend criminal prosecution to the Department of Justice. Moreover, governmental authorities can ban or request the recall, repair, replacement or refund of the cost of any device or product we manufacturett or distribute. We are also potentially subject to the UK Bribery Act, which would also subject us to the imposm ition of civil and criminal fines. Any of the foregoing actions could result in decreased sales as a result of negative publicity and product liabia lity claims, and could have a material adverse effect on our financial condition, results of operations and prospects. ploym m ff Physician Payments Sunshine Act of 2009 (Sunshine Act) SS The Sunshine Act was enacted into law in 2010 and requiq res public disclosure to the United States government of payments to physicians and teaching hospitals, including in-kind transfers of value such as free gifts or meals. The Act also provides penalties for non-compliance. The Sunshine Act requires that we file an annual report on March 31st of a calendar year for the transfers of value incurred for the prior calendar year. This law, along with various international and individual state reporting requirements, such as in Massachusetts and Vermont, increases the possibility that a healthcare company may run afoul of one or more of the requirements. Compliance Program tt A compliance program is a set of internal controls establish ed by a company to prevent and/or detect any non-compliant activities and to address properly those issues that may be discovered. The United States government has recommended that healthcare companies, among others, develop and maintain an effective compliance program to reducd e the likelihood of any such non- rs. In addition, some states, such as Massachusetts and California, compliance by the company, its employm now require certain healthcare compam nies to have a formal compliance program in place in order to do business within the state. For years, we have maintained a complmm iance program structured to meet the requirements of the federal sentencing guidelines for an effective compliance program and the model complmm iance program guidance promulgated by HHS over the years. Our program includes, but is not limited to, a Code of Ethical Business Conduct, designation of a complm iance offiff cer, oversight by a designated committee of our Board of Directors, policies and procedures, a confidential disclosure method (a hotline), and conducting periodic audits to ensure compliance. ees, agents and contracto t Foreign Government Regulatll iott n Sales of medical devices outside the United States are subju ect to foreign government regulations, which vary subsu tantially from country to country. The time 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 has adopted numerous directives and standards regulating the design, manufacturet ling, and adverse event reporting for medical devices. Additionally, certain countries (such as Switzerland), have voluntarily adopted laws and regulations that mirror those of the European Union with respect to medical devices. Devices that complmm y with the requirements of a relevant directive will be entitled to bear “CE” conformity marking, and, accordingly, can be commercially distributed throughout Europe. The method of assessing conformity varies depending on the class of the productd , but normally involves a combination of self-assessment by the manufacturer and a third-party assessment by a “Notified Body”. This third-party assessment consists of an audit of the manufacturer’s quality system and technical review of the manufacturer’s product. We have now successfully passed several Notified Body audits since our original certification in 2001, granting us ISO certification and allowing the CE conformity marking to be applied to certain of our devices under the European Union Medical Device Directive. , clinical trials, labea a m The Japanese governm pproval froff m the Ministry of Health, Laboa ent in recent years made revisions to the Pharmaceutical Affairs Law (now called PMD Act) that made significant changes to the preapproval regulatory systems. These changes have - in part - stipulated that, in addition to obtaining a manufacturing or import a r and Welfare, certain low-risk medical devices can now be evaluated by third-party organizations. Based on the risk-based classification, manufacturers are provided thrt ee procedurd es for Todokede; Pre-market satisfying the PMD Act require Certification, or Ninsho; and Pre-market Approval, or Shonin. NuVasive markets devices in Japaaa n that are assessed by both government entities and third-party organizations using all three procedures in place for manufacturers. The level of review and time line for medical device approval will depend on the risk-based classification and subsequent regulatory procedu re that the medical device is aligned based on assessment against the current PMD Law. Manufacturt ers must also obtain a manufacturing or importm license from the prefecturt al government prior to imporm ting medical devices. We also pursue authot rizations required by the prefectural government as required. q ments prior to placing products on the market: Pre-market Submission, or q u rr tt 13 Device and tissue premarket approval and/or registration and/or facility licensing requirements also exist in other markets where international NuVasive facilities are establa ished and/or where we may conduct business, including, but not limited to, Southeast Asia, Australia, and Latin America. Such requirements vary by countryrr and NuVasive has established procedures to drive its complmm iance with these requirements. Third-Party Reimbursement Broadly speaking, payer pushback on spine surgery and IOM services in the United States has increased in the recent past, and t on spine procedure volumes and prices. we believe this has had an overall dampem ning effecff m We expect that sales volumes and prices of our products and services will continue to be largely dependent on the availability of Medicare and Medicaid, private insurance ent is contingent on established coding for a given reimbursem organizations and managed care programs. Reimbursem plans, accountable care procedure, coverage of the codes by the third-party payers, and adequate payment for the resources used. ent from third-party payers, such as governmental programs, for example,m m a Physician coding for procedures is established by the American Medical Association, or AMA. For coding related to spine surgery, the North American Spine Society, or NASS, is the primary liaison to the AMA. In July of 2006, NASS establa ished the proper physician coding for the XLIF procedure by declaring it to be encompassed in existing codes that describe an anterolateral approach to the spine. This position was confirmed in a formal statement by NASS in January 2010. Hospital coding is established by the Centers for Medicare & Medicaid Services. XLIF is included in the nomenclature for hospital codes as an additional descriptor under long standing codes. All physician and hospital coding is subju ect to change which could impact rei mbursement and physicianaa practice behavior. m t Independent of the coding status, third-party payers may deny coverage based on their own criteria, including if they feel that a device or procedure is not well established clinically, is not the most cost-effective treatment available, or is used for an unapproved indication. At various times in the past, certain insurance providers have adopted policies of not providing reimbursement for the XLIF procedure. We have worked with our surgeon customers and NASS who, in turn, have worked with these insurance providers to supply the information, explanation and clinical data they require to categorize the XLIF procedure as a procedure entitled to reimbursement under their policies. At present, the majori ty of insurance companies provide reimbursement forff XLIF procedures. a However, certain carriers, large and small, may have policies significantly limiting coverage of XLIF, Interlaminar Lumbar Interbody Fusion, or ILIF, Osteocel Plus and Osteocel Pro, cervical interbody implm ants, and/odd r other procedures, producd ts or services that we offer. We will continue to provide resources to patients, surgeons, hospitals, and insurers in order to ensure optimum patient care and clarity regarding reimbursement and work to remove any and all non-coverage policies. National and regional coverage policy decisions are subju ect to unforeseeable change and have the potential to impactm physician behavior and reimbursement for definitive time frames or final outcomes regarding reversal of the coverage-limiting policies, as physician services. We cannot offer the process is dictated by the third-party insurance providers. For a discussion of these risks, please see the “Risk Factors” section of this Annual Report. ff Payment amounts are established by government and private payer programs and are subju ect to fluctuat tions which could impactm s physician practice behavior. Third-party payers are increasingly challenging the prices charged for a wide range of medical productd and services, including those in spine and intraoperative monitoring where we participate. In internar tional markets, reimbursement and healthcare payment systems vary significantly by country and many countries have instituted price ceilings on specific product lines. There can be no assurance that our products will be accepted by third-party payers, ement policies (if available) will not adversely affect that reimbursm our ability to sell our products profitably. ement will be available, and/or that the third-party payers’ reimbursm ff a m Particularly in the United States where major heal thcare reform provisions are scheduld ed, third-party payers must demonstrate they can improve quality and reduce costs; we accordingly see an increase in pre-approval/prior authorizations and non-coverage policies citing higher levels of evidence required for medical therapies and technologies. In addition, insured individuad ls are facing increased premiums and higher out–tt of-pff ocket costs for medical coverage which can lead a patient to delay medical treatment. An increasing numbem r of insured individuals receive their medical care through managed care programs, which monitor and often require pre-approval of the services that a member will receive. The percentage of individuals covered by managed care programs is expected to grow in the United States over the next decade. a Overall escalating costs of medical products and services has led to, and is expected to continue to lead to, increased pressuresuu that third-party reimbursement and on the healthcare industry to reduce the costs of productd coverage will be availabla e or adequate, or that future legislation, regulation, or reimbursm ement policies of third-party payers will not adversely affect the demand for our products and services or our ability to sell these products and services on a profitabla e basis. The unavailability or inadequaq cy of third-party payer coverage or reimbursm ement could have a material adverse effect on our business, operating results and financial condition. For a discussion of these risks, please see the “Risk Factors” section of this Annual Report. s and services. There can be no assurance a 14 Shareowners (our employees) We refer to our employees as “shareowners”. As of December 31, 2017, we have a direct and indirect workforce of over 2,600, including approximately 2,400 shareowners. In addition to our shareowners, we partner with independent sales agencies and independent distributors who sell our products in the United States and internationally. As of Decemberm 31, 2017, there are approximately 290 individuals associated with such sales agencies and distributors. None of our shareowners or sales agents are represented by a labor union, and we believe our shareowner and agency relations are good. Corporate Information Our business was incorporated in Delaware in July 1997. Our principal executive offices are located at 7475 Lusk Boulevard, a 92121, and our telephone number is (858) 909-1800. Our website is located at www.nuvasive.com. San Diego, Californi ff 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 availablea free of charge on our website under the investor relations page as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Commission. All such reports were made available in this fashion during 2017. The public can also obtain any documents that we file with the Commission at http://www.sec.gov. The public may read and copy any materials that we fileff with the Commission at the Commission’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. This report may refer to brand names, trademarks, servirr ce marks or trade names of other companm ies and organizations, and these brand names, trademarks, service marks and trade names are the property of their respective holders. Item 1A. Risk Factors An investment in our common stock involves a high degree of risk. Risk factors that co m our o expectations and that couldl negatgg ively impam ct our financial condition and results of operations are set forth below and elsewhere in ctstt this report. If any of these risks actually occur, our business, financial condition, results of operations and future growth prospe dd couldll be materially and adversel yll affeff cted. Under these circumstances, the trading price of our common stock could decline, and you may lose all or part of yoff ur investment. Further, addidd tional risks not currently known to us or that we currently believe are immaterial also may impair our business, operations, liquidity and stock price materially and adversely. You should consider carefully the risks and uncertainties described below and elsewhere in this report beforff e you decide to invest in our common stock. uld cause actual results to differ fro tt i ll Risks Related to Our Business and Industry To be commercially successful, we must effectively demonstrate to spine surgeons the value proposition of our products and procedural solutions compared to those tt of our competitors. d We focus on marketing our products and procedural solutions to spine surgeons, because of the role that they play in determining the course of patient treatment. Spine surgeons may not widely adopt our producdd ts and procedural solutions unless we are able to effectively educate and train them as to the distinctive characteristics, perceived benefits, safety and cost-effectiveness of our ngs as compamm red to those of our competitors. We believe that the most effective way to introduce and build market demand forff offeri ff s and procedural solutions is by directly training spine surgeons in their use. If surgeons are not properly trained, they may our productd products and procedurd al solutions. This may also result in unsatisfactory patient outcomes, patient misuse or ineffectively use our ff injury, negative publicity or lawsuits against us, any of which could have a significaff nt adverse effeff ct on our business, financial condition and results of operations. 15 Surgeons may be hesitant to use our products and procedural solutions for the following reasons, among others: • lack of surgeon experience with minimally-disruptive surgical products and procedures; • lack or perceived lack of evidence supporting additional patient benefits; • perceived liabia lity risks generally associated with the use of new products and procedured • existing relationships with competim tors and distributors; • limited or lack of availability of coverage and reimbursm • increased competition in lateral procedural offerings; • lack or perceived lack of differentiation among lateral procedures; • costs associated with the purchase of new products and equipment; and • the time commitment that may be required for training. ement within healthcare payment systems; s; If we are not able to effectively demonstrate to spine surgeons the value proposition of our products and procedurdd al solutions, or to increase, which could if spine surgeons adopt competing products into their practice, our sales could significantly decrease or fail adversely impam ct our profitability and cash flow. In addition, we believe recommendations and support of our offerings by influential spine surgeons and other key opinion leaders are essential for market acceptance and adoption. If we are not successful in obtaining such support, surgeons may not use our products and procedural solutions, and we may not achieve expected sales or profitability. ff ff Our future success depends on our strategy tt of obsoletingtt our products dd ii and our ability to timely acquire, develop and o introduce new products or product enhancements that will be accepted by the market. An importm ant part of our business strategy is to stay ahead of our competitors by obsoleting our current offerings with new and enhanced products and technologies. As such, our success will depend in part on our ability to acquire, develop and introduce new changes in technology and market demand, as well as products and enhancements to our existing products to keep pace witht physician, hospital and healthcare provider practices. The success of any new product offering or enhancement to an existing productd will depend on numerous factors, including our ability to: ff ff • properly identify and anticipate surgeon and patient needs; • develop and introduced • adequately protect our intellectual property and avoid infringing upon the intellectual property rights of third parties; • demonstrate the safety and efficacy of new products new products or product enhancements in a timely and cost-effective manner; through the conduct of clinical investigations or the collection of existing ff relevant clinical data; for adequate reimbursement from third-party payers; and • qualifyff • obtain the necessary regulatory clearances or approvals for new products or product enhancements. In addition, our research and development efforts may require a subsu tantial investment of time and resources before we are adequately able to determine the commercial or technical viability of a new product, technology, or other innovation. Even if we are able to develop enhancements or new generation products successfully, these enhancements or new generation products may not generate sufficient demand or produce sales in excess of the costs of development, which would cause our results of operations to suffer. It ant that we carefully manage our introducd tion of new and enhanced products. If potential customers delay purchases until new or enhanced products are available, it could negatively impact our sales. In addition, to the extent we have excess or obsolete inventory as we transition to new products, it would result in margin reducing write-offs for obsolete inventory, and our results of operations may suffer. is also importm ff Furthermore, our product development strategy is based on certain assumptions, including assumptmm ions about various l nt of spine disorders, which could affect the demand for our products and procedurad demographic trends and trends in the treatmet solutions. However, these trends are uncertain and actual demand for our products and procedural solutions could differ materially from projected demand if our assumptions regarding these trends prove to be incorrect or do not materialize, or if alternative treatments to those offered by our products gain widespread acceptance. 16 We operate in a highi ly competitive market segmegg nt that is subject to rapia d chang ii e, and if we are unable to compete successfully, our sales and operating results may sa uffer. ff The market for spine surgery products and procedured s is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. Our ability to compemm te successfully will depend on our ability to develop proprietary products that reach the market in a timely manner, receive adequate reimbursem ent and are safer, less invasive and less expensive than those of our competitors. With respect to our nerve monitoring systems, we compete with Medtronic and Vyaire Medical (formerly VIASYS Healthcare, a division of Becton, Dickinson and Compam ny), each of which have significantly greater resources than we do. Our IOM services business competes with Specialty Care and numerous smaller and regional nerve monitoring companimm es. With respect to MaXcess, our minimally-disruptive surgical system, our largest competitors are Medtronic, DePuy/Synthes, Stryker Spine, Globus Medical, K2M and Zimmer Biomet Spine. We compete with many of the same oducts. We also compete with numerous smaller companies with respect to our implm ant compam nies witht products, many of whom have a significaff nt regional market presence. At any time, these companm ies and other potential market entrants may develop alternative treatments, products or procedures for the treatment of spine disorders that compete directly or indirectly with our offerings. In addition, they may gain a market advantage by developing and patenting competitive products or processes earlier than we can or by obtaining regulatory clearances or market registrations more rapidly than we can. respect to our other pr m d t Many of our competitors have greater resources than we have. Many of our larger competitors are either publu icly traded or divisions or subsiu diaries of publicly traded companies, and enjoy several competitive advantages over us, including: • significantly greater name recognition; • established relationships with a greater number of spine surgeons, hospitals, other healthcare providers and third-party payers; • larger and more well-established distribution networks domestically and/or internarr • productd • greater experience in obtaining and maintaining FDA and other regulatoryrr approvals or clearances for productd s supported by long-term clinical data; s and product tionally; enhancements; • greater experience in, and resources for, launching, marketing, distributing and selling products, including capital equipment; • greater ability to cross-sell their products or create bundled offerings to incentivize hospitals and surgeons to use their ff products; • more expansive portfolios of intellectual property rights; and • greater financial assets, cash flow, capital markets access and other resources for product research and development, sales and marketing, and litigation. Because of the significant size of the potential market for spine surgery products and procedures, we anticipate that existing competitors will continue to dedicate subsu tantial resources to developing competing producd ts. If we are unable to compete effectively, our sales and operating results may suffer. Third-party reimbursement policies and practices, including non-coverage de a cisions, can negatively impact our ability tott sellll our productstt and services. Sales of our products and procedural solutions depend on the availability of adequate reimbursement from third-party payers. Futurt e third-party reimbursement for healthcare costs may be subject to changes in policies and practices, such as more restrictive for surgery coverage or reduction in payment amounts to hospitals and surgeons for approved surgery and IOM criteria to qualifyff services, both in the United States and internationally. Further, certain third-party payers have stated non-coverage decisions concerning our technologies and services. These actions could significantly alter our ability to sell our products and procedural solutions. The continuing effoff rts of governmental authorities, insurance companies, and other payers of healthcare costs to contain or reducd e costs could lead to patients being unable to obtain approval for payment froff m these third-partytt payers. Changes in legislation, regulation or reimbursement policies of third-party payers may adversely affect the demand for our products and services as healthcare providers generally rely on third-party payers to reimburse all or part of the costs and fees associated with the procedures performed with these devices and servirr ces. Likewise, spine surgeons, neurophysiologists and their supervising physicians rely primarily on third- party reimbursement for the surgical or monitoring fees they earn. Spine surgeons are unlikely to use our products and services if they do not receive reimbursement adequate to cover the cost of their involvement in surgical procedures. 17 Further, as we continue to grow our international business, market acceptance of our products and procedural solutions in a particular foreign market may also depend, in part, upon the availabili ement within the applicable a healthcare payment system. Reimbursement and healthcare payment systems in international markets vary significantly by country. As in the United States, our products and procedural solutions may not obtain coverage and reimbursement approvals in a timely manner, if at all, in a particular foreign market. In addition, even if we are able to obtain country-specificff ent approvals, we could incur considerabla e expense to do so. Our failure to obtain such coverage and approvals would negatively affect market acceptance of our products and procedural solutions in the international markets in which such failure occurs and the expenses incurred in connection witht obtaining such coverage and approvals could outweigh the ben coverage and reimbursem ff ty of coverage and reimbursm of obtaining them. efitsff m tt n Pricing pr rr essure from our competitortt s, hospit altt customtt ers and insurance providers can dd negatively impact our ability to e sell our productstt and services. The market for spine surgery products is large and has attracted numerous new companies and technologies. As some compamm nies have sought to compemm te based on price, it has created pricing pressure, which we expect to continue in the future. In addition, we may experience decreasing prices for our products due to pricing pressure from our hospital customers and insurance providers. Because healthcare costs have risen significantly over the past decade, numerous initiatives and reforms have resulted in efforts to drive down prices. As hospitals look to reduce costs, including by aggregating purchasing decisions and through industry consolidation, they may demand lower pricing and limit their number of suppliers. If competimm tive forces drive down the prices we are able to charge for our products, our profit ma rgins will shrink, which will adversely affect our ability to maintain our profitability and to invest in and grow our business. ff In addition, as we expand our procedural solutions offerings to include new technologies, we expect that sales and leases of capital equipment will become a larger portion of our revenues. Demand for capital equipment can be affected by changes in the budgets of healthcare organizations, the timing of spending under these budgets and conflicting spending priorities. In addition, the implementation of healthcare reform in the United States, which may reduce or eliminate the amount that healthcare organizations demand. Any such decreases in expenditures by these healthcare may be reimbum rsed for capital equipment, could further impactm organizations and decreases in demand for our capital equipment could have an adverse effecff t on our results of operations and financial condition. The proliferation of physician-o ll wned distrib ii rr utortt ship s, as well as aggressive competitive tactics to attratt could result in increased pricing pr n essure and harm our ability to maintain or grow revenue. ct away key cu e stomers, Physician-owned distributorships, or PODs, are medical device distributors that are owned, directly or indirectly, by physicians. These physicians derive revenue from selling or arranging for the sale of medical devices via their PODs that are used in the procedures they perform on their patients. We do not sell or distribute any of our products to PODs. However, the proliferaff tion of PODs may reduce our market opportunities and may hamper our ability to grow or maintain revenue. PODs can have significant market knowledge and access to the surgeons who use our products, and we have seen increasingly aggressive competitive tactics from PODs focused on attracting customers away from us. To the extent these tactics are successful, our revenue may materially suffer. Quality or safety issues affecting our products could harm our reputation, result in liabilityii and adversely impact our m business. In the course of conducting our business, we must adequately address quality and safety issues that may arise with our products, s. Although we have established internal procedures to minimize as well as defects in third-party components included in our productdd risks that may arise from quality and safety issues, we may not be able to eliminate or mitigate occurrences of these issues and associated liabilities. Manufacturing flaws, component failures, design defects, or inadequate disclosure of product-related information could result in an unsafe condition or the injury or death of a patient. These problems could lead to a recall of, or issuance of a safetytt alert relating to our products and result in significant costs and negative publu icity. An adverse event involving one of our products could result in reduced market acceptance and demand for our products, and could harm our reputation and our ability to market our products in the future. In some circumstances, adverse events arising from or associated with the design, manufacture or marketing of our products could result in the suspension or delay of regulatory reviews of our applications for new product approvals or clearances. We may also voluntarily undertake a recall of our products, temporarily shut down production lines, or place products on a shipping hold based on internal safety and quality monitoring and testing data. While we have a network of quality systems throughout our business lines and facilities, quality and safety issues may occur with respect to any of our products. A quality or safety issue may result in a public warning letter from the FDA, or potentially a consent decree. In addition, we may be subjeb ct to product recalls or seizures, monetary sanctions, injun nctions to halt manufacturing and distribution of products, civil or criminal sanctions, refusal of a government to grant clearances or approvals or delays in granting such clearances or approvals, import detentions of products made outside the United States, restrictions on operations or withdrawal or suspension of existing approvals. Any of the foregoing events could disruprr on our results of operations and financial condition. t our business and have an adverse effect ff tt 18 The safeta ytt of manyn of our productstt is not yet suppou rted by long-term clinic ll al data and many of our productstt maya therefoe re prove to be less safe and effecff tive than initially thoughtgg .tt As a consequence of our strategy to obsolete our own products with new technologies, many of our products do not have a long history of use. Further, many of our products are subju ect to thet FDA’s 510(k) premarket notification clearance process in the United States and similar regulatory processes in other countries, which typically do not require clinical data. Accordingly, many of our productd reasons, s currently lack the breadtht of published long-term clinical data supporting their safety and effectiveness. For these spine surgeons may be slow to adopt our products, we may not have compamm rative data that our competitors have or are generating, and we may be subject to greater regulatory and product liabia lity risks. ff t Further, futurtt e patient studie s or clinical experience may indicate that treatment with our products does not improm ve patient sustainable reimbum rsement from third-party payers, significantly outcomes. Such results would reduce demand for our products, affect ff ver, if future reduce our ability to achieve expected revenue and could prevent us from sustaining or increasing profitability. Moreo results and experience indicate that our products cause unexpecte d or serious complm ications or other unforeseen negative effects, we could be subject to significant legal liability and harm to our business reputation. The spine medical device market has been particularly prone to potential producdd t liability claims that are inherent in the testing, manufacturett and sale of medical devices and products for spine surgery procedures. aa ff ff We may engage in strategic transactions, including acquisitions, investments, joint development agreements or divestitures that may have an adverse effect on our bus ff iness. We may pursue transactions, including acquisitions of complementary businesses, technology licensing arrangements and joint development agreements to expand our product offerings and geographic presence as part of our business strategy, which could be material to our financial condition and results of operations. We may also consider divesting non-core product lines or out-licensing our technology. We may not complmm ete transactions in a timely manner, on a cost-effecff tive basis, or at all, and we may not realize the expected benefits of any acquisition, license arrangement, joint development agreement or divestiturt e. Other companies may compete with us for these strategic opportunities. We also could experience negative effects on our results of operations and financial condition from acquisition-related charges, amortization of intangible assets and asset impairment charges, and other issues that could arise in connection with, or as a result of, the acquisition of an acquired company or business, including issues related to internal control over financial reporting, regulatory or compliance issues and potential adverse short-term effects on results of operations through increased costs or othet rwise. Acquisitions involve numerous risks, including the following: • difficulties in finding suitable partners or acquisition candidates; • difficulties in obtaining financing on favorable terms, if at all; • difficulties in completing transactions on favorabla e terms, if at all; • the possibility that we will pay more than the value we derive from the acquisition, which could result in future non-cash impairment charges and/or a dilution of futurtt e earnings per share; significff ant attention of our management team that otherwise would be availablea • difficulties in integration of the operations, technologies, personnel, and products of acquired companies, which may require for the ongoing development of our business; • the applicability of additional laws, regulations and policies that have particular application to our acquisitions, including ks, those relating to patient privacy, insurance fraud and abuse, false claims, prohibitions against self-referrals, anti-kickbackk direct billing practices, HIPAA compliance, and prohibitions against the corporate practice of medicine and fee-splitting; • the assumption of certain known and unknown liabilities of acquired companies; • the incurrence of debt, contingent liabia lities or future write-offs of intangible assets or goodwill; • difficulties in retaining key relationships with employmm • difficulties in operating in different business markets where we may not have historical experience. ees, customers, partnett rs and suppliers of an acquired company; and Any of these factors could have a negative impact on our business, results of operations or financial position. Further, past and potential acquisitions entail risks, uncertainties and potential disruptions to our business, especially where we have limited experience as a company developing or marketing a particular product or technology. Following any acquisition, we must integrate the new business, which can be expensive and time-consuming. Failure to timely and successfully integrate acquired businesses may result in non-compliance with regulatoryr or other requirements and may result in unexpected costs, including as a result of inadequate cost containment and failure to fully realize expected synergies. As a result of any of the foregoing, we may not realize the expected benefit from any acquisition. If we cannot integrate acquired businesses, products or technologies, our business, financial conditions and results of operations could be materially and adversely affected. 19 In addition, we may face additional risks related to foreign acquisitions. Foreign acquisitions involve unique risks in addition to y risks and those mentioned above, including those related to integration of operations across differff ent cultures and languages, currenc the particular economic, political and regulatory risks associated with specific countries. r Any divestitures may result in a dilutive impact to our future earnings, as well as significant write-offs, including those related to goodwill and other intangible assets, which could have a material adverse effect on our results of operations and financial condition. Divestiturt es could involve additional risks, including difficulties in the separation of operations, services, products and personnel, the diversion of management’s attention from other business concerns, the disruption of our business and the potential loss of key employees. We may not be successful in managing these or any other significant risks that we encounter in divesting a product or m technology. Healthcare p ll olicy changes may have a material adverse effect on us. Political, economic and regulatory influences are subjecting the healthcare industry to fundamental changes. In March 2010, comprehensive healthcare reform legislation was signed into law in the United States through the passage of the Patient Protection and Affordabla e Health Care Act and the Health Care and Education Reconciliation Act (“ACA”). Among other initiatives, the legislation implemented a 2.3% annual excise tax on the sales of certain medical devices in the United States, effeff ctive January 2013. This excise tax was suspended for years 2016 through 2019, but will be reinstated as of January 1, 2020, absent further legislative action to repeal – or extend the suspension of – the tax. As this excise tax is recorded as a selling, general and administrative expense, it will have an adverse effect on our operating expenses and results of operations. In addition, the ACA significantly alters Medicare and Medicaid reimbursements for medical services and medical devices, which could result in downward pricing pressure and decreased demand for our products. As additional provisions of healthcare reform are implm emented, we anticipate that Congress, regulatoryrr agencies and certain state legislatures will continue to review and assess alternative healthcare delivery systems and payment methods with an objective of ultimately reducing healthcare costs and expanding access. We cannot predict with certainty what healthcare initiatives, if any, will be implemented at the state level, or what ultimate effect federal healthcare reform or any future legislation or ation of regulation may have on our customers’ purchasing decisions regarding our products and services. However, the implement new legislation and regulation may lower reimbursements for our products, reduce medical procedurd e volumes and adversely affect ff our business, possibly materially. m Our IOM business exposes xx us to risks inherent with the sale of services. Our IOM services and suppu ort business exposes us to different risks than our other products and technologies. Through our NuVasive Clinical Services business, including the Biotronic NeuroNetwork ssage business acquired in Januaryr 2018, we provide onsite and remote monitoring of the neurological systems of patients undergoing spinal and brain-related surgeries. Our neurophysiologists are present in the operating room during procedures and work in partnership with supervising physicians who remotely oversee and interpret neurophysiological data gathered via broadband transmission over the Internet. Providing this service subjeb cts us to malpractice exposure. In addition, given the reliance on technology, any disruption to our neuromonitoring equipq ment or the Internet could harm our service operations and our reputation among our customers. Further, r any disruption to our computer systems could adversely impacm t the performar business acquired in July 2016 and the SafePa nce of our neurophysiologists. ff tt a In addition, IOM services are directly billed to Medicare and commercial payers, which brings with it additional risks associated with proper billing practice regulations, HIPAA compliance, corporate practice of medicine laws, and new collections risk associated with third-partytt payers. Due to the breadth of many healthcare laws and regulations, our IOM business could also be subject to healthcare fraud re gulation and enforff cement by both the federal government and the states in which we conduct our business, ents. If our operations are found to be in including under the Anti-Kickback Statute, the federal false claims laws and state law equival violation of any of the laws described in the previous sentence or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results. q As we expand our offerings to include capitaltt equipmii ent and invest in relatll ed resources tt and expertise, we are exposed to additional risks. ii As we expand our procedural solutions offerings to include new technologies, including LessRay, we expect that sales and leases of capital equipment will become a larger portion of our revenues. We do not have a long history of selling, leasing or servicing capital equipment, and we intend to invest in building resources and expertise in this area. We may not generate sufficient revenue to offset the expenses associated with this investment. There can be no assurance that our capital equipment strategy will be successful and will not materially adversely affect our financial condition and operating results. 20 In addition, approval processes of healthcare organizations for the purchase or lease of capital equipment can be lengthy, and such organizations may delay or accelerate system purchases or leases in conjunction with their budget timelines. As a result, it is difficult for us to predict the length of capia tal sales cycles and, therefore, the exact timing of capital sales, which may cause fluctuations in our financial results. Further, demand for capital equipment can be affected by changes in the budgets of healthcare organizations and conflicting spending priorities. Any such decreases in expenditures by these healthcare organizations and decreases in demand for our capital equipment could have an adverse effect on our results of operations and financial condition. Our employee shareowners, consultants, impropeo r activities, including non-compliance with reg distrii ii ibutortt ll srr and other commercial partnett ii d requirements. tt y st andards an r ulator m rs maya engagn e in miscii onduct or other We are exposed to the risk that our emplom yee shareowners, consultants, distributors and other commercial partners may engage in fraudulent or illegal activity. Misconduct by these parties could include intentional, reckless or negligent conduct or other unauthorized activities that violate the regulations of the FDA and non-U.S. regulators, including those laws requiring the reporting of true, complm ete and accurate information to such regulators, manufacturing standards, healthcare frauda and abuse laws and regulations in the United States and abroad or laws that require the true, complete and accurate reporting of financial information or data. In particular, sales, marketing and business arrar ngements in the healthcare industry, including the sale of medical devices, are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrarr ngements. It is not always possible to identifyff and deter misconduct by emplmm oyees, sales agencies, distributors and other third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us and we are not successful in defending ourselves or asserting our rights, those actions could result in the imposition of significant fines or other sanctions, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profitsff and future earnings and curtailment of operations, any of which could adversely affect our ability to operate our business and our results of operations. Whether or not we are successful in defending against such actions or investigations, we could incur substantial costs, including legal fees, and divert the attention of management in defending ourselves against any of these claims or investigations. m u Risks Related to our Commercial Operations and Plans for Future Growth If we are unable to maintaitt n and ex paxx nd our netwott ii rk of direct and indepeee ndent sales rep ll tt resentattt ives, we may not be able to tt generate anticipat ed sales. ii In the United States, we sell our products through a combination of exclusive independent sales agents and directly-employed ed sales personnel, as well as sales personnel. Our international sales force is comprised of independent sales agents, directly-employmm exclusive and non-exclusive independent third-party distributors. We expect these sales representatives to develop long-lasting relationships with the customers they serve. If our sales representatives fail to adequately promote, market and sell our producd ts, or fail to develop lasting relationships with customers, our sales could significantly decrease or faiff l to increase. Further, we may to claims and lawsuits. Asserting or defending against these b terminate sales representatives from time to time, which could subject us types of claims and lawsuits may result in significant legal fees and expenses, and if we are unsuccessful, we could be liablea for damages. We face significant challenges and risks in managing our geographically dispersed distribution network and retaining the individuals who make up that network. In the past, we have experienced departures of sales representatives, which have had a negative impact on our results. If sales representatives were to depart and be retained by one of our competitors, we may be unable to prevent them from helping competitors solicit business from our existing customers, which could further adversely affeff ct our sales. In addition, as we expand into new markets, it may be difficult to find sales representatives with the appropriate expertise or it may take l operational effectiveness and generate expected revenue. Because of the intense time for new sales representatives to reach fulff competition for their services, we may be unable to recruit or retain sales representatives to work with us. Failure to hire or retain qualified sales representatives would prevent us from expanding our business and generating sales. We may be unable to managea ff our future growth effectivtt ely, which couldll make it diffi icult to execute our business strategtt y.gg We intend to grow our business operations and we may experience periods of rapid growth at nd expansion. This anticipated futurett growth could create a strain on our organizational, administrative and operational infrastructurt e, including manufacturing operations, quality control, technical support and customer service, sales force management and general and financial administration. We may not be able to maintain the quality or delivery timelines of our products or satisfy customer demand as it grows. Our ability to r operational, financial and management controls, as well as our manage our growtht properly will require us to continue to improve ou reporting systems and procedures. m 21 tt , customer service, billing and general process improve If our commercial operations and sales volume grow, we will need to continue to increase our workflow capacity for manufacturing ments and expand our internal quality assurance program, m among other things. We will also need to purchase additional equipment, some of which can take several months or more to procure, set up and validate, and increase our manufacturing, maintenance, software and compumm ting capacity to meet increased demand. These increases in scale, expansion of personnel, purchases of equipment or process enha ncements may not be successfully implm emented. q Our reliani ce on a limited number of suppliers and manufacff turers could limit our ability to ii meet demand for our products in d a timely manner or within our budget. a u ff lf-manufact While we are increasing our capacity to se urt e many of our products, we continue to rely on a limited number of to supply and manufacture our products, and we may not be able to find replacements or third-party supplier s and manufacturers rs. Many of our key products are manufactured at single locations, with immediately transition to alternative suppliers or manufacturett limited alternate facilities, and it could take considerabla e time and resources for us to replace the capacity of such vendors in the event of disruptions. In addition, required to verify that the new manufacturer maintains facilities, procedured s and operations that comply with our quality and applicable regulatory requirements, which could further impede ou if we are required to change the manufacturer of a critical component of our products, we will be r ability to manufacture our producd ts in a timely manner. m u d t ff Further, for reasons of quality assurance or cost effective ness, we purchase certain components and raw materials from sole suppliers. To be successful, we rely on our suppliers to provide us with products and compom nents in substantial quantities, in complmm iance with regulatory requirements, in accordance with agreed upon specifications, at acce ptable cost and on a timely basis. In the event we experience delays, shortages, or stoppages of supply wit any supplier, we would be forced to identify a suitable ht alternative supplier which could take significant time and result in significant expense. In addition, our anticipated growth could strain the ability of suppliers to deliver an increasingly large supply of products, materials and components. If we are required to transition to new third-partytt tive suppliers could require us to alter our operations. Any such interruption or alteration could harm our reputation, business, financial ier could be time-consuming and expensive, may result in u condition and results of operations. Transitioning to a new suppl interruptu ions in our operations and product delivery, could affect the performance specifications of our products or could require that we modify the design of those systems. ts of our products, the use of components or materials furnished by these alternar suppliers for certain componen mm u ff ff Performance issues, service interruptions or price increases by our shipping our reputattt our services on a timely basis.ii iott n and abiliii ty t ott providei pp ii harmrr carriers could adversely affect our business and ii Expedited, reliablea shipping is essential to our operations. We rely heavily on providers of transport servirr ces for reliable and secure point-to-point transport of our products to our customers and for tracking of these shipments. Should a carrier encounter delivery performance issues such as loss, damage or destruction of any products, it could be costly to replace such products in a timely manner and such occurrences may damage our reputation and lead to decreased demand for our products and increased cost and expense to our business. In addition, any significant increase in shipping rates could adversely affect our operating margins and results of operations. Similarly, strikes, severe weather, naturt al disasters or other service interruptions affect ing delivery services we use would adversely affect our ability to process orders for our products on a timely basis. ff Manufacturing risks may adversely affect our ability to manufacture products and could reduce our gross margins and negatively affecff t our operating results. In 2017, we significantly expanded our self-manufacturing capabilities as we increased production at our approximately 180,000 square foot manufacturing facility in West Carrollton, Ohio. As part of our business strategy, we intend to continue to expand our ability to manufacturett our current and new producd ts with exceptional quality and in sufficient quantities to meet demand, while complm ying with regulatory requirements and managing manufacturing costs. We are subju ect to numerous risks relating to our manufacturing capabilities, including both those of our own manufacturing facilities and those of our third party suppliers, such as: tt tt 22 • problems with quality control and assurance; • defects in product components that we source from third-party suppliers; • delays in obtaining components from third-party suppliers and component supply shortages; • failing to predict demand accurately, resulting in a failure to increase production of products to meet demand; • potential adverse effeff cts on existing business relationships with current third-party suppliers as we expand our in-house manufacturing tt capabilities; • maintaining control over manufacturing expenses as productio • difficulties associated with compliance with local, state, federal and foreign regulatory requirements; • the inability to modify production lines to enable the efficient manufacture of new products or to quickly implmm ement changes n expands; dd to current producd ts in response to regulatory requirements; and • potential damage to or destruction of our, or our suppliers u ’ manufacturing tt equipment or manufacturing tt facilities. These risks may be exacerbated by our limited experience with self- manufacturing processes and procedures. In addition, as we seek to expand our manufacturing capabilities, we will have to continue to invest additional resources to hire and train personnel and enhance our production processes. If we fail to increase our manufacturing capacity efficiently, our profit margins will shrink, which will negatively affect our operating results. The loss of key employee shareowners, or our inabilityll to recruit, hire and retaitt n skilled and ii xx experi enced personnel, could negatively impact our ability to effectively manage and expand our business. Our success depends on the skills, experience and perforff mar ee shareowners. Their individual and collective efforts will be importm nce of the members of our executive management team and other ant as we continue to develop our products and as we city of existing members of our executive management team could negatively our operations, particularly if we experience difficulties in hiring qualified successors. We do not maintain key man life key employm expand our commercial activities. The loss or incapaa impactm insurance with respect to any of our employee shareowners. Our research and development programs and operations depend on our ability to attract and retain highly skilled engineers and technicians. We may not be able to attract or retain qualified managers, engineers and technicians in the future due to the compem tition for qualified personnel among medical device businesses, particularly in California. We also face compem tition from universities and public and private research institutions in recruiting and retaining highly qualified personnel. Recruiting and retention difficff ulties can limit our ability to support our commercial, manufacturing and research and development programs. All of our U.S. employmm ee shareowners are employmm ee shareowner may terminate his or her employment at any time. The loss of key rs, the failure of any key emplom yee shareowners to perforff m or our mm inability to attract and retain skilled emplm oyee shareowners, as needed, or an inability to effectively plan for and implm ement a succession plan for key employee shareowners could harm our business. ed on an at-will basis, which means that either we or the employm m employee shareowne We face risks associated with our international business. During the year ended Decembem r 31, 2017, $176.3 million or approximately 17% of our net revenue was attributable to our international customers. We are seeking to increase our international sales over the foreseeabla e future. Our international business operations are subjeb ct to a variety of risks, including: 23 • difficulties in staffing and managing foreign and geographically dispersed operations; • having to comply with various U.S. and international laws, including the U.S. Foreign Corrupt Practices Act of 1977, or the FCPA, and anti-money laundering laws; • having to comply with U.S. and foreign trade, import and export and customs regulations and laws, including, but not limited to, the Export Administration Regulations and trade sanctions against embargoed countries, which are administered by the Office of Foreign Assets Control within the Department of the Treasury, as well as the laws and regulations administered by the Department of Commerce; m ing regulatory requirements for obtaining clearances or approvals to market our products; • differff • changes in, or uncertainties relating to, foreign rules and regulations that may impact our ability to sell our products, perform services or repatriate profits to the United States; • tariffs and trade barriers, export regulations and other regulatory and contractual limitations on our ability to sell our productdd s in certain foreign markets; • fluctuations in foreign currency exchange rates; • limitations on or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries or joint u ventures; • differing multiple payer reimbursement regimes, government payers or patient self-pay systems; • differing labor laws and standards; • complex data privacy requirements; • economic, political or social instability in foreign countries and regions; • an inability, or reduced ability, to protect our intellectual property, including any effect of co ff mpulsory licensing imposed by government action; • potential changes to U.S. trade policy, including new legislation that could restrict international trade, or protectionist or retaliatory measures taken by governments of other countries; and • availability of government subsidies or other incentives that benefit competitors in their local markets that are not available to us. The FCPA and similar anti-bribery laws in non-U.S. jurisdictions generally prohibit companmm ies and their intermediaries from making imprm oper payments for the purpose of obtaining or retaining business. The FCPA also imposm es accounting standards and requirements on publicly traded U.S. corporations and their forff eign affiliates, which are intended to prevent the diversion of corporate ent-sponsored healthcare funds to the payment of bribes and other improper payments. Because of the predominance of governmrr systems around the world, many of our customer relationships outside of the United States are with governmental entities and are therefore subjeb ct to such anti-bribery laws. Our internar l control policies and procedures may not always protect us from reckless or shareowners, distributors or agents. In recent years, both the United States and foreign criminal acts committed by our employee ental investigations of the medical device government regulators have increased regulation, enforcement, inspections and governmrr industry, including increased United States government oversight and enforff cement of the FCPA. Despite implementation of a comprm ehensive global healthcare compliance program, we may be subject inspections and investigations by governmental authorities in the future. to more regulation, enforcement, m Any failure to comply with applicable legal and regulatory obligations in the United States or abroad could adversely affect us in a variety of ways that include, but are not limited to, significant criminal, civil and administrative penalties, including imprim sonment of individuals, fines and penalties, denial of export privileges, seizure of shipments and restrictions on certain business activities, disgorgement and other remedial measures, disruption s of our operations, significant management distraction. Also, the failure to icable legal and regulatory obligations could result in the disruption of our distribution and sales activities. Any comply with appl reduction in internar our tional sales, or our failure to further develop our international markets, could have a material adverse effect on business, results of operations and financial condition. a ff r 24 Our results may be impacted by a changes in foreign currency exchange rates. As we increasingly compete in markets outside of the United States, we are and will be exposed to foreign currency exchange risk related to our foreign operations. A significant portion of our foreign subsidiaries ’ operating expenses are incurred in foreign currencies. If the U.S. dollar weakens, our consolidated operating expenses would increase. An increase in the value of the U.S. dollar relative to foreign currencies could require us to reducd e our selling price or risk making our producd ts less competitive in international markets or our costs could increase. Also, as our international sales continue to increase, we may enter into a greater number of transactions denominated in non-U.S. dollars, which could increase our exposure to foreign currency risks, including changes in currency exchange rates. If we are unable to address these risks and challenges effect ively, our international operations may not be successful and our business could be harmed. u ff If we fail toii properly manage our a anticipatedtt international growth, our business could suffer. We have invested, and expect to increase our investment forff the foreseeable future, in our expansion into internarr tional markets. To execute our anticipated growtht in internar tional markets we must: • manage the complm exities 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 complmm ex clinical trials; • manage our directly-employm ed sales personnel as well as independent distributors and sales agents operating in international markets often pursuant to laws, regulations and customs that may be differff ent than those that are customary for our United States operations; • expand our sales and marketing presence in internar tional markets generally to avoid revenue concentration in a small number of markets that would subject us to the risk of business disruptu ion as a result of economic or political problems in concentrated locations; • upgrade our internal business processes and capabilities (e.g., information technology platform and systems, product distribution and tracking) to create scalability and properly handle the transaction volumes that our growing geographi cally diverse organization demands; and a • 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. Internar tional markets may be slower than domestic markets in adopting our products and are expected, in many instances, to yield lower profit margins when compared to our domestic operations. We have only limited experience in expanding into international markets as well as marketing and operating our products and services in such markets. Additionally, our international endeavors may involve significant risks and uncertainties, including distraction of Company tional strategy, and management from domestic operations, insufficient Because expansion into international markets is inherently issues not discovered in our due diligence of new markets or ventures. risky, no assurance can be given that such strategies and initiatives will be successful and will not materiall y adversely affect our financial condition and operating results. Even if our international expansion is successful, our expenses may increase at a greater pace than our revenue and our operating results could be harmed. the expenses associated with our internarr revenue to offset ff ff ff tt Furthet r, our anticipated growth internationally will place additional strain on our suppliers and manufacturers, resulting in ly monitor quality assurance. Any failure by us to manage our international growtht effectively could increased need for us to carefulff have an adverse effect on our ability to achieve our development and commercialization goals. t Cyber security risks and the failure to maintaitt n the confidentiality, integ toolsll and functions could result inll and availaii bility of ii rity, harm to our busineii our computer hardware, ss and/or subject us to costs,tt ii ii softwff are, and Intertt net applpp icll atiott ns and relatll edtt fines or lawsuits. We rely on sophisticated inforff mation technology systems and network infrastructurt e to operate and manage our business. We also maintain personally identifiable information (PII) about our employee shareowners, and given the naturt e of our business, we have access to PHI. Our business therefore depends on the continuous, effective, reliable, and secure operation of our computer hardware, software, networks, Internet servers, and related infrastr ions or access to rr ucture. To our data by internal personnel, suppli . ers or customers through the Internet is interruptu ed or compromised, our business could sufferff the extent that our hardware or software malfunct u ff ff 25 The integrity and protection of our customer, personnel, financial, research and development, and other confidential data is critical to our business and our customers and employm ees have a high expectation that we will adequately protect their personal information. The regulatory environment governir ng information, security and privacy laws is increasingly demanding and continues to evolve. Although our computer and communim cations hardware is protected through physical and software safeguards, it is still vulnerable to system malfunction , computm er viruses, and cyber-attacks. These events could lead to the unauthorized access of ouruu information technology systems and result in the misappropriation or unauthorized disclosure of confidential information belonging to ers. The techniques used by criminal elements to attack computer us, our employee shareowners, partners, customers, or our suppli systems are sophisticated, change frequently and may originate from less regulated and remote areas of the world. As a result, we may not be able to address these techniques proactively or implm ement adequate preventative measures. If our information technology systems are compromm ised, we could be subject to fines, damages, litigation and enforcement actions and we could lose trade secrets or other confidential information, the occurrence of which could harm our business. u ff We relyll on the performance of our inforn marr gg tion technologll y systems, the failuii re of which could have an adverse effeff ct on our business and perforff mance. rr q Our business require s the continued operation of sophisticated information technology systems and network infrastructurt e. ion, computer viruses, security These systems are vulnerabla e to interruption by fire, floods, earthquakes, power loss, system malfunct ions could reduce our ability to manufacture and provide breaches and other events, which are beyond our control. Systems interrupt s, and could have an adverse effect on our operations and financial performance. The level of protection and service for our productd disaster-recovery capabi lity varies from site to site, and there can be no guarantee that any such plans, to the extent they are in place, will be totally effective. Loss of data could interrupt our operations, including our ability to bill our customers, provide customer support services, conduct research and development activities, process and prepare company financial information, manage various general and administrative aspects of our business and damage our reputation, any of which could adversely affect our business. a rr ff ff Our operations are vulnerable to interruptionii or loss due to natural or other disasters, power loss, strikes and other events tt beyond our control. tt a nrr We conduct a significant portion of our activities, including administration and data processing, at facilities located in Souther hquakes, fires and other naturt al disasters. In addition, our primary self- California, an area that has experienced major eart facility is located in West Carrollton, Ohio, an area that has experienced tornados, winter storms and other natural manufacturing o or other disaster (such as a majoa r flood, tsunami, storm or terrorist attack) affeff cting these disasters. A majoa r earthquake, fire, tornadrr or other NuVasive facilities, or those of our suppliers, could significantly disruptu our operations, and delay or prevent producd t shipment or installation during the time required to repair, rebuild or replace our facilities or those of our suppliers. These delays could be lengthy and costly. If our manufacturing facilities or any of our customers’ facilities are negatively impam cted by a disaster, shipments of our products could be delayed. Additionally, customers may delay purchases of our products until operations returnr to normal. Even if we are able to quickly respond to a disaster, the ongoing effects of the disaster could create some uncertainty in the operations of our business. In addition, our facilities may be subject to a shortage of available electrical power and other energy supplies. Any shortages may increase our costs for power and energy suppu lies or could result in blackouts, which could disrupt the about terrorism, the effects of a terrorist attack, operations of our affected facilities and harm our business. In addition, concernsr political turmoil or an outbreak of epidemic diseases could have a negative effect on our operations, those of our suppliers and customers and the ability to travel, which could harm our business, financial condition and results of operations. r ff tt Our insurance policies ll are expexx nsive and protect us only from some business risks, which will leave us exp ll osed to significant i uninsured liabilities. We do not carry insurance for all categories of risk that our business may encounter. Some of the policies we currently maintain include general liabia lity, foreign liabia lity, employm ee benefits liabia lity, property, umbrella, workers’ compensation, products liability and directors’ and officers’ insurance. We do not know, however, if we will be able to maintain existing insurance with adequate levels of coverage. Any significant uninsured liability may require us to pay substantial amounts, which would adversely affect our cash position and results of operations. We bear the risk of warrantytt claims on our products.tt We bear the risk of express and implm ied warranty claims on products we suppl y, including equipq ment and component parts manufactured by third parties. We may not be successfulff in claiming recovery under any warranty or indemnity provided to us by our suppliers or vendors in the event of a successful warranty claim against us by a customer or that any recovery from such vendor or supplier would be adequate. In addition, warranty claims brought by our customers related to third-party components may arise after our ability to bring corresponding warranty claims against such suppliers expire, which could result in additional costs to us. There is a risk that warranty claims made against us will exceed our warranty reserve and our business, financial condition and results of operations could be harmed. u ff 26 Risks Related to Litigation and Intellectual Property e i Defending against liti gat and money, and if we are unsuccessful, we may be obligated to paya damagesa of intellectual property infringement could require us of our proceedings or third-party claill msii and halt salesll tt or other iontt to spend signifii cant timeii products.tt Significant litigation regarding patent rights occurs in our industry and our commercial success depends in part on not infringing the patents or violating the other proprietary rights of others. We have received in the past, and expect to receive in the future, claims from our competitors alleging infringement of their intellectual property rights as part of business strategies designed to impem de our successful commercialization of updated and new products and entry in to new markets. A patent infringement suit brought against us t or any of our strategic partners or licensees may force us or such strategic partners or licensees to stop or delay developing, selling potential products that are claimed to infringe a third-party’s intellectual property, unless that partyt grants us tt manufacturing or or our strategic partners or licensees rights to use its intellectuatt l property. In such cases, we may be required to obtain licenses to patents or proprietary rights of others in order to continue to commercialize our products. However, we may not be able to obtain any licenses required under any patents or proprietary rights of third parties on acceptable terms, or at all, and any licenses may require substantial royalties or other payments by us. Even if our strategic partners, licensees or we were able to obtain rights to the third- party’s intellectual property, these rights may be non-exclusive, thereby giving our compem titors access to the same intellectual property. Ultimately, we may be unabla e to commercialize some of our potential products or may have to cease some of our business operations as a result of patent infringement claims, which could severely harm our business. u Moreover, we may become party to future adversarial proceedings regarding our patent portfolio or the patents of third parties. mental examination or contested post-grant proceedings such as inter partes review, Such proceedings could include supple reexamination, interference or derivation proceedings before the U.S. Patent and Trademark Office and challenges in U.S. District Court. Patents may be subjeb cted to opposition, post-grant review or comparable proceedings lodged in various foreign, both national and regional, patent offices. The legal thresh old for initiating litigation or contested proceedings may be low, so that even lawsuits or ff proceedings with a low probabia lity of success might be initiated. Litigation and contested proceedings can also be expensive and time- consuming, and our adversaries in these proceedings may have the ability to dedicate substantially greater resources to prosecuting these legal actions than we can. Any lawsuits resulting from such allegations could subject us to significant liability for damages and invalidate our proprietary rights. Any potential intellectual property litigation also could forff ce us to do one or more of the following: • stop making, selling or using products or technologies that allegedly infringe the asserted intellectual property; • lose the opportunity to license our technology to others or to collect royaltyt payments based upon successful protection and l property rights against others; assertion of our intellectuat • incur significant legal expenses; • pay substantial damages or royalties to the party whose intellectuatt • pay the attorney’s fees and costs of litigation to the party whose intellectual property rights we may be found to be infringing; • redesign those products that contain the allegedly infringing intellectual property, which could be costly, disruptu ive and/or l property rights we may be found to be infringing; infeasible; or • attempt to obtain a license to the relevant intellectual property from third parties, which may not be available on reason a able terms or at all. Any litigation or claim against us, even those without merit, may cause us to incur substantial costs, and could place a significff ant strain on our finff ancial resources, divert the attention of management from our core business and harm our reputation. In addition, we generally indemnify our customers and international distributors with respect to infringement by our products of the proprietary rights of third parties. If third parties assert infringement claims against our customers or distributors, we may be required to initiate or defend protracted and costly litigation on behalf of our customers or distributors, regardless of the merits of these claims. If any of these claims succeed or settle, we may be forced to pay damages or settlement payments on behalf of our customers or distributors or may be required to obtain licenses for the products they use. If we cannot obtain all necessary licenses on commercially reasonable terms, our customers may be forced to stop using our products. 27 We are currently, tt expenses and result inll harm to our business. and maya in the future be, subject to claims and lawsuits that could cause us to incur signi ificant legal ll We are currently subject to a purported securities class action lawsuit, shareholder derivative litigation, and various commercial and product liability lawsuits, and we may be subject to additional claims and lawsuits in the future. In addition, we, as well as certain of our officers and sales representatives, are subject to claims or lawsuits from time to time. Regardless of the outcome, these lawsuits may result in significant legal fees and expenses and could divert management’s time and other resources. If the claims contained in these lawsuits are successfully asserted against us, we could be liable for damages and be required to alter or cease certain of our business practices or product lines. Any of these outcomes could cause our business, financial performance and cash position to be negatively impam cted. Litigation may also harm our relationships witht existing customers and subject us to negative publicity, each of which could harm our business and financial results. Our ability to protect tt gg our intellectual property and proprietary technology throug gg h pa tents and other tt means is uncertain. Our success depends significantly on our ability to protect our proprietary rights to the technologies used in our products and procedural solutions. We rely on patent protection, as well as a combination of copyright, trade secret and trademark laws, and nondisclosure, confidentiality and other contractual restrictions to protect our proprietary technology. However, these legal means only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. If we affordff do not adequately protect our intellectual property and proprietary te chnology, competmm itors may be able to use our technologies and erode or negate any competitive advantage we may have, which could harm our business and ability to achieve profitabia lity. r u Our pending U.S. and foreign patent applications may not issue as patents at all or not in a form that will be advantageous to us fully challenged by others and invalidated. Our existing patents and any patents issued in the or may issue and be subsequently success futurett may not have claims with a scope sufficie nt to protect our products, any additional featurt es we develop for our products or any new products. Both the patent application process and the process of managing patent disputes can be time consuming and expensive. Other parties may have developed technologies that may be related or competimm tive to our technology, may have filed or may file patent applications and may have received or may receive patents that overlap or conflict with our patent applications, either by claiming the same methods or devices or by claiming subject matter that could dominate our patent position. Further, compemm titors may also be able to design around our patents or develop products that provide outcomes that are comparabla e to our products but fall outside of the scope of our patent protection. ff We rely on our trademarks, trade names and brand names to distinguish our producd ts from the products of our competitors, and have registered or applied to register many of these trademarks. We cannot assure you that our trademark applications will be approved. Third parties may also oppose our trademark applications, or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand not assure you that recognition, and could require us to devote resources to advertising and marketing new brands. Further, we can competitors will not infringe upon our trademarks, or that we will have adequate resources to enforce our trademarks. ff t If we seek to enforce our intellectual property rights through litigationii or other proceedings, it could require us to spend signigg ficant time i and money, with uncertain results. In the event a competitor infringes upon our patent or other intellectual property rights, enforcing those rights may be costly, difficult and time consuming. We may not have sufficie nt resources to enforce our intellectual property rights or to defend our patents against a challenge. Our ability to enforce our patent rights depends on our ability to detect infringement. It may be difficult to detect e to obtain infringers who do not advertise the components that are used in their products. Moreover, it may be difficult or impossibl evidence of infringement in a competitor’s or potential competitor’s product. The medical device industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. It is not unusual for parties to exchange letters surrounding allegations of intellectual property infringement and licensing arrangements. In addition, the patent positions of medical device companies, including our patent position, may involve complex legal and factual questions, and, therefore, the scope, validity and enforff ceability of any patent claims that we have or may obtain cannot be predicted with certainty. m ff 28 Recent changes in U.S. patent laws may limit our ability to obtain, defend and/or enforce our patents. Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. The Leahy-Smith America Invents Act, or the Leahy-Smith Act, includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted and also affect patent litigation. The U.S. Patent and Trademark Office recently developed new regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substu antive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, which only became effective on March 16, 2013. The first to file provisions limit the rights of an inventor to patent an invention if not the first to file an application for patenting that invention, even if such invention was the first invention. Accordingly, it is not clear what, if any, impam ct the Leahy-Smith Act will have on the operation of our business. 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 to expand and the grace period 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 patent rights to technology which we invented first. Furthet rmore, the newly enacted patent laws have expanded the types of post grant challenges of issued patents and these proceedings may provide our competitors with additional opportuni ties to challenge the validity of our issued patents. ff tt Additionally, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the enforff cement and defense of our issued patents. For example, the Leahy-Smith Act provides that an administrative tribunal known as the Patent Trial and Appeals Board, or PTAB, provides a venue for challenging the validity of patents at a cost that is much lower than district court litigation and on timelines that are much faster. Although it is not clear what, if any, long-term impam ct the PTAB proceedings will have on the operation of our business, the initial results of patent challenge proceedings before the PTAB since its inception in 2013 have resulted in the invalidation of many U.S. patent claims. The availabia lity of the PTAB as a lower-cost, faster and potentially more potent tribunal for challenging patents could increase the likelihood that our own patents will be challenged, thereby increasing the uncertainties and costs of maintaining and enforcing them. Furthet r, competitors may challenge our issued patents through post-grant challenge procedures (domestically) and/or opposition proceedings (internationally). The Leahy-Smith Act amended the post-grant challenge procedures in the U.S. to eliminate inter partes reexamination, maintain ex parte reexamination, and add inter partes rev iew making it easier for third-parties to challenge issued aa patents. We are currenrr tly engaged in various such proceedings with respect to our issued patents and the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the enforcement or defenff se of our issued patents. tt If we are unable to prot ect the confi deii ntiality of our trade secrets, our business and competitive position could tt tt be harmed. ee shareowners, consultants and We rely upon non-disclosure agreements and invention assignment agreements with our employmm third parties to protect our confidential and proprietary information and trade secrets. In addition to contract l measures, we try to protect the confidential naturt e of our proprietary information using physical and technological security measures. Such measures may rized access, provide not, for example, in the case of misappropriation of a trade secret by an employee or third party with authot adequate protection for our proprietary inforff mation. Our security measures may not prevent an employee or consultant from misappropriating our trade secrets and providing them to a competitor, and recourse we take against such misconduct may not provide an adequate remedy to protect our interests fully. Unauthorized parties may also attempt to copy or reverse engineer certain aspects of our products that we consider proprietary. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret can be difficult, expensive and time-consuming, and the outcome is unprn edictable. In addition, trade secrets may be independently developed by othet rs in a manner that could prevent legal recourse by us. If any of our confidential or proprietary information, such as our trade secrets, were to be disclosed or misappropriated, or if any such inforff mation was independently developed by a competitor, our business and competitive position could be harmed. uat mm t We may not be able to enforff ce our intellectual property rightgg s throughout the worl tt d.ll The laws of some foreign countries do not protect intellectual property rights to thet same extent as the laws of the United States. Many companies have encountered significff ant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. This could make it difficult for us to stop infringement of our foreign patents, if obtained, or the misappropriation of our other intellectual property rights. For example, some foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, some countries lim of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries. ff it the enforceability t and Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the United States and foreign countries may affect our ability to obtain adequate protection for our technology and the enforcement of our intellectual property. ff 29 Third parties may assert ownership or commercial rights to inventions we develop. We enter into agreements with collaborators that provide for the ownership of intellectual property arising from our collaborations and product development initiatives. These collaborators and other third parties may in the future make claims challenging the inventorship or ownership of our intellectual property. In addition, we may face claims by third parties that our agreements with employee shareowners, contractors or consultants obligating them to assign intellectual property to us are ineffective or in conflict with prior or competing contractual obligations of assignment, which could result in ownership disputes regarding intellectual property we have developed or will develop and interfere with our ability to capture the commercial value of such intellectuat l property. Litigation may be necessary to resolve an ownership dispute, and if we are not successful, we may be precluded from using certain intellectual property or may lose our exclusive rights in that intellectual property. Either outcome could harm our business and competitive position. In addition, in certain instances we have agreed to pay consultants royalties, milestones and other payments in connection witht their product development efforts. There can be no assurance that these consultants will not claim to be entitled to a royalty, milestone or other payment, even if we do not believe that it is warranted. Any such claim against us, even those without merit, may cause us to incur substantial costs, and could place a strain on our financial resources, divert the attention of management from our core business and harm our reputation. u Third parties may assert that our employees or consultantt ts have wrongfugg lly used or discl ii osll ed confidential information or misapprpp opriated trade secrets or are in breach of non-competition or non-solicitation agreements withii our competitors. We employ individuals who previously worked with other companies, including our competitors or potential competitors. Although we try to ensure that our employee shareowners and consultants do not use the proprietary information or know-how of to claims that we or our personnel, consultants or independent contractors have others in their work for us, we may be subject inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other er er or other third party. In addition, we have been and may in the future be subjeb ct to claims that we caused an employee to employm breach the terms of his or her non-competition or non-solicitation agreement with a third party. Litigation may be necessary to defend against these claims. If we fail in defending any such claims or settling those claims, in addition to paying monetary damages or a settlement payment, we may lose valuabla e intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substu antial costs and/or be a distraction to management and other employee shareowners. proprietary information, of a formff u t t If personal injury lawsuitsii are brought against us, our business ii maya be harmed,dd and we may be required to paya damagesa that exceed our insurance coverage.a Our business exposes us to potential product liability claims that are inherent in the testing, manufacture and sale of medical devices for surgical procedures, as well as potential malpractice claims that are inherent in the provision of IOM services. Surgical procedures using our products and service s ofteff n involve significant risk of serious complications, including bleeding, nerve injun ry, paralysis and even death. We could become the subjeb ct of product liabia lity lawsuits alleging that component failures, malfunctions, manufacturing flaws, design defects or inadequate disclosure of product-related risks or product-related information resulted in an unsafe condition or injury to patients. Furthermore, our biologics products may expose us to additional potential product liabia lity claims, including due to the risk of transmitting disease to human recipients. Additionally, our IOM services business could become the subject of medical malpractice lawsuits alleging negligence on the part of our neurophysiologists and/or oversight physicians. rr We have had, and continue to have, a small number of personal injury claim s relating to our products and clinical services, none of which either individually, or in the aggregate, have resulted, or do we believe will result, in a material negative impam ct on our business. In the future, we may be subju ect to additional personal injun ry claims, some of which may have a negative impacm t on our business. Regardless of the merit or eventual outcome, personal injury claims may result in: n n to our reputation; • decreased demand for our producd ts; • injuryrr • significant litigation costs; • substantial monetary awards to or costly settlements with patients; • product recalls; • material defense costs; • loss of revenue; • increased insurance costs; • the inability to commercialize new products or product candidates; and • diversion of management attention from pursuing our business strategy. 30 rr Our existing insurance coverage for personal injury claims may be inadequate to protect us from any liabilities we might incur. If a personal injury claim or series of claims is brought against us for uninsured liabilities or in excess of our insurance coverage, our business could suffer. In addition, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts or scope to protect us against losses. Any claims against us, regardless of their merit, could severely harm our finff ancial condition, strain our management and other resources and adversely affect or eliminate the prospects for commercialization of our IOM business or of any such claim. sales of a product or product candidat e that is the subject d u Risks Related to Regulatory and Compliance We are subject to rigorous FDA and other governmental regulatll tt ions ff regarding the development, manuf e acture, and cant expenses to comply with these regulations and develop products that satisfy thett sale of seee our products and we maya incur signifi tt regulatll ions. i The medical devices we manufacture and market are subject to rigorous regulation by the FDA and numerous other federal, state and foreign governmental authorities, including regulations that cover, among other things, the composition, labeling, testing, clinical study, manufacturing, packaging, marketing and distribution of our products. We are required to register with the FDA as a device manufacturer and tissue bank. As a result, we are subjeb ct to periodic inspection by the FDA for complmm iance with the FDA’s Quality System Regulation (QSR) and Good Tissue Practices requirements, which require manufacturett rs of medical devices and tissue banks to adhere to certain regulations, including testing, quality control and documentation procedures. Our complm iance with applicabla e regulatory requirements is subjeb ct to continual review and is rigorously monitored through periodic inspections by the FDA. In the European Communim ty, we are required to maintain certain ISO certifications in order to sell our products, and are subject to periodic inspections by Notified Bodies to obtain and maintain these certifications. If we or our suppliers fail to adhere to QSR, ISO or other applicable regulations and standards, it could negatively ct to recall by the impact product production and regulatory clearances and could result in fines. Further our products could be subjeu ing of a FDA or other regulatory bodies, or voluntarily by us, in the event of a material deficiency or defect in design, manufacture, label a product or in the event that a product poses an unacceptable risk to health. These and other consequences could have a material adverse effecff t on our sales and results of operations. Most medical devices must receive FDA clearance or approval before they can be commercially marketed. In addition, the FDA may require testing and surveillance programs to monitor the effeff cts of approved products that have been commercialized, and canaa prevent or limit further marketing of a product based upon the results of such post-marketing programs. In addition, the Federal Medical Device Reporting Regulations require us to provide information to the FDA whenever there is evidence that reasonably suggests that a device may have causa ed or contributed to a death or serious injun ry or, if a malfunc tion were to occur, that could cause or contribute to a death or serious injun ry. Furthermore, most majora markets for medical devices outside the United States require clearance, approval or compliance with certain standards before a product can be commercially marketed. The process of obtaining regulatory approvals to market a medical device, particularly from the FDA and certain foreign governmental authorities, can be costly and time-consuming, and approvals may not be granted for futurtt e productd s or product impromm vements on a timely basis, if at all. Delays in receipt of, or failure to obtain, approvals for future products or product improvements could result in delayed realization of material adverse effect on our business or results of operations product revenue or in substantial additional costs, which could have a or prospects. At any time afteff , the FDA may conduct periodic inspections to determine compliance with both QSR requirements and/or current Medical Device Reporting regulations. If we fail to complym with our reporting obligations, the FDA could take action, including warning letters, untitled letters, administrative actions, criminal prosecution, imposm ition of civil monetary penalties, revocation of our device clearance, seizure of our products or delay in clearance of future products. Product clearances or approvals by the FDA can be withdrawn due to failure to comply with regulatory standards or the occurrence of unforeff seen problems following initial clearance or approval. r approval of a productd aa ff Also, the procurement and transplantation of allograft bone tissue is subject to the cri minal statute National Organ Transplant Act and state rules and regulations which govern, among other things, payments we make to vendors in consideration for the services they provide in connection with the recovery and screening of donors. Failure to comply with such laws could result in enforcement action against us and a disrupti on to these product lines (and the revenue associated therewith). u rr Failure or allell gee d faiff ii lure to tt regulatll ory proceedings, which are comply with FDA and other go xx expensive and e regul couldll divert management attention. vernmentaltt tt tt atll ions tt can result in investigat ions i and other tt If the FDA or other governmental authorities in the United States or abroad believes we are not conducting our business in compliance with applicable laws or regulations, such governmental authority can initiate investigations or other regulatory proceedings. Responding to such investigations and proceedings may cause us to incur substantial costs, and could place a significant strain on our financial resources and divert the attention of management from our core business. We could be subject to proceedings to detain or seize our products, product recalls, or operating restrictions, Moreover, governmr ental authorities can ban or request the recall, repair, replacement or refund of the cost of any device or product we manufacture or distribute. Any of the foregoing actions could result in decreased sales as a result of negative publicity and product liability claims, and could have a material adverse effect on our financial condition, results of operations and prospects. ff 31 We are subject to federal, state and foreigni penalties. violated, could subject us to substantial tt fraud and abuse laws and health information ll privacy and security l w tt awll s, whi ch, if There are numerous U.S. federal and state, as well as foreign, laws pertaining to healthcare fraud and abuse, including anti- kickback, false claims and physician transparency laws. Our relationships with physicians, providers and hospitals are subject to scrutiny under these laws. We may also be subject to patient privacy regulation by both the federal governmr ent and the states and forff eign jurisdictions in which we conduct our business. ff Healthcare fraud and abuse laws are broad in scope and are subju ect to evolving interpretation, which could require us to incur substantial costs to monitor complm iance or to alter our practices if they are found not to be in compliance. Violations of these laws may be punishable by criminal or civil sanctions, imprim sonment and exclusion from participation in entation of a comprehensive global healthcare compliance program, we cannot governmental healthcare programs. Despite implemmm provide assurance that any of the healthcare fraud and abuse laws will not change or be interpreted in the future in a manner which restricts or adversely affects our business activities or relationships with healthcare professionals, nor can we make any assurances that authorities will not challenge or investigate our current or future activities un including substantial fines, der these laws. uu In July 2015, we entered into a settlement agreement with the U.S. Department of Justice, or DOJ, pursuant to which we paid $13.5 million to resolve an investigation into possible false or otherwise improper claims submitted to Medicare and Medicaid. We admitted no wrongdoing as part of the settlement. In August 2015, we received a civil investigative demand, or CID, issued by the DOJ pursuant to the federal False Claims Act. The CID requires the delivery of a wide range of documents and information related to an investigation by the DOJ concerning allegations that we assisted a physician group customer in submitting improper claims for reimbursement and made imprm oper payments to the physician group in violation of the Anti-Kickback Statute. We are cooperating with the DOJ. Additionally, in June 2017, we received a subpoena from the OIG in connection with an investigation into possible false or otherwise imprope r claims submitted to Medicare and Medicaid. We are working with the OIG to understand the scope of the subpoena and its requesq t for documents, and we intend to fully cooperate with the OIG’s request. m No assurance can be given as to the timing or outcome of these investigations. Responding to government requeq sts and investigations requires considerable resources, including the time and attention of management. If we were to become the subju ect of an enforcement action, including any action resulting from the investigation by the DOJ or the OIG, it could result in negative publicity, penalties, fines, the exclusion of our producd ts from reimbursement under federally-funded programs and/or prohibitions on our ability to sell our products, which could have a material adverse effect on our results of operations, financial condition and liquidity. We may fail to obtain or maintain foreigni regue sll latory approval pp to market our productstt tt in other countries. We currently market our products internationally and intend to expand our international marketing. Internar tional jurisdictions require separate regulatory approvals and compliance with numerous and varying regulatory requirements. The approval procedures vary among countries and may involve requirements for additional testing. Clearance or approval by the FDA does not ensure jurisdictions, and approval or certification by one foreign tt approval or certification by regulatory authorities in other countries or regulatory authority does not ensure approval or certification by regulatory authorities in other foreign countries or by the FDA. The foreign regulatory approval or certification process may include all of the risks associated with obtaining FDA clearance or approval. We may not obtain foreign regulatory approvals on a timely basis, if at all. We may not be able to file for regulatory approvals or certifications and may not receive necessary approvals to commercialize our products in any market. If we fail to receive necessary approvals or certifications to commercialize our products in foreign jurisdictions on a timely basis, or at all, our business, results of operations and financial condition could be adversely affected. If we fail to obtain, or experience signi xx product enhancements, our ability tott commercially distribute fii cant delayll ii and market our products could suffer. s in obtaining, FDA clearances or approvals for our future productstt or The process of obtaining regulatory clearances or approvals to market a medical device, particularly from the FDA, can be costly and time consuming, and there can be no assurance that such clearances or approvals will be granted on a timely basis, if at all. In particular, the FDA permits commercial distribution of a new, non-exempt, non-Class I medical device only afteff r the device has received clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act, or receives approval under the premarket approval application (PMA) process. If clinical trials of our current or future product candidates do not produce results necessary to support regulatory approval, we will be unable to commercialize these products, which could have a material adverse effect on our financial results. 32 The FDA will clear marketing of a medical device through the 510(k) process if it is demonstrated that the new product is substantially equivalent to other 510(k)-cleared products. The PMA process is more costly, lengthy and uncertain than the 510(k) clearance process. Additionally, any modification to a 510(k)-cleared device that could significantly affect its safety or efficacy, or that would constitute a majoa r 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. Our failure to comply with such rovals, product recalls, termination of regulations could lead to the imposm ition of injunctions, suspensions or loss of regulatory app facilities are possible. distribution, or product seizures. In the most egregious cases, criminal sanctions or closure of our manufacturing rr t The misuse or off-ff label use of our products may harm our reput tt result in costly investigations, fines or sanctions by regue tt attt ion in the marketplace, result in injuries that lead to latory bodies if we are deemed to have engagea d in a product liability suits or ii the promotiott n of these uses, any of which couldll be costly t tt ott our business. Pursuant to FDA regulations, we can only market our products for cleared or approved uses. Although physicians are permitted to use medical devices for indications other than those cleared or approved by the FDA based on their medical judgment, we are prohibited from promoting products for such off-lff abel uses. We train our marketing personnel and independent sales representatives and distributors to not promote our products for uses outside of the FDA-cleared indications. Although we believe our marketing, promotional materials and training programs for physicians do not constitute promotion of unapproved uses of our products, if the FDA or any foreign regulatory body determines that our marketing, promotional materials or training programs constitute promotion could be subject to significant fines in addition to regulatory enforcement actions. It is also possible that other of an off-label use, we a federal, state or foreign enforcement authorities might take action under other regulatory autho rity, such as false claims laws, if they l use, which could result in significant penalties, including, but consider our business activities to constitute promotion of an off-labea not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs and the curtailment of our operations. rr In addition, there may be increased risk of injury to patients if physicians attempt to use our products off-ff use of our products for indications other than those cleared by the FDA or approved by any foreign regulatory bo effectively treat such conditions, which could harm our reputation in the marketplace among physicians and patients. rr label. Furthermore, the dy may not ii If we or our suppliers faiff l to comply ’ with the FDA ’s quality system reg internatiott nally, the manufacture and processing of our productstt could be delayll by the FDA or other governme nt agencies. DD ii ulatll and standards tt ions ed and we may be subject to an enforff cement actiott n or equivalent reg tt ulatll ions dd ll We and our suppliers are required to complm y with the QSR and other applicable standards and requirements, which cover the methods and documentation of the design, testing, production or processing, control, quality assurance, labeling, packaging, storage and shipping of our products. The FDA and other regulatory bodies enforce compliance with regulatory requirements and standards through periodic inspections. If we or one of our suppliers fail an inspection or if any corrective action plan is not sufficient, the release of our producd ts could be delayed. We have undergone inspections by the FDA and other regulatory bodies regarding our allograft business and FDA inspections regarding our medical device activities. In connection with these inspections as well as prior inspections, regulatory agencies have requested minor corrective actions, which we have implemented. There can be no assurance that the FDA will not subject us to further enforcement action and 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 label u ed by us, regardless of ers. Thus, a failure by us or our suppliers to comply with applicable s are manufacturt ed by us or our suppli a uirements can result in enforcement action against us by the FDA, which may include any of the following sanctions: whether the productd regulatory req rr n tions, and civil penalties; • fines, injunc • recall or seizure of our producd ts; • 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. 33 We or our supplu ii stri n processing or di buii tion of allograft products. ll iell rs may be the subject of claims for non-compliance with FDA regulations in connection with the DD It is possible that allegations may be made against us or against donor recovery groups or tissue banks, including those with which we have a contractuatt l relationship, claiming that the acquisition or processing of tissue for allograft products does not comply with applicable FDA regulations or other relevant statutes and regulations. Allegations like these could cause regulators or other authorities to take investigative or other action against us, or could cause negative publicity for us or our industry in general. These antial costs, divert the attention of management from our business, harm actions or any negative publicity could cause us to incur substu our reputation and cause the market price of our shares to decline. Complianii ce with SEC regulations relating ll to “conflict miner “ als” may ia ncii rease our coststt and adversely affect our business. ff minerals originate from the Democratic Republic of Congo (“DRC”), or an adjoid We are subject to SEC regulations that require us to determine whether our products contain certain specified minerals, referred to under the regulations as “conflict minerals”, and, if so, to perforff m an extensive inquiry into our supply chain, in an effort to determine whether or not such conflict . ning countrytt Compliance with these regulations has increased our costs, and we expect our costs may increase in the future. We have determined that certain of our products contain such specified minerals. As of the date of our conflict minerals report for the 2016 calendar year, we were unable to determine whether or not such minerals originate from the DRC or an adjoini ng country. We are continuing to conduct inquiries into our supply chain in connection with the preparation of our conflict minerals report for 2017, which must be audited by an independent auditor pursuant to existing government auditing standards. Compliance with these requirements has been time-consuming for management and our supply ers), and we expect that In addition, to the complm iance will continue to require the expenditure of significant amounts of time and money by us and them. extent any of our disclosures are perceived by the market to be “negative,” it may cause customers to refuse to purchase our products. Further, if we determine to make any changes to products, processes, or sources of supply, it may result in additional costs, which may adversely affect our business. chain personnel (as well as time-consuming for our suppli u d u r Legislativtt e or regulator ll y re foe rms may make it more diffi i cultll and costlytt for our products or to produce,e market or distributett our productstt aftertt for us to obtain regulator clearance or approval is obtained.dd ll yr clearances or approvals From time to time, legislation is drafted and introducd ed in Congress that could significantly change the statutory provisions governing the regulation of medical devices or the reimbum rsement thereof. In addition, the FDA regulations and guidance are ofteff n revised or reinterprr eted by the FDA in ways that may significantly affeff ct our business and our products. Any new statutes, regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of any futurt e products or make it more difficult to manufacture, market or distribute our products or futurtt e products. We cannot determine what effect changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted may have on our business in the futurett . Such changes could, among other things, require: • additional testing prior to obtaining clearance or approval; • changes to manufacturing methods; • recall, replacement or discontinuance of our products or future products; or • additional record keeping. Any of these changes could require substantial time and cost and could harm our business and our financial results. tt Our relatll ionship b ii be subject to l sanctions. ii subject us to possible administrative, civil or crimina s with physicians could h additional scrutiny from regula tory enforcement authorities and could ii Federal and state laws and regulations imposm e restrictions on our relationships with physicians. We have entered into consulting agreements, license agreements and other agreements with physicians in which we provided equity awards or cash or both as compensation. Some of the physicians with which we have such consulting and other agreements are affiliated with some of our customers. Finally, we have other arrangements with physicians, including for research and development grants and for other purposes as well. We could be adversely affected if regulatory agencies were to interpret our financial relationships with these physicians, who may be in a position to influence the ordering of and use of our products for which governmental reimbursement may be available, as being in violation of applicabla e laws. If our relationships with physicians are found to be in violation of the laws and regulations that apply to us, we may be required to restructure the arrangements and could be subju ect to administrative, civil and criminal penalties, ing of our operations, any including exclusion from participation in government healthcare programs and the curtailment or restruct of which could negatively impact our ability to operate our business and our results of operations. urt r 34 Our business involves the use of hazardous materials and we and our third-pdd arty manufacturers must comply with environmentaltt laws and regulations, which may be expens xx ive and restrict how we do business. ii Our third-party manufacturers’ activities and our own activities involve the controlled storage, use and disposal of hazardous materials. We and our manufacturers are subjeb ct to federal, state, local and foreign laws and regulations governing the use, generation, manufacture, storage, handling and disposal of these hazardous materials. We currently carry no insurance specificff ally covering environmental claims relating to the use of hazardous materials, but we do reserve funds to address these claims at both the federal for handling and disposing of these materials and waste products and state levels. Although we believe that our safety procedures complm y with the standards prescribed by these laws and regulations, we cannot eliminate the risk of accidental injury or contamination from the use, storage, handling or disposal of hazardous materials. In the event of an accident, state or federal or other applicablea authorities may curtail our use of these materials and interrupt our business operations. In addition, if an accident or environmental discharge occurs, or if we discover contamination caused by prior operations, including by prior owners and operators of properties we acquire, we could be liablea antial, this could significantly harm our financial condition and results of operations. for cleanup obligations, damages and fines. If such unexpected costs are substu rr ff Risks Related to Our Financial Results and Need for Financing gg We may be unable to grow our revenue or earningii s as anticipated, which may have a matertt ial adverse effect on dd our future operating results. We have experienced rapid growtht since our inception, and have increased our revenue from $38.4 million in 2004, the year of our initial public offering, to $1.03 billion in 2017. Our ability to achieve futurtt e growth will depend upon, among other things, the success of our growth strategies, which we cannot assure will be successful. In addition, we may have more difficulty maintaining our prior rate of growtht of revenue or recent levels of profitability and cash flow. Our futurtt e success will depend upon various factors, including the strength of our brand image, the market success of our current and future products, competitive conditions and our ability to manage increased revenue, if any, or implm ement our growth strategy. In addition, we anticipate significantly expanding our infrastruct and adding personnel in connection with our anticipated growth, which we expect will cause our selling, 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 impam cted if we do not achieve our anticipated growth. urett ff We have a signific i ant amount of outstandindd g indebtedtt nedd ss, and our financ ii ial conditiodd n and results of operatrr iott ns could be adversely affected if we do not efficiently managea our liabilities. As of December 31, 2017, we had outstanding $650.0 million aggregate principal amount of our 2.25% Convertible Senior Notes due 2021 (the “2021 Notes”). This significant amount of debt has importmm ant risks to us and our investors, including: • • • • • q requiri ng a portion of our cash flow from operations to make interest payments on this debt; increasing our vulnerability to general adverse economic and industry conditions; reducing the cash flow available to fund capital expenditurt es and other corporate purposes and to grow our business; limiting our flexibility in planning for, or reacting to, changes in our business and the industry; and limiting our ability to borrow additional funds as needed or take advantage of business opportunities as they arise. indebtedness, the risks described above could increase. Furthet In addition, to the extent we draw on our $500.0 million revolving senior credit facility (the “2017 Facility”) or otherwise if we increase our indebtedness, our actuat incur additional l cash requirements in the futurtt e may be greater than expected. Our cash flow from operations may not be sufficient to repay all of the outstanding debt as it becomes due, and we may not be able to borrow money, sell assets or otherwise raise funds on acceptable terms, or at all, to refinance our debt. Further, there are a large number of shares of common stock reservedrr for issuance upon the potential conversion of our 2021 Notes and the warrants that we issued as part of the related bond hedge transactions related to the 2021 Notes. The issuance of these shares may depress the market price of our common stock. r, rr 35 If we fail to comply with the covenants and other obligations under our credit facility, the lenders may be able to accelerate amounts owed under the facilities and may foreclose upon the assets securing ou n r obligll ations. tt rr rr In April 2017, we entered into an Amended and Restated Credit Agreement (the “2017 Credit Agreement”) with respect to the nt 2017 Facility, which replaced the previous Credit Agreement we had entered into in February 2016. The 2017 Credit Agreeme provides for secured revolving loans, multicurrency lo an options and letters of credit in an aggregate amount of up to $500.0 million. The 2017 Credit Agreement also contains an expansion feature, which allows us to increase the aggregate principal amount of the 2017 Facility provided we remain in compliance with the underlying financial covenants, including but not limited to, compliance with the consolidated interest coverage ratio and certain consolidated leverage ratios. All of our assets and the assets of our material subsidiaries are pledged as collateral under the 2017 Facility (subject to customary exceptions) and each of our material domestic subsidiaries guarantee the 2017 Facility. The covenants set forth in the 2017 Credit Agreement restrict, among other things, our ability fundamental changes, sell and to: create liens on assets, incur additional indebtedness, make investments, make acquisitions and other dispose of property or assets, pay dividends and other distributions, change the business conducted, engage in certain transactions witht affiliates, enter into burdensome agreements, limit certain use of proceeds, amend organizational documents, change accounting policies or reporting practices, modify or terminate documents related to certain indebtedness, enter into sale and leaseback transactions, fund any person or business that is the subject of sanctions, and use proceeds for any breach of anti-corruption laws. If we fail to comply with the covenants and our other obligations under the 2017 Facility, the lenders would be able to accelerate the required repayment of amounts due under the 2017 Credit Agreement and, if they are not repaid, could foreclose upon our assets securing our obligations under the 2017 Facility. q t We may need additional financing in the future to meet our capital needs ii or to make oppo ortunistic acquisitions and such financing maya not be availaii ble on favorable terms, if at all,ll and may be dilutiv ii e to existing stockholdell rs. ff In furtherance of our growtht strategy and global expansion efforts , we intend to continue to invest in our business, including through acquisitions and strategic transactions. These investments will be expensive, and we may need to seek additional financing in and the ability to the future to meet our capital needs. As of December 31, 2017, we had $72.8 million in cash and cash equivalents draw $500.0 million on our 2017 Facility. In January 2018, we drew $50.0 million from the 2017 Facility to be used for working capia tal, general corporate purposes, and strategic investments and acquisitions, including the acquisition of SafePassage, a privately- held provider of IOM services. We may seek to raise capita ings, borrowings under our existing or future credit facilities or other sources. We may be unable to obtain any desired additional financing on terms favorable to us, if at all. If adequate funds are not available on acceptable terms, we may be unabla e to fund our expansion, successfully develop or enhance products or respon d to competitive pressures, any of which could negatively affect our business. If we raise additional funds d through the issuance of equity securities, our stockholders will experience dilution of their ownership interest. If we raise additional funds by issuing debt, we may be subject to limitations on our operations due to restrictive covenants. Additionally, our ability to make scheduld ed payments or refinance our obligations will depend on our operating and financial performance, which in turn is subject to prevailing economic conditions and financial, business and othet al from public and private debt and equity offer r factors beyond our control. q ff We could be subject to changes in tax rates,ee the adoption, evolutiott n or change of new and/or// amended U.S. or internatiott nal taxaa legislation or exposure to additional ta ii xaa liabilities. ii We are subject to taxes in thet United States and numerous foreign jurisdictions, including the Netherlands, where a number of our subsidiaries are located. Significant judgment is required to determine and estimate our worldwide tax liabilities. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. Our effective income tax rates have been, and could in the future be adversely affected by changes in tax laws or interpretations of those tax laws, by stock-based compensation and other non-deductible expenses, by changes in the mix of earnings in countries with differing statutory tax rates, or by changes in the valuation of our deferred tax assets and liabilities. As part of our globalization initiative, we have centralized international operations in the Netherlands and have entered into intercompany transfer pricing arrangements, including the licensing of intangibles. We continue to streamline our international operations to better align with and support our international business activities and markets through changes in how we develop, license and use our intangible property and how we structure our international procurement and customer service functions. We have experienced a negative impacm t to our effecff tive tax rate over the last few years as we’ve invested in our expansion and expect continued but declining pressure on the tax rate over the next several years until we achieve our net profitability goals outside the U.S. and see the long-term benefits of expansion on our effective tax rate. There can be no assurance that the taxing authorities of the jurisdictions in which we operate or will operate or to which we are otherwise deemed to have sufficient tax presence will not challenge the tax benefits that we ultimately expect to realize as a result of our internar tional structure. In addition, current and future changes to U.S. and non-U.S. tax laws, including recently enacted U.S. tax reform of international business, could negatively impact the anticipated ture. Any long term benefits to our tax rate will also depend on our ability to achieve our tax benefits of our international strucrr tional growth projections and to operate our business in a manner consistent with our international structure and anticipated internar intercompany transfer pr icing arrangements. If we do not operate our business consistent with the structure and applicable tax ff provisions, we may fail to achieve the financial efficiencies that we anticipate as a result of the structure and our futurtt e operating results and financial condition may be negatively impacted. 36 Finally, we may be subjeb ct in the future to examination of our income tax returns by the Internal Revenue Service and other taxing authorities which may result in the assessment of additional income taxes. We regularly assess the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of our provision for taxes. There can be no assurance as to the outcome of these examinations. If our effective tax rates were to increase, particularly in the U.S. or the Netherlands or if the ultimate determination of our taxes owed is for an amount in excess of amounts previously accrued, our financial condition, cash flows or results of operations could be adversely affect ed. ff Risks Related to the Securities Markets and Ownership of Our Common Stock We expect that the price of our common stock will fluctuate substantially, potentiatt lly adversely affecting rr ii the ability of investors to sellll their shares. The market price of our common stock may be subject to wide fluctuations, which may negatively affect the ability of investors to sell our shares at consistent prices. Fluctuation in the stock price may occur due to many factors, including, without limitation: • general market conditions and other factors related to the economy or otherwise, including factors unrelated to our operating performance or the operating performance of our competitors; • people’s expectations, favorable or unfavorable, as to the likely unit growth of • negative stock market reactions to the results of litigation; • negative publu icity regarding spine surgeon’s practices or outcomes, whether warrarr nted or not, that cast the sector in a the spine sector; t negative light; roval for, and market new and enhanced products on a timely basis; t developments with respect to intellectual property rights or other potential legal actions; • the introduction of new products or product enhancements by us or our competitors; • changes in the availability of third-party reimbum rsement in the United States or other countries; • disputes or other • our ability to develop, obtain regulatory clearance or appa • 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; • the acquisition or divestiture of businesses, products, assets or technology by us or by our competitors; • litigation (including intellectual property litigation) and any associated negative verdicts or ruling; • announcements of actions by the FDA or other regulatory agencies; and • changes in earnings or operating margin estimates or recommendations by us or by securities analysts. Anti-takeover provisions in our organizatiott nal documentstt and Delawar a change of control, even if an acquisition would be beneficial to our stockholders, which could affect our stock price adversely and prevent attemptm stt by .tt our stockholders to replace or remove our current management e law may discourage or prevent a a ll Our certificate of incorporation and bylaws contain provisions that could delay or prevent a change of control of our company or changes in our board of 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 rights senior to those of the common stock; • provide for a classified board of directors, with each director serving a staggered three-year term; • provide 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 stockhold kk ers 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. 37 In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain business combinations with stockhokk lders owning 15% or more of our outstanding voting stock. These and other provisions in or potential acquirers to our certificate of incorporation, our bylaws and Delaware law could make it more difficult for stockholders obtain control of our board of directors or initiate actions that are opposed by 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 a change of control transaction or changes in our board of directors could cause the market price of our common stock to decline. k We do not intend to paya cash divdd idendd ds.s We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. In addition, the terms of any future debt or credit facility may preclude us from paying any dividends. As a result, capia tal appreciation, if any, of our common stock will be our stockholde rs’ source of potential gain for the foreseeable future. k Item 1B. Unresolved Staff ll Comments None. Item 2. PP Properties The following table sets forth our principal properties as of December 31, 2017, all of which are leased unless otherwise noted as owned: ff other facilities (1) Primary Use Manufacturing facilities (2) Corporate office and Fulfillment and warehouse operations (2) Office facilities Office facilities and warehouse Office facilities Office facilities and warehouse Office facilities and warehouse Office facilities and warehouse Offiff ce facilities Office facilities Square Footage Location 180,000 152,000 100,000 53,000 37,000 21,000 15,000 14,000 11,000 10,000 7,000 West Carrollton, OH San Diego, CA Memphis, TN Aliso Viejo, CA Japan Columbia, MD Germany Netherlands Australia Brazil KUK (1) Our corporate headquarters (2) Owned by the Company Item 3. Legal Proceedings For a description of our material pending legal proceedings, referff to “Note 11. Contingencies” in the Notes to Consolidated Financial Statements included in this Annual Report. Item 4. Mine Safety Disclosures Not applicable. PART II Item 5. Market for the Registrant’s Comm ’ on Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Common Stock Market Price Our common stock is traded on the NASDAQ Global Select Market under the symbol “NUVA.” The following table presents the high and low per share sale prices of our common stock during the periods indicated, as reported on NASDAQ. 38 2016 First Quarter Second Quarter Third Quarter Fourtht Quarter 2017 First Quarter Second Quarter Third Quarter Fourtht Quarter $ $ High Low $ $ 55.53 60.09 69.00 69.50 75.83 79.97 81.11 60.79 36.81 47.87 59.02 56.70 66.16 70.44 53.54 50.58 We had approximately 78 stockhold antially greater than the number of record holders because a large portion of our common stock is held of record through brokerage firms in “street name.” ers of record as of January 31, 2018. The number of beneficial owners is substu k Recent Sales of Unregistered Securities During the fourth quarter of 2017, we did not issue any securities that were not registered under the Securities Act of 1933, as amended (thet Securities Act). Dividend Policy We have never declared or paid any cash dividends on our capital stock. We currently intend to retain futurett earnings, if any, for development of our business and do not anticipate that we will declare or pay cash dividends on our capital stock in the foreseeable futurett . Equity Compensation Plan Information The following table provides certain information with respect to all of our compensation plans in effect as of Dec ff embem r 31, 2017: k Plan Ca gtegoryy Equity Compensation Plans approved by stockholders Equity Compensation Plans not approved by stockholders k Total (A) Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (B) Weighted Average Exercise Price of Outstanding Options, Warrants and Rights (C) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in column(A)) 2,038,368 (1)$ —— 2,038,368 $ 35.41 —— 35.41 5,491,267 (2)(3) —— 5,491,267 (1) (2) (3) Consists of shares subject to outstanding stock options, restricted stock units and performance restricted stock units under the NuVasive 2004 Amended and Restated Equity Incentive Plan, the NuVasive 2014 Equity Incentive Plan, and the Ellipse Technologies 2015 Incentive Award Plan, some of which are vested and some of which remain subju ect to the vesting and/or perforff mance criteria of the respective equity award. Consists of shares available for future issuance under the NuVasive 2014 Equity Incentive Plan, the Ellipse Technologies 2015 Incentive Award Plan, and the Amended and Restated 2004 Employee Stock Purchase Plan (ESPP). As of December 31, 2017, an aggregate of 2,953,163 shares of common stock were available for issuance under the NuVasive 2014 Equiq ty Incentive Plan, 1,294,706 shares of common stock were available for issuance under the Ellipse Technologies 2015 Incentive Award Plan, and 1,243,398 shares of common stock were available for issuance under the 2004 Amended and Restated Employee Stock Purchase Plan. The NuVasive 2004 Amended and Restated Equity Incentive Plan terminated in February 2014, upon the tenth anniversary of its effective date, and we are no longer granting awards under that plan. However, awards granted under the plan will remain outstanding until they are exercised, issued, terminated, cancelled or they expire. Pursuant to the terms of the plan, shares subjeb ct to awards granted under the NuVasive 2004 Amended and Restated Equity Incentive Plan may be utilized for future grants of awards under the NuVasive 2014 Equity Incentive Plan, to the extent such awards are terminated, cancelled or they expire, or shares subject thereto are withheld to cover taxes. During the year ended December 31, 2016, we registered 2,200,637 of such shares for re- use under the NuVasive 2014 Equity Incentive Plan. ff 39 PERFORMANCE GRAPH a The following graph c ompares the cumulative total stockholder return data on our common stock with the cumulative return of (i) The NASDAQ Stock Market Composite Index, and (ii) NASDAQ Medical Equipment Index over the five year period ending December 31, 2017. The graph assumes that $100 was invested on December 31, 2012 in our common stock and in each of the compam rative indices. The stock price performance on the following graph is not necessarily indicative of future stock price performance. The following graph and related information shall not be deemed “soliciting material” or be deemed to be “filed” with the Commission, nor shall such information be incorporated by reference into any future filing, except to the extent that we specifically incorporate it by reference into such filing. ff COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* AMONG NUVASIVE, INC., THE NASDAQ COMPOSITE INDEX AND THE NASDAQ MEDICAL EQUIPMENT INDEX $600 $500 $400 $300 $200 $100 $0 NuVasive, Inc. NASDAQ Composite NASDAQ Medical Equipment * $100 invested on December 31, 2012 in stock or index, including reinvestment of dividends. 40 Purchases of Equity Securities In October 2017, we announced that our Board of Directors had approved a share repurchase program authorizing the repurchase of up to $100 million of our common stock over a three-year period. Under this program, we are authorized to repurchase our shares in open market purchases, privately negotiated purchases or other transactions through October 2020. As of December 31, 2017, we have not repurchased any shares under this program. Item 6. Selected Financial Data The selected consolidated financial data set forth in the tablea below has been derived from our audited financial statements. The data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited financial statements and notes thereto appearing elsewhere in this report. Year Ended December 31, 2017 (1) 2016 (2) 2015 2014 2014 2013 (In thousands, except per share amounts) Statement of Operations Data: Total revenues Gross profit Consolidated net income (loss) Net income (loss) attributable to NuVasive, Inc. Net income (loss) per share attributable to NuVasive, Inc.: Basic Diluted Balance Sheet Data: Workir ng capital Total assets Senior Convertible Notes (net of current portion) Non-current liabilities (excluding convertible notes) Total equity (3) $1,029,520 $ 962,072 $ 811,113 $ 762,415 $ 685,173 504,689 6,985 7,902 580,057 (17,496) (16,720) 760,512 81,263 83,006 721,979 35,426 37,147 616,634 65,290 66,291 $ $ 1.63 $ 1.50 $ 0.74 $ 0.69 $ 1.36 $ 1.26 $ (0.36) $ (0.36) $ 0.18 0.17 December 31, 2017 (1) 2016 (2) 2015 2014 2013 (In thousands, except per share amounts) $ 398,322 $ 332,946 $ 603,210 $ 490,972 $ 418,856 1,179,568 1,289,649 346,060 376,542 111,478 111,288 604,878 702,202 1,639,067 582,920 96,325 799,154 1,570,804 564,412 63,371 700,524 1,343,459 360,746 119,456 648,358 (1) The selected consolidated financial data set forth for the year ended December 31, 2017 includes the operations and results of our 2017 acquisitions from their respective dates of acquisition. See Note 4 to the Consolidated Financial Statements included in this Annual Report for further discussion. (2) The selected consolidated financial data set forth for the year ended December 31, 2016 includes the operations and results of Ellipse Technologies, Inc., BNN Holdings Corp. and our other acquisitions from their respective dates of acquisition. See Note 4 to the Consolidated Financial Statements included in this Annual Report for further discussion. (3) The Company elected to early adopt ASU 2016-09 in the second quarter of 2016. As a result, the Company recorded a modified retrospective adjustment of $16.6 million to deferff red tax assets and accumulated deficit as of January 1, 2016. See Note 1 to the Consolidated Financial Statements included in this Annual Report for further discussion. 41 Item 7. Management’s Discussi ’ on and Analysis of Financial Condition and Results of Operations As noted earlier, this Annual Repoe contain forward-looking statementstt that involve risks, uncertainties, assumptions and other factors which, if they do not materialize or prove correct,t could cause our results to differ from ooking statements. Please review this Annual i r and analysis in light of the forward-ldd ooking stattt ements provisions outlined at the outset of Part I. Report and the following discussion histii orical results or those expressed or implied by such forward-l rt,t including the following discussion and analysis, may yy ii You should read the following discii ussion and analysis ll of our financial condition and results of operations in conjunction with the Consolidated dd Overview Financial Stateme tt ntstt and the Notes to those statementstt includeddd in this Annual Report. tive We are a leading medical device company in the global spine surgeryrr market, focused on developing minimally-disruprr surgical products and procedurally-integrated solutions for spine surgery. Our currently-marketed product portfolio is focused on applications for spine fusion surgery, including ancillary products and services used to aid in the surgical procedure. For the year ended December 31, 2017, we generated global revenues of $1.03 billion, including sales in over 50 countries. visualization and are designed to enabla e safe and reproducid Our principal product offering includes a minimally-disruptive surgical platform called Maximum Access Surgery, or MAS. disruptu ion during spine fusion surgery, The MAS platform combines three categories of solutions that collectively minimize soft tissue provide maximumm ble outcomes for the surgeon and the patient. The detection and avoidance systems, NVM5, and Intraoperative Monitoring, or platform includes our proprietaryr by our NuVasive Clinical Services division; MaXcess, an integrated split-blade retractor system; IOM, services and support offered and a wide variety of specialized implant s and biologics. Many of our products, including the individual components of our MAS m platform can also be used in open or traditional spine surgery. Our spine surgery product line offerings, which include products for the thoracolumbar and the cervical spine, are primarily used to enable surgeon access to the spine to perform restorative and fusion a platform called Integrated Global procedures in a minimally-disruptu ive fashion. To assist with surgical procedures w Alignment, or iGA, in which products and computer assisted technology under our MAS platform help achieve more precise spinal alignment. are-driven nerverr ff e offer softwff dd ff ff ff Our MAS platform and its related offeri ngs are designed to provide a unique and comprehensive solution for the safe and reproducible minimally-disruptive surgical treatment of spine disorders by enabla ing surgeons to access the spine in a manner that affords both direct visualization and detection and avoidance of critical nerves along with intraoperative reconciliation. The fundamental difference between our MAS platform, which is sometimes referred to in the industry as “minimally invasive surgery” or “MIS”, is the ability to customize safe and reproducible access to the spine while allowing surgeons to continue to use instruments that are familiar to them and effective during surgery. Accordingly, the MAS platform does not force surgeons to reinvent or learn new . We have dedicated and continue to dedicate approaches that add complm exity and undermine safety, ease of use and/or efficacy significff ant resources toward training spine surgeons around the world; both those who are new to our MAS and other product platforms, as well as ongoing educad ant ongoing objective of ours has been to maintain a leading position in access and nerve avoidance, as well as to pioneer and remain the ongoing leader in minimally invasive spine surgery. Our MAS platform, with the unique advantages provided by our nerve monitoring systems, enables an innovative lateral procedure known as eXtreme Lateral Interbor a fusion procedure from the side of the patient’s body, rathet r than froff m the front or back. It has been demonstrated clinically that XLIF and other procedures facilitated by our MAS platform decrease trauma and blood loss, and lead to faster overall patient recovery times compamm red to open spine surgery. tion for MAS-trained surgeons attending advanced courses. An importm dy Fusion, or XLIF, in which surgeons access the spine forff ff r mm ff We offer a co mprehensive portfolio of implant s and fixation devices designed to be used with the MAS platform. io of implmm ants used for interbody disc height restoration include implants made from allograft, titanium, and polyetheretherketone, or PEEK. Our fixation products include specialized pedicle screws, rods and plates. Our biologics products, which are used to aid in the spinal fusion process or bone healing process, include allograft (donated human tissue) and synthetic offerings. We also design and sell expandable growing rod implant syste ms that can be non-invasively lengthened following implantation with precise, incremental adjustmd ents via an external remote controller using magnetic technology called MAGnetic External Control, or MAGEC, which allows for the minimally invasive treatment of early-onset and adolescent scoliosis. This technology is also the basis for our PRECICE limbm lengthening system, which allows for the correction of long bone limb length discrepancy, as well as enhanced bone healing in patients that have experienced traumatic injury. The PRECICE limb lengthening system is sold by our NuVasive Specialized Orthopedics division. r Our portfrr olff mm n We intend to continue development on a wide variety of projects intended to broaden surgical applications for greater procedural integration of our MAS techniques and additional applications of the MAGEC technology. Such applications include tumor, trauma, and deformity, as well as increased fixation options, sagittal alignment products, imaging and navigation. We also expect to continue expanding our other product and services offerings as we execute on our strategy to offer customers an end-to-end, integrated procedural solution for spine surgery. We intend to continue to pursue business and technology acquisition targets and strategic partnerships. 42 Revenues and Operations a m To date, the majori ty of our revenues are derived from the sale of implants, biol ogics and disposabla es and we expect this trend to continue for the foreseeable future. Additionally, with our recent acquisitions of IOM service providers, we expect our IOM service revenue to increase compared to previous periods. We loan our proprietary software-driven nerverr monitoring systems and and support u surgical instrument sets at no cost to surgeons and hospitals that purchase disposabla es and implant s for use in individual procedures. In addition, we often place our proprietary software-driven nerve monitoring systems, MaXcess and other MAS instrument sets witht s, biologics and disposabla es are currently sold and shipped hospitals for an extended period at no up-froff nt cost to them. Our implant from our distribution and warehousing operations. We generally recognize revenue for implants, biologics and disposabla es upon receiving a ppurchase order from the hospital, or acknowledgment from the hospital indicating product use or implantation, or upon shipment to third-party customer ces is recognized in the period the service is performed for the amount of payment we expect to receive. We sell MAS instrument sets, MaXcess devices, and our proprietary software-driven nerve monitoring systems, however this does not make up a material part of our business. Currently, sales and leases of capital equipment, including our LessRay software technology suite, represent a small portion of our consolidated revenues. s who immediately accept title . Revenue from IOM servi m m The majoa rity of our operations are located and the majoa rity of our sales have been generated in thet United States. We sell our ed sales products in the United States through a sales force comprised primarily of independent sales agents and directly-employm representatives. Our sales force provides a delivery and consultative service to our surgeon and hospital customers and is compensated based on sales and product placements in their territories. Sales force commissions are reflected in the sales, marketing and administrative operating expense line item within our Statement of Operations. We continue to invest in international expansion with a focus on European, Asia-Pacific and Latin American markets. Our international sales force is comprised of directly-employm ed sales personnel, independent sales agents, as well as exclusive and non-exclusive independent third-party distributors. As of December 31, 2017, we did not have any significant backlog. We have operations in Puerto Rico that have been impacm ted by hurricanes during the year ended December 31, 2017. These operations do not constitute a material amount of our assets, liabia lities or revenue. The ultimate impact of the hurricanes on the government, the local economy and on individual institutions may affect the realization of our assets as well as our ongoing ability to generate revenue; however, the assessment is currently underway. We believe the results of our financial position reflect the best estimate of the realizable value of our existing assets. Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations is based upon our audited Consolidated Financial Statements, which have been prepared in accordance with generally accepted accounting principles in the United States (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates including those related to revenue recognition, bad debts, inventories, valuation of finff ancial instruments, goodwill, intangibles, property and equipment, contingent liabilities, stock-based compensation, income taxes, and legal proceedings. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities not readily apparent from other sources. Actual results may differ from these estimates. ff The following accounting policies are 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 following s and/or servirr ces has occurred; (iii) the criteria are met: (i) persuasive evidence that an arrangement exists; (ii) delivery of the productd enue from the sale of implants and selling price is fixed or determinable; and (iv) collectabia lity is reasonably assured. Specifically, rev disposabla es is generally recognized upon receipt of a purchase order from the hospital or acknowledgment from the hospital indicating to third-party customers who immediately accept title. Revenue from our monitoring product use or implantation, or upon shipment services is recognized in the period the service is perforff med for the amount of payment we expect to receive. Revenue from the sale of our instrument sets is recognized upon receipt of a purchase order and the subsequent shipment to customers who immediately accept title. Instrument sales account for an immaterial amount of annual sales. m ff rr 43 Allowance for Doubtful Accounts and tt Sales Return Reserve q We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The allowance for doubtful accounts is reviewed quarterly and is estimated based on the aging of account balances, collection history and known trends with current customers and in the economy in general. As a result of this review, the allowance is adjusted on a specific identification basis for significant accounts and a general reserve approach for non-significant accounts. We also review the overall quality and age of those invoices not specifically identified. In determining the provision for invoices not specifically reviewed, we analyze historical collection experience and current economic trends. An increase to the allowance for doubtful accounts results in a correspo nding charge to sales, marketing and administrative expenses. If the historical data used to calculate the allowance provided for doubtful accounts does not reflect our future ability to collect outstanding receivables or if the financial condition of customers were to deteriorate, resulting in impairment of their ability to make payments, an increase in the provision for doubtful accounts may be required. We maintain a relatively large customer base that mitigates the risk of concentration with any one particular customer. Historically, our reserverr s have been adequate to cover losses. rr In addition, we establish a reserve for estimated sales returns and pricing adjustments that is recorded as a reducd tion to revenue. This reserve is maintained to account for futurtt e return of producd ts or pricing adjustments on products sold in the current period. This reserve is reviewed quarterly and is estimated based on an analysis of our historical experience and expected future trends. Historically, our reserves have been adequate to account for returns and pricing adjud stments. d Inventory Net inventory primarily consists of $232.4 million finished goods, which includes specialized implants and disposables, and is stated at the lower of cost or market determined by utilizing a standard cost method which approximates the weighted average cost. Our inventory balance also includes $5.0 million and $9.8 million raw materials and work in progress, respectively. We review the components of our inventory on a periodic basis for excess and obsolescence and adjust inventory to its net realizable value as necessary. d Excess and Obsolete Inventoryrr We provide an inventory reserve for estimated obsolescence and excess inventory based upon historical turnover and assumptm ions about futurett demand for our products and market conditions. Our allograft products have shelf lives ranging from two to five years and are subjeb ct to demand fluctuations based on the availability and demand for alternative products. Our inventory, which consists primarily of disposabla es and specialized implant s, is at risk of obsolescence following the introduction and development of new or enhanced producd ts. Our estimates and assumptions for excess and obsolete inventory are reviewed and updated on a quarterly basis. The estimates we use for demand are also used for near-term capacity planning and inventory purchasing and are consistent with our revenue forecasts. Increases in the reserve for excess and obsolete inventory result in a corresponding charge to cost of goods sold. Historically our reserves have been adequate to cover losses. m A stated goal of our business is to focus on continual productdd innovation and to obsolete our own products. While this provides a competitive edge, it also results in the risk that our products and related capital instruments will become obsolete prior to sale or to the end of their anticipated useful lives. Fair Value of Financial Instruments ASC Topico 820,0 Fair Value Measurements and Discl rr ue and requires us to establa ish a framework fo measuring fair value and disclosure about fair value measurements. The framework requires the valuation of assets and liabia lities subjeb ct to fair value measurements using a three tiered approach and fair value measurement be classified and disclosed in one of the following three categor Observabla e inputs reflect market data valuation techniques are observabla e or unobservarr ble. obtained from independent sources, while unobservable inputs reflect our market assumptions. osures, defines fair val Inputs to ies. a r ff ii Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data. Level 3: Unobservable inputs are used when little or no market data is available. Carrying value of the financial instruments measured and classified within Level 1 is based on quoted prices. The types of instruments that trade in markets that are not considered to be active, but are valued based on quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency are generally classified within Level 2 of the fair value hierarchy. Certain contingent consideration liabia lities are classified within Level 3 of the fair value hierarchy because they use unobservable inputs. For those liabilities, fair value is determined using a probability-weighted discounted cash flow model, the significant inputs which are not observable in the market. 44 Valuation of Goodwill and Intangible Assets with Indefidd nite Lives Our goodwill represents the excess of the cost over the fair value of net assets acquired from our business combinations. The determination of the value of goodwill and intangible assets arising from business combinations and asset acquiq sitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair value of the net tangible and intangible assets acquired, including ca h and development, or IPR&D. Intangible assets acquired in a business a combination that are used for IPR&D activities are considered indefinite lived until the completion or abandonment of the associat ded research and development efforts. Upon reaching the end of the relevant research and development project, we will amortize the acquired in-process research and development over its estimated useful life or expense the acquired in-process research andd development should the research and development project be unsuccessful with no future alternative use. d in-process researc pitalized ff Goodwill and IPR&D are not amortized; however, they are assessed for impam irment using fair value measurement techniques on an annual basis or more frequently if facts and circumstance warrant such a review. The goodwill or IPR&D are considered to be impaired if we determine that the carrying value of the reporting unit or IPR&D exceeds its respective fair value. ff We perform our goodwill impam irment analysis at the reporting unit level, which aligns with our reporting structure and d availability of discrete financial information. We perform our annual impam irment analysis by either doing a qualitative assessment of a reporting unit’s fair value from the last quantitative assessment to determine if there is potential impam irment, or comparing a reporting unit’s estimated fair value to its carrying amount. We may do a qualitative assessment when the results of the previous quantitative test indicated the reporting unit’s estimated fair value was significantly in excess of the carrying value of its net assets and we do not believe there have been significant changes in the reporting unit’s operations that would significantly decrease its estimated fair value or significantly increase its net assets. If a quantitative assessment is performed the evaluation includes management estimates of cash flow projections based on internal futurtt e projections and/or use of a market approach by looking at market values of comparable companies. Key assumptions for these projections include revenue growth, future gross and operating margin growth, and its weig dhted cost of capital and terminal growth rates. The revenue and margin growtht is based on increased sales of new and existing products as we maintain our investment in research and development. Additional assumed value creators may include increased efficiencies from capia tal spending. The resulting cash flows are discounted using a weighted average cost of capital. Operating mechanisms andd aa requirements to ensure that growth and efficiency assumptions will ultimately be realized are also considered in the evaluation, including timing and probability of regulatory approvals for our products to be commercialized. Our market capitalization is also considered as a part of this analysis. mm Our annual evaluation for impamm irment of goodwill consists of two reporting units; the Progentix reporting unit and the remainder of the Company (see Note 4 to the Consolidated Financial Statements included in this Annual Report for further discussion of Progentix). In accordance witht our policy, we complm eted our most recent annual evaluation for impaim rment as of October 1, 2017 dand determined that no impam irment existed, and it was determined that no reporting unit of the Company was at risk of impam irment wh nen assessing the unit’s fair value compared to its carrying value. In addition, no indicators of impam irments were noted throu Dgh ecember 31, 2017 and consequently, no impaim rment charge has been recorded during the year. Valuation of Intangible Assets Our intangible assets are comprised primarily of purchased technology, customer relationships, manufacturi ng know-how and trade secrets, and trade name and trademarks. We make significant judgments in relation to the valuation of intangible assets resulting from business combinations and asset acquisitions. tt Intangible assets are generally amortized on a straight-line basis over their estimated useful lives of 2 to 17 years. We base the lives and related amortization expense on the period of time we estimate the assets will generate revenues or otherwise be used usefulff bby the Company. We also periodically review the lives assigned to our intangible assets to ensure that our initial estimates do tnot exceed any revised estimated periods from which we expect to realize cash flows from the technologies. If a change were to occur in any of the above-mentioned factors or estimates, the likelihood of a material change in our reported results would increase. We evaluate our intangible assets with finite lives for indications of impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverabla e. Factors that could trigger an impairment review include significant under- performance relative to expected historical or projeo cted future operating results, significant changes in the manner of our use of the acquired assets or the strategy for our overall business or significant negative industry or economic trends. If this evaluation indicates that the value of the intangible asset may be impam ired, we make an assessment of the recoverabia lity of the net carrying value of the asset over its remaining useful life. If this assessment indicates that the intangible asset is not recoverable, based on the estimated undiscounted future cash flows of the technology over the remaining amortization period, we reduce the net carrying value of the related intangible asset to fair value and may adjust the remaining amortization period. Significant judgment is required in thet forecasts of future operating results that are used in the discounted cash flow valuation models. It is possible that plans may change and estimates used may prove to be inaccurate. If our actual results, or the plans and estimates used in future impam irment analyses, are lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairmm ent charges. 45 Valuation of Stock-Based Compensation Stock-based compensation expense forff equity-classified awards, principally related to restricted stock units, or RSUs, and performance restricted stock units, or PRSUs, is measured at the grant date based on the estimated fair value of the award and is recognized over the employee’s requisite service period on an accelerated basis. The fair value of equity instruments that are expected to vest is recognized and amortized over the requisite servirr ce period. We have granted awards with up to five year graded or cliffff vesting terms (in each case, with service through the date of vesting being required). No exercise price or other monetary payment is required for receipt of the shares issued in settlement of the respective award; instead, consideration is furnished in the form of the participant’s service to the Company. The fair value of RSUs including PRSUs with pre-defined performance criteria is based on the stock price on the date of grant whereas the expense for PRSU with pre-definff ed performance criteria is adjusted with the probabia lity of achievement of such performance criteria at each period end. The fair value of the PRSUs that are earned based on the achievement of pre-defined market conditions for total shareholder return,rr is estimated on the date of grant using a Monte Carlo valuation model. The key assumptions in applying this model are an expected volatility and a risk-free interest rate. Stock-based compensation expense is adjuste d from the grant date to exclude expense for awards that are expected to be forfeited. The forfeiture estimate is adjusted as necessary through the vesting date so that full compensation cost is recognized only for awards that vest. We assess the reasonableness of the estimated forfeiture rate at least annually, with any change to be made on a cumulative basis in the period the estimated forfeiture rates change. We considered our historical experience of pre-vesting forfeitures on awards by each homogenous group of shareowners as the basis to arrive at our estimated annual pre-vesting forfeiture rates. d We estimate the fair value of stock options issued under our equity incentive plans and shares issued to shareowners under our employee stock purchase plan, or ESPP, using a Black-Scholes option-pricing model on the date of grant. The Black-Scholes option- pricing model incorporates various and highly sensitive assumptions including expected volatility, expected term and risk-free interest rates. The expected volatility is based on the historical volatility of our common stock over the most recent period commensurate with the estimated expected term of our stock options and ESPP which is derived from historical experience. The risk-freff e interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield in effect at the time of grant. We have never declared or paid dividends and have no plans to do so in the foreseeable future. ff Stock-based compensm ation expense was $22.4 million, $26.9 million, and $26.2 million for 2017, 2016, and 2015, respectively. Stock-based compensation expense decreased $4.5 million in 2017 compared to 2016. This decrease in 2017 was primarily attributed to an increase in award forfeitures, including forfeitures on awards held by certain executives who exited the Company during 2017. Stock-based compensm ation expense for 2016 and 2015 was relatively consistent. As of December 31, 2017, there was approximately $22.9 million and $18.9 million of unrecognized compensation expense for RSUs and PRSUs, respectively, which is expected to be recognized over a weighted-average period of approximately 1.9 years for both RSUs and PRSUs. In addition, as of December 31, 2017, there was $1.0 million of unrecognized compem nsation expense for shares expected to be issued under the ESPP which is expected to be recognized through April 2018. There was no unrecognized amortization expense for stock options as of December 31, 2017. Accounting for Income Taxes The asset and liability approach is used to recognize deferred tax assets and liabia lities for the expected futff ure tax con sequences of temporary differences between the carrying amounts and the tax bases of assets and liabia lities. Tax law and rate changes are reflected in income in the period such changes are enacted. We include interest and penalties related to income taxes, including unrecognized tax benefits, within income tax expense. t a On December 22, 2017, President Trump signed U.S. tax reform legislation, commonly referred to as the Tax Cuts and Jobs Act (the “Act”), which became effective January 1, 2018. The Act significantly changes the fundamentals of U.S. corporate income eral corporate income tax rate to 21%, converting to a territorial tax taxation by, among many other things, reducing the U.S. fedff system, and creating various income inclusion and expense limitation provisions. We have performed an in-depth review of the Act, and based on information available at Decem 31, 2017, recorded certain provisional amounts related to the revaluation of our deferred taxes and the realization of certain tax credit carryforwards. Due to insufficient guidance on certain aspects of the Act, such as officer’s compensation, as well as uncertainty around the GAAP treatment associated with many other parts of the Act, such as the implementation of certain international provisions, we cannot be certain that all deferred tax assets and liabilities have been establa ished for the future effects of the legislation. Therefore, the final accounting for these provisions is subjeb ct to change as furff ther information becomes available and furthet r analysis is complm ete. Additionally, given the uncertainty and complexity of these new international tax regimes, we are continuing to evaluate how these provisions will be accounted for under U.S. generally accepted accounting principles; therefore, we have not yet adopted an accounting policy for treating the effects of these provisions as either a component of income tax expense in the period the tax arises, or through adjusting our deferred tax assets and liabilities to account for the estimated future impam ct of the special international tax regimes. berm d 46 Our income tax returt ns are based on calculations and assumptm ions that are subjec t to examination by the Internal Revenue Service and other tax authorities. In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. While we believe we have appropriate support for the positions taken on our tax returns, we regularly assess the potential outcomes of examinations by tax authorities in determining the adequacy of our provision for income taxes. We continually assess the likelihood and amount of potential adjustments and adjust the income tax provision, income taxes payable and deferred taxes in the period in which the facts that give rise to a revision become known. u Significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and the valuation allowance recorded against our net deferred tax assets. Deferred tax assets and liabilities are determined using the enacted tax rates in effect for the years in which those tax assets are expected to be realized. A valuation allowance is established when it is more likely than not the future realization of all or some of the deferred tax assets will not be achieved. The evaluation of the need for ff a valuation allowance is performed on a jurisdiction-by-jurisdiction basis, and includes a review of all available positive and negative evidence. Factors reviewed include projections of pre-tax book income for the foreseeable future, determination of cumulative pre-tax book income after permanent differences, earnings history, and reliability of forecasting. Based on our review, we concluded that it was more likely than not that we would be able to realize the benefit of our domestic and foreign deferred tax assets, with the primary exception of California, in the future. This conclusion was based on historical and projected operating performance, as well as our expectation that our operations will generate sufficient taxabla e income in futur e periods to realize the tax benefits associated with the deferred tax assets within the statutory carryover periods. But, due to the inclusion of foreign losses, lower state apportionment, and the generation of research credits in Californi a, we concluded that it is not ff a deferred tax assets. Therefore, we maintained a full valuation more likely than not that we will be able to utilize our Californi allowance on our Californi rer d tax assets as of Decemberm 31, 2017 and 2016. a deferff ff ff ff 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 q operations for the period that the adjud stment is determined 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 actions are not within our complete control and may not be known for prolonged periods of time. In some actions, the claimants seek damages as well as other relief,ff including injun nctions barring the sale of products that are the subjeb ct of the lawsuit, that could require significff ant expenditures or result in lost revenues. In accordance with authoritative guidance, we disclose information regarding each material claim where the likelihood of a loss contingency is probable or reasonabla y possible. An estimated loss contingency is accrued in our financial statements if it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. If a loss is reasonably possible and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the Consolidated Financial Statements. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded. Our significant legal proceedings are discussed in Note 10 to the Consolidated Financial Statements included in this Annual Report. The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP. See our Consolidated Financial Statements and Notes thereto included in this Annual Report, which contain accounting policies and other disclosures required by GAAP. 47 Results of Operations Revenue re Spinal Hardwad Surgical Support Total Revenue 2017 Year Ended December 31, 2016 (Dollars in thousands) 2015 2016 to 2017 $ Change % Change 2015 to 2016 $ Change % Change $ 732,038 $674,057 $559,388 $ 57,981 9,467 $1,029,520 $962,072 $811,113 $ 67,448 288,015 251,725 297,482 9% $114,669 3% 36,290 7% $150,959 20% 14% 19% Our spinal hardware product line offerings include our implm ants and fixation products. Our surgical support product line offerings include IOM services, disposabla es and biologics, all of which are used to aid spinal surgery. tional markets as our sales forff ce executes on our strategy of selling the full mix of our products and The continued adoption of minimally invasive procedures for spine has led to the expansion of our procedure volume. In addition, increased market acceptance in our internar tional markets contributed to the increase in revenues for the periods presented. We expect continued adoption of our innovative minimally invasive procedures and deeper penetration into existing accounts and internar services. However, the continued consolidation and increased purchasing power of our hospital customers and group purchasing organizations, the continuedn existence of physician-owned distributorships, recent changes in the public and private insurance markets regarding reimbursement, n of the sppine and ongoingg policy , g solutions should continue to grg ow over the long term ed sppine surggeryyrr market. Althoughg economic, polp itical and regulatory influences are subjecting our industry to significant changes that may slow the growth rate of the spine surgery market growth in revenue in 2018 should come primarily from market share gains in the shift toward less invasive spinal surgery, revenue from new products and services, and international growth. geg s in the United States have created less predictability in the lu durally-y integratg y and legislative chan the market for proce p mbar portio t. Our p y d g p p Our total revenues increased $67.4 million in 2017 compared to 2016 and $151.0 million in 2016 compared to 2015, ctuations have not materially impamm cted representing total revenue growth of 7% and 19%, respectively. To date, foreign currency flu our overall revenues as a percentage of growth year over year. rr Revenue from our spinal hardware product line offerings increased $58.0 million, or 9%, in 2017 compared to 2016. Revenue associated with our 2016 acquisitions accounted for approximately 1% of the increase in spinal hardware revenue for the year ended December 31, 2017. Product volume for our spinal hardware business, excluding the impact from our 2016 acquisitions, increased our revenue by approximately 10%, offsff et by unfavorabla e changes in price of approximately 3% for the year ended Decembem r 31, 2017 as compamm red to 2016. Foreign currency fluctuatt tion from 2016 to 2017 did not have a material impact on spinal hardware revenue. m Revenue from our spinal hardware product line offeri ngs increased $114.7 million, or 20%, in 2016 compared to 2015. Revenue associated with our 2016 acquisitions accounted for approximately 11% of the increase in spinal hardware revenue for the year ended December 31, 2016 as compared to 2015. Product volume for our spinal hardware business, excluding the impact from our 2016 by unfavorable changes in price of approximately 2% for the year acquisitions, increased our revenue by approximately 11%, offset tion from 2015 to 2016 did not have a material impact on m ended December 31, 2016 as com spinal hardwad pam red to 2015. Foreign currency fluctuatt re revenue. ff ff ff Revenue from our spinal hardware product line offerings for the year ended December 31, 2016 included a $4.8 million purchase order, which did not recur during the year ended December 31, 2017, from an organization established by certain former stockholders of Ellipse Technologies with their stated purpose to be donated for use in spinal deformity procedures for children in underprivileged communim ties. See Note 3 to the Consolidated Financial Statements included in this Annual Report for furthet r discussion. d Revenue from our surgical support product line offeri ngs increased $9.5 million, or 3%, in 2017 compared to 2016. Revenue associated with our 2016 acquisitions accounted for approximately 10% of the increase in surgical support revenue for the year ended December 31, 2017 as compared to 2016. Product and service volume for our surgical support business, excluding the impact from our 2016 acquisitions, decreased our revenue by approximately 4% for the year ended December 31, 2017 as compared to 2016. We also realized unfavff orable changes in price of approximately 3% which includes lower reimbursement rates on our IOM servirr ces for tion from 2016 to 2017 did not have a material the year ended December 31, 2017 as compared to 2016. Foreign currency fluctuatt impact on surgical support revenue. u ff Revenue from our surgical support product line offerings increased $36.3 million, or 14%, in 2016 compared to 2015. Revenue ended associated with our 2016 acquisitions accounted for approximately 11% of the increase in surgical support revenue for the year December 31, 2016 as compared to 2015. Product and service volume for our surgical support business, excluding the impact from our 2016 acquisitions, increased our revenue by approximately 4%, offset by unfavorable changes in price of approximately 1% compared to the same period in 2015. Foreign currency fluctuat tion from 2015 to 2016 did not have a material impact on surgical support revenue. u 48 Cost off Goodsdd Sold,ll excludinggii Cost of Goods Sold % of total revenue amortiztt atiott n off puff 2017 2015 rchased technologygy Year Ended December 31, 2016 (Dollars in thousands) $240,093 $269,008 $194,479 26% 25% 24% 2016 to 2017 $ Change % Change 2015 to 2016 $ Change % Change $ 28,915 12% $ 45,614 23% Cost of goods sold consists primarily of purchased goods, raw materials, labor and overhead associated with product manufacturing, inventory-related costs and royalty expenses, as well as the cost of providing IOM services, which includes personnel and physician oversight costs. We primarily procure and manufacture our goods in the United States, and accordingly, foreign currency fluctuati ons have not materially impam cted our cost of goods sold. tt Cost of goods sold increased $28.9 million, or 12%, during the year ended December 31, 2017 compared to 2016. The cost of goods sold associated with the operations of our 2016 acquisitions accounted for approximately 9% of the total increase during the year ended December 31, 2017 compared to the same period in 2016. Cost of goods sold for our business, excluding our 2016 inventory costing and product acquisitions, increased primarily due to growth in volume, but also includes unfavorable shifts in mix, for an overall increase of approximately 11% for the year ended December 31, 2017. These increases were partially offset by royaltyt obligations for certain product lines and other non-recurring inventory related items, including write-offsff and reserves from both manufacturing and obsolescing producd ts, which accounted for approximately a 2% decrease to costs of goods sold for the year ended December 31, 2017 compam red to the same period in 2016. The year ended December 31, 2017 did not include the non-recurring inventory expense associated with the purchase accounting for our acquisition of Ellipse Technologies, which accounted for 6% of total cost of goods sold in the same period in 2016. ff Cost of goods sold increased $45.6 million, or 23%, during the year ended December 31, 2016 compared to 2015. Cost of goods sold for our business, excluding our 2016 acquisitions, increased as a result of the growth in volume, slightly offset with favorable shifts in purchase price, for an overall increase of approximately 13%. Inventory expense associated with the purchase accounting for our acquisition of Ellipse Technologies accounted for approximately 8% of the total increase compared to 2015. The cost of goods sold associated with the operations of our 2016 acquisitions accounted for approximately 14% of the total increase during the year ended December 31, 2016 compam red to 2015. The overall increases in cost of goods sold were partially offset by decreases in other cost of goods sold expenses of approximately 11%, related to reductions in costs from the repeal of the Affordable Care Act’s medical device tax in 2016, expiring royalty obligations for certain product lines, and other non-recurring inventory related items including obsolescence of certain producd ts in 2015 resulting from newer product launches. On a long term basis, we expect cost of goods sold, as a percentage of revenue, to decrease moderately. 49 Operating Expenses Sales, marketing, and administrative % of total revenue Research and development % of total revenue Amortization of intangibles Litigation liability Business transition costs kk Sales, Marketing and Admidd nistrative Year Ended December 31, 2016 to 2017 2015 to 2016 2017 2016 2015 $ Change % Change $ Change % Change $539,913 (Dollars in thousands) $533,624 $457,280 $ 6,289 1% $ 76,344 52% 55% 56% 50,425 47,999 35,833 2,426 5% 12,166 5% 5% 4% 48,039 4,500 4,287 42,001 (43,310) 18,138 12,516 (41,826) 13,748 6,038 47,810 (13,851) 14% 29,485 110% (1,484) 4,390 76% 17% 34% 236% 4% 32% Sales, marketing and administrative expenses consist primarily of compem nsation costs, commissions and training costs for our employees (who we refer to as “shareowners”) engaged in sales, marketing and customer support functions. The expense also includes commissions to sales representatives, freight expenses, surgeon training costs, depreciation expense for property and equipment such as surgical instrument sets, and administrative expenses for both shareowners and third party servirr ce providers. Sales, marketing and administrative expenses increased by $6.3 million, or 1%, during the year ended December 31, 2017 as compared to the same period in 2016 due to increases in shareowner compensation and other expenses resulting from increased headcount, offsff et by the reversal of stock-based compensation expense previously recognized on unvested equiq ty awards forfeited during the year. Other costs which increased as a function of the increase in revenue and expansion included consulting, facilities, travel and equipment, which were partially offset by decreased distributor commissions due to increased sales mix to our direct sales force in 2017 as compared to 2016 and decreased legal expense in 2017 due to the settlement of the Medtronic litigation in 2016. Sales, marketing and administrative expenses associated with our 2016 acquisitions, which are included in the results discussed herein, accounted for approximately 2% of the increase in sales, marketing and administrative expenses for the year ended December 31, 2017, compared to the same period in 2016. Sales, marketing and administrative expenses increased by $76.3 million or 17% during the year ended December 31, 2016 compared to the same period in 2015, primarily related to a $49.2 million increase in shareowner compensation due to increased headcount and commissions to our direct sales representatives from increased sales. Other costs which increased as a function of the tional expansion, such as distributor commissions, freight, and travel, in the aggregate, accounted for increase in revenue and internarr approximately 3% of the increase compared to 2015. The sales, marketing and administrative expenses associated with our 2016 acquisitions, which is included in the results discussed herein, accounted for approximately 11% of the increase in sales, marketing and administrative expenses compared to 2015. Sales, marketing and administrative expenses as a percentage of revenue decreased during year ended December 31, 2017 compared to the same period in 2016. On a long-term basis, we expect total sales, marketing and administrative costs, as a percentage of revenue, to decrease moderately. To date, foreign currency fluctuations have not materially impacted our sales, marketing and administrative expenses. m Research and Development Research and development expense consists primarily of product research and development, clinical trial and study costs, regulatory and clinical functions, and compensation and other shareowner related expenses. In the last several years, we have introduced numerous new products and product enhancements that have significantly expanded our MAS platform, including iGA, and our comprehensive producd t portfolio. We have also acquired complementary and strategic assets and technology, particularly in the area of spinal hardware products. We continue to invest in research and development programs. Research and development expense increased by $2.4 million, or 5%, in 2017 compared to 2016. The increase in spending is primarily due to increased headcount and increased spending for our integrated operative solutions technologies, partially offsff et by non-recurring research and development expenses associated with our 2016 acquisitions. Research and development expense increased by $12.2 million or 34% in 2016 compared to 2015. The increase in spending is primarily due to product related expenses associated with our 2016 acquisitions, as well as increased spending for our other technologies. Research and development costs as a percentage of revenue remained consistent witht the previous year. On a long-term basis, we expect total research and development costs as a percentage of revenue to increase moderately in support of our ongoing development and regulatory approval effoff rts. 50 Amortization of Intangible Assets Amortization of intangible assets relates to the amortization of finite-lived intangible assets acquired. Amortization expense increased $6.0 million in 2017 compared to 2016, primarily due to our 2016 and 2017 acquisitions. Amortization expense increased $29.5 million in 2016 compam red to 2015 due to our 2016 acquisitions. During the year ended December 31, 2017, we acquired $39.8 million in definite-lived intangible assets, and began amortizing the assets over their respective useful lives. We expect future a tt mortization of our current intangible assets as a percentage of revenue to be relatively consistent, excluding future acquisitions. i Litigat ion Liability Loss (Gain) During the year ended Decembem r 31, 2017, we paid $4.5 million for the settlement of fees associated with the outcome of the Medtronic litigation matter. During the year ended Decembem r 31, 2016, we agreed to settle our ongoing litigation with Medtronic. As a result of the settlement, we paid $45.0 million to Medtronic and accordingly recorded a gain of $43.3 million related to the settlement by reducing our previous accruar l of $88.3 million related to the matter. Litigation liability gain of $41.8 million for the year ended December 31, 2015 primarily related to the recognition of a $56.4 million gain stemming from a favorabla e appeal in the first phase of the Medtronic litigation, which revised the award for lost profits and convoyed sales, and a gain of $2.8 million in litigation accrual change related to the settlement of the NeuroVision trademark litigation reducing the accrual from $30.0 million to $27.2 million. The litigation liability gains were partially offset by litigation liability losses of $13.8 million in connection with a definitive settlement agreement we entered into with the U.S. Department of Justice, or DOJ, to settle the investigation brought by the Office of the Inspector Gen eral of the U.S. Department of Health and Human Services and $3.6 million in a general litigation matter. ff See Note 10 and Note 11 to the Consolidated Financial Statements included in this Annual Report for further discussion. Business Transition Costs We incur certain costs related to acquisition, integration and business transition activities, which include severance, relocation, consulting, leasehold exit costs, third-party merger and acquisition costs, contingent consideration fair value adjustments and other costs directly associated with such activities. During the year ended December 31, 2017, we incurred $4.3 million of business transition costs, which consisted primarily of acquisition and integration activities, and $(1.3) million of fair value adjustments on contingent consideration liabilities associated with our 2017 and 2016 acquisitions. During the year ended December 31, 2016, we incurred $18.1 million of such costs, which consisted primarily of acquisition and integration activities, and $7.3 million of fair value adjustments on contingent consideration liabilities associated with our 2016 acquisitions. During the year ended December 31, 2015, we incurred $13.7 million of business transition costs, which included $3.0 million in restructuring and impairment charges associated with the exit of our New Jersey location and termination of the respective lease, and a $3.4 million charge associated with the resignation of our former Chief Executive Officer and Chairman of the Board. The $3.4 million charge includes certain severance and compensation-related charges, net of certain forfeitures of previously recognized equity-based compensation. ff t t 51 Interest and Other Expense,e Net Interest income Interest expense Loss on repurchases of convertible notes Other (expense) income, net Total interest and other expense, net % of total revenue $ 2017 2015 Year Ended December 31, 2016 (Dollars in thousands) $ 1,091 (40,520) (19,085) (305) 440 (38,021) —— (1,542) (651) 2,499 19,085 (1,237) $ (39,123) $ (58,819) $ (27,064) $ 19,696 $ 1,589 (29,078) —— 425 $ 4% 6% 3% 2016 to 2017 $ Change % Change 2015 to 2016 $ Change % Change 60% $ (498) 6% (11,442) 100% (19,085) 406% (730) 33% $ (31,755) 31% 39% * 172% 117% Total interest expense decreased during the year ended Decembem r 31, 2017 compamm red to thet same period in 2016, due to the settlement of the Senior Convertible Notes due 2017 on July 1, 2017. Total interest expense increased by $11.4 million during the year ended December 31, 2016 compared to the same period in 2015 as a result of issuance of the Senior Convertible Notes due 2021 31, 2016 related to the in March 2016. Additionally, a loss of $19.1 million was recognized during the year ended Decemberm repurchase of a portion of the Senior Convertible Notes due 2017. Other (expense) income, net, for all periods presented included marginal income earned on marketable securities. Income Tax (Benefit) Expe aa nse Income tax (benefit)ff Effective income tax rate expense Year Ended December 31, 2016 2017 2015 $ (7,038) (Dollars in thousands) $ 29,282 $ 46,729 (9)% 45% 42% 2016 to 2017 $ Change % Change 2015 to 2016 $ Change % Change $ 36,320 124% $ 17,447 37% The provision for income tax (benefit) expense as a percentage of pre-tax income from continuing operations was (9)% benefit for the year ended Decembem r 31, 2017 compared with 45% expense for the year ended December 31, 2016. The effective tax rate for 2017 is lower than 2016 primarily due to one-time tax benefitsff from deduction of excess tax over book basis in the amount of $19.5 million or 26% benefit to the effective tax rate in one of our wholly-owned U.S. subsidiaries and the revaluation of deferred taxes in rate due to the enactment of U.S. tax reform. In addition, during the the amount of $12.2 million or 16% benefit to the effective tax current year, there were lower losses in jurisdictions where we do not receive benefit as well as tion costs, ff offset by a reduction in current year share-based compensation windfall tax benefits. d lower non-deductible acquisi ff The provision for income tax expense as a percentage of pre-tax income from continuing operations was 45% for the year ended December 31, 2016 compam red with 42% for the year ended December 31, 2015. The effective tax rate for 2016 is higher than 2015 primarily due to increases in non-deducd tible acquisition related costs, offset by share-based compensation windfall tax benefits and the non-recurrence of prior year reserve and valuation allowance releases. ff We are subject to audits by federal, state, local, and foreign tax authorities. We believe that adequate provisions have been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. Should any issues addressed in our tax audits be resolved in a manner not consistent with our expectations, we could be required to adjust our provision for income taxes in the period such resolution occurs. We expect our future effective income tax rate to be in-line with the U.S federal and statutory income tax rates due to the large concentration of earnings in the U.S. and foreign statutory tax rates being, on average, comparable to that in the U.S. We continue to streamline our international operations, including procurement, logistics and customer service functions, in an effort to imprm ove overall operational effiff ciencies. U.S. tax reform has lessened the tax benefit associated with foreign earnings due to a reduced U.S. federal corporate tax rate and the forced U.S. inclusion of certain foreign intangible related earnings. As internar tional tax rules and regulations change, we may be subju ected to higher taxes on foreign earnings. t Liquidity, Cash Flows and Capital Resources Liquidiii ii tyii and Capia tal Resources Our principal sources of liquidity are our existing cash, cash equivalents and marketable securities, cash generated from operations, proceeds from our convertible notes issuances, and access to our revolving line of credit. We expect that cash provided by operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, working capital requiq rements and capital deployment decisions. We have historically invested our cash primarily in the U.S. treasuries and government agencies, corporate debt, and money market funds. Certain of these investments are subject to general credit, liquidity and other market risks. The general condition of the financial markets and the economy may increase those risks and may affect the value and liquidity of investments and restrict our ability to access the capital markets. a 52 Our future capital requirements will depend on many factors including our rate of revenue growth, the timing and extent of spending to support development efforts, the expansion of sales, marketing and administrative activities, the timing of introductions of new producd ts and enhancements to existing products, successful vertical integration of our manufacturing process, the continuing market acceptance of our products, the expenditures associated with possible future acquisitions or other business combination transactions, the outcome of current and future litigation, the evolution of our globalization initiative, and continuous internarr tional expansions of our business. Our cash flow from operations and growing operations should continue to fund the ongoing core markets for additional funding. As we business. As current borrowing sources become due, we may be required to access the capital assess inorganic growtht ement our internally generated cash flow with outside sources. In the event that we are required to access the debt market, we should be able to secure reasonabla e borrowing rates. As part of our liquiditytt strategy, we will continue to monitor our current level of earnings and cash flow generation as well as our ability to access the market in light of those earning levels. strategies, we may need to supplu a t tt a A substantial portion of our operations are located in the United States, and the majority of our sales and cash generation since inception have been made in the United States. Accordingly, we do not have material net cash flow exposures to foreign currency rate fluctuations. However, as our business in markets outside of the United States continues to increase, we will be exposed to foreign ons in the rate of exchange between the United States dollar and currency exchange risk related to our foreign operations. Fluctuati foreign currencies, primarily in the pound sterling, the euro, the Australian dollar, the Singapoa re 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 enter into forward currency contracts to par he impam ct from fluctuations of the foreign currency rates on our third party and short-term intercompany receivables and payables between our domestic and international operations. We currently do not hedge futurtt e forecasted transactions but will continue to assess whether that strategy is appropriate. At December 31, 2017, the cash balance held by our foreign subsidi aries with currencies other than the United States dollar was approximately $27.3 million and it is our intention to indefinitely reinvest all of current foreign earnings in order to partially support foreign working capital and to mber 31, 2017, our account receivable bab lance held by our expand our existing operations outside the United States. As have operations in foreign subsidiaries with currencies other than the United States dollarr was approximately $38.9 millio We markets in which there is governmental financial instability which could impam ct funds that flow into the medical reimbursm ement system. In addition, loss of financial stabia lity within these markets could lead to delays in reimbursement or inability to remit payment due to currency controls. Specifically, we have operations and/or sales in Puerto Rico, Brazil, Argentina and Venezuela. We do not have any material financial exposure to one customer or one country that would significantly hinder our liquidity. Although our sales and operational activities located in the United States and Puerto Rico were affected by inclement weather during the year ended December 31, 2017, we do not anticipate the disruption will have a material impact to our liquidity. ff tially offset t Dece of n. u r On August 31, 2015, we received a civil investigative demand, or CID, issued by the DOJ pursuant to the federal False Claims Act. The CID requires the delivery of a wide range of documents and information related to an investigation by the DOJ concerning allegations that we assisted a physician groupu customer in submitting improper claims for reimbursm ement and made improper payments to the physician group in violation of the Anti-Kickback Statute. We are cooperating with the DOJ. No assurance can be given as to the timing or outcome of this investigation, and the probable outcome of this matter cannot be determined. On June 9, 2017, we received a subpoena from the Office of the Inspector General of the U.S. Department of Health and Human Services, or OIG, in connection with an investigation into possible false or otherwise imprope r claims submitted to Medicare and Medicaid. The subpoena seeks discovery of documents for the period January 2014 through June 2017, primarily associated with sales to a particular customer and relationships related to that customer account. We are working witht the OIG to understand the scope of the subpoena and its request for documents, and we intend to fully cooperate with the OIG's request. No assurance can be given as to the timing or outcome of this investigation, and the probable outcome of this matter cannot be determined. m t We are involved in a number of legal actions and investigations arising out of the normal course of our business as discussed in Note 10 and Note 11 of the Consolidated Financial Statements included in this Annual Report. Due to the inherent uncertainties nding legal actions and investigations, we cannot predict the outcome, and, with respect to certain pending litigation associated with pe or claims where no liability has been accrued, to make a meaningful estimate of the reasonably possible loss or range of loss that could result from an unfavorable outcome, other than those matters disclosed in this Annual Report. We have no material accruals for pending litigation or claims for which accrual amounts are not disclosed in our Consolidated Financial Statements included in this Annual Report. It is reasonabla y possible, however, that an unfavorable outcome that exceeds our current accrual estimate, if any, for one or more of the matters described in our Consolidated Financial Statements included in this Annual Report could have a material adverse effecff t on our liquidity and access to capital resources. Additionally, it is possible that as part of the ongoing legal appeals process, regardless of our assessment of the probability of a loss, we could be required to set aside funds in an escrow or purchase a performance bond. These requirements to escrow funding could have an adverse impact on our ability to access our current liquidity or impamm ct our access to additional capia tal resources. 53 In January 2018, we drew $50.0 million from our $500.0 million revolving senior credit facility to be used for working capital, rate purposes, and strategic investments and acquisitions, including the acquisition of SafePassage, a privately-held general corporr provider of IOM services. On September 7, 2017, we completed an acquisition of a medical device company that developed interbody implant s for spinal nnection with the acquisition we recorded a purchase accounting fair value fusion using patented porous PEEK technolo estimate of $31.4 million for contingent consideration liabia lities related to the achievement of certain manufacturi ng and commercial milestones. We anticipate these milestones will become payable at varying times between 2019 and 2021, but are subject to change based on the achievement of those manufacturing and commercial milestones. . In co gy m tt On August 28, 2017, we entered into a 17 year operating lease agreement for the purpose of expanding and restrutt cturing our feet. The corporate headquarters in San Diego, California, from approximately 145,000 square feet to approximately 252,000 square lease and its terms supersede the existing lease agreement with respect to the currently occupied office buildings comprising our corporr ers is expected to be complmm eted in three phases over a period of two years. The rental payments associated with the lease will total approximately $164.2 million over the 17 year term of the lease. Rental payments escalate annually at 3% for the term of the lease upon the anniversary of completion of each phase of expansion. rate headquarters. The renovation and expansion of the corporate headquart q q On July 1, 2017, the Senior Convertible Notes due 2017, which we refer to as the 2017 Notes, reached maturity and a majora yity of the holders elected to convert their outstanding notes. We paid $64.0 million in cash for the settlement of the outstanding principal amount including accrued interest and issued 650,070 shares for settlement of the conversion value over the principal amount of the not Refer to the below section subtitled “2.75% Senior Convertible Notes due 2017” for further details. es. On Septembem r 12, 2016, we completed an acquisition of an imaging software and techn ology platform known as LessRay. In connection witht the acquisition we recorded a purchase accounting fair value estimate of $34.1 million for contingent consideration liabia lities related to the achievement of certain regulatory and commercial milestones. In January 2018, we paid $9.0 million of the outstanding contingent consideration liabilities for the achievement of a commercial milestone. We anticipate the remaining milestones will become payable at varying times between 2018 and 2020. We expect the imaging software and technology platform to be incorporated into our MAS platform to form a foundational element in our imaging, navigation and automation platform development strategy. ff rr On February 11, 2016, we acq uired Ellipse Technologies for an upfront payment of $380.0 million (including holdbacks for retained employment of Ellipse Technologies leadership that is to be expensed and is not considered part of the final purchase price) and a potential milestone payment of $30.0 million payable in 2017 related to the achievement of a specific revenue target. The revenue-based milestone was achieved as of December 31, 2016. We paid the milestone in April 2017, and no additional consideration is owed related to the acquisition. In furtherance of our initiative to increase the amount of products that we self-manufacture, in 2015, we added an approximately 180,000 square foot manufacturing facility in West Carrollton, Ohio. In 2017, we substantially complmm eted the build out of the new facility and initial production is underway. 54 t liquidity should be sufficie Cash, cash equivalents and marketabla e securities were $72.8 million and $153.6 million at December 31, 2017 and December 31, 2016, respectively. Our existing cash and cash equivalents and availablea nt to meet our anticipated cash ld have varying needs for cash as a result of the achievement of certain acquisition related needs for the next 12 months. We cou milestones. We anticipate funding these milestones from cash on hand and operations, however, we have the ability to fund these from our existing line of credit if necessary. The change in liquidity during the year ended December 31, 2017 of $80.8 million was mainly driven by $110.2 million in cash used for purchases of property and equipment, $63.3 million in cash used for the repurchase of ess combinations and strategic investments, $30.0 million ff our Senior Convertible Notes due 2017, $62.4 million in cash used for busin in cash used for a contingent consideration payment to Ellipse Technologies and $11.9 million in cash used on treasury stock purchases, offset by $190.2 mi llion from cash inflow from operations. At December 31, 2017, we have cash totaling $5.4 million in requirements if and when needed. Future litigation or restricted accounts which are not available to us to meet any ongoing capital r business on an ongoing requirements to escrow funds could materially impam ct our liquidity and our ability to invest in and run ou basis. a ff ff rr s Cash Flowll The following table summarizes our Consolidated Statements of Cash Flows: (in thousands) Cash provided by operating activities Cash used in investing activities Cash (used in) provided by financing activities Effect of exchange rate changes on cash q (Decrease) increase in cash and cash equival Year Ended December 31, 2016 to 2017 2015 to 2016 2017 2016 2015 $ Change % Change $ Change % Change $ 178,979 $ 156,295 $ 88,727 $ 22,684 130,024 (304,885) (197,851) 110,823 2,999 (929) ents $ (80,840) $ (38,696) $ 49,952 $ (42,144) (174,861) (87,028) 2,070 (7,514) (30,344) (917) 15% $ 67,568 43% (297,371) 179% 141,167 323% (12) 109% $ (88,648) 76% 3,958% 465% 1% 177% Cash provideddd by operating activities Cash provided by operating activities was $179.0 million for the year ended December 31, 2017, compared to $156.3 million for the same period in 2016. The $22.7 million increase in cash provided by operating activities was primarily due to $45.0 million in al cash flows in 2016 related to cash paid for the settlement of the Medtronic litigation matter in 2016, offset with increased operation timing of spending and cash receipts. Additionally, we paid $30.0 million in 2017 for contingent consideration related to the acquisition of Ellipse Technologies, of which $11.2 million related to increased fair value adjustments and thus decreased cash flows from operating activities, witht the remaining $18.8 million representing the initial purchase price allocation classified in financing activities. ff Cash provided by operating activities was $156.3 million in 2016, compared to $88.7 million in 2015. The $67.6 million to income tax refunds in increase in cash provided by operating activities was primarily due to income tax payments in 2015 shifting 2016. ff Cash used in investing activities Cash used in investing activities was $174.9 million in 2017, compared to $304.9 million in 2016. The $130.0 million decrease in cash used in investing activities in 2017 as compared to 2016 is primarily due to the $380.1 million cash payment (net of cash received) to fund the acquisition of Ellipse Technologies and a net $278.1 million cash received related to activities within investment portfolios during the year ended December 31, 2016. The year ended December 31, 2017 includes a decrease of $49.9 million in cash tions, strategic investments and purchases of intangible assets and an increase of $21.8 million in cash used used for business combinam on purchases of property and equipment associated with our manufacturing initiative and general business as compared to the same period in 2016. tt Cash used in investing activities was $304.9 million for the year ended December 31, 2016, compared to $7.5 million used for the same period in 2015. The $297.4 million increase in cash used in investing activities was primarily due to the $380.1 million cash payment (net of cash received) to fund the acquisition of Ellipse Technologies, the $92.5 million cash payment (net of cash acquired and amounts retained for acquired provisional obligations) for the acquisition of BNN Holdings, and $22.0 million used in other acquisition related investments including purchases of intangible assets. The funding of these acquisitions and investments was partially offset by a net increase of $176.5 million cash received related to activities within investment portfolios over the periods presented. For 2018, we expect capi be in the rangeg of $85.0 million to $95.0 million which is exppected to be sourced by the cash generated from operations and the credit facility, as described below in the section “Revolving Senior Credit Facility”. ons of our business glg obally toy p tal expep nditurt es to support p expansi ppu p 55 Cash (used in)n provided by financing activities Cash used in financing activities was $87.0 million for the year ended December 31, 2017, compared to $110.8 million cash provided for the same period in 2016. The $197.9 million decrease in cash provided by financing activities was primarily due to the net issuance of the Senior Convertible Notes due 2021 of $634.1 million. The proceeds from the issuance of the Senior Convertible Notes due 2021 were offseff t by the net $66.3 million purchase of a call spread related to that issuance and approximately $439.5 million in cash to repurchase a portion of the Senior Convertible Notes due 2017 during the year ended December 31, 2016. We used $63.3 million to settle the remaining principal on the Senior Convertible Notes due 2017 during the year ended December 31, 2017. Our equity incentive plans allow for “net share settlement” of certain equity awards whereby, in lieu of (i) making cash payments in satisfaction of the exercise price owed respective to non-qualified stock option awards, or (ii) open market selling award shares to generate cash proceeds for use in satisfaction of statutory tax obligations respective to an award’s settlement or exercise, we offset the award shares being settled in a respective transaction by the numbem r of shares of our common stock with a value equal to the respective obligation, and, in the case of taxes, making a cash payment to the respective taxing authority on behalf of the shareowner using our cash on hand. The net share settlement is accounted for with the cost of any award shares that are net settled being included in treasury stock and reported as a reduction in total equity at the time of settlement. ff During 2018, we estimate at least $7.5 million of such cash tax payments will be made, however the actual remittance can be largely different depending on our share price at the date of RSU or PRSU release or option exercises or actual volume of such activities. We anticipate using cash generated from operating activities and the credit facility to fund all such payments. Cash provided by financing activities was $110.8 million for the year ended December 31, 2016, compared to $30.3 million cash used forff the same period in 2015. The $141.2 million increase in cash provided by financing activities was primarily due to the net proceeds from the issuance of the Senior Convertible Notes due 2021 of $634.1 million, offset by the use of $66.3 million net for the call spread on the sale and purchase of warranr ts and bond hedge in connection with the issuance. Additionally, we used approximately $439.5 million in 2016 to repurchase a portion of the outstanding Senior Convertible Notes due 2017. Senior Convertible Notes 2.25% Senior Convertible Notes due 2021 ff ff ppa In March 2016, we issued $650.0 million principal amount of unsecured senior convertible notes with a stated interest rate of 2.25% and a maturity date of March 15, 2021, which we refer to as the 2021 Notes. The net proceeds from the offering, after deducting initial purchasers' discounts and costs directly related to the offering, were a roximately $634.1 million. Interest on the 2021 Notes began accruing upon issuance and is payable semi-annually. The 2021 Notes may be settled in cash, stock, or a combim nation thereof,ff solely at our discretion. It is our current intent and policy to settle all conversions through combination settlement, which involves satisfying the principal amount outstanding with cash and any note conversion value over the principal amount in shares of our common stock. The initial conversion rate of the 2021 Notes is 16.7158 shares per $1,000 principal amount, which is equivalent to a conversion price of approximately $59.82 per share, subju ect to adjustments. Prior to September 15, 2020, holders may convert their 2021 Notes only under the following conditions: (a) during any calendar quarter beginning June 30, 2016, if the reported sale price of our common stock for at least 20 days out of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than 130% of the conversion price on each applicable trading day; (b) during the five business day period in which the trading price of the 2021 Notes falls below 98% of the product of (i ) the last reported sale price of our common stock and (ii) the conversion rate on that date; and (c) upon the occurrence of specifieff d corporate events, as defined in the 2021 Notes. From Septembem r 15, 2020 and until the close of business on the second scheduled trading day immediately tnot preceding March 15, 2021, holders may convert their 2021 Notes at any time (regardless of the foregoing circumstances). We may redeem the 2021 Notes prior to March 20, 2019. We may redeem the 2021 Notes, at our option, in whole or in part on or afteff rr March 20, 2019 until the close of business on the business day immediately preceding September 15, 2020 if the last reported sale pprice of our common stock has been at least 130% of the conversion price then in effect f at least 20 trading days during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which we deliver written notice of a redemptmm ion. The redemptmm ion price will be equal to 100% of the principal amount of such 2021 Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemp principal payments are due on the 2021 Notes prior to maturity. Other than restrictions relating to certain fundamental changes and consolidations, mergers or asset sales and customary anti- tments, the 2021 Notes do not contain any financial covenants and do not restrict us from paying dividends or issuing or dilution adjusd repurchasing any of our other securities. We are unaware of any current events or market conditions that would allow holders to convert the 2021 Notes. The impact of the convertible featurett will be dilutive to our earnings per share when our average stock price for the period is greater than the conversion price. tion date . No orff dd ff 56 In connection with the offering of the 2021 Notes, we entered into transactions for convertible notes hedge, which we refer to as the 2021 Hedge and warrants, which we refer to as the 2021 Warrants. The 2021 Hedge was entered into with the initial purchasers of the 2021 Notes and/or their affiliates, which we refer to as the 2021 Counterparties, entitling us to purchase up to 10,865,270 shares of our own common stock at an initial stock price of $59.82 per share, each of which is subject to adjustmd ent. The cost of the 2021 Hedge was $111.2 million. The 2021 Hedge will expire on March 15, 2021. The 2021 Hedge is expected to reduce the potential equity dilution upon conversion of the 2021 Notes if the daily volume-weighted average price per share of our common stock exceeds the strike price of the 2021 Hedge. Our assumed exercise of the 2021 Hedge is considered anti-dilutive since the effect of the inclusion would always be anti-dilutive with respect to the calculation of diluted earnings per share. In addition, we sold the 2021 Warrants to the 2021 Counterparties to acquire up to 10,865,270 common shares of our stock. The 2021 Warrants will expire on various dates from June 2021 through Decembem r 2021 and may be settled in cash or net shares. It is our current intent and policy to settle all conversions in shares of our common stock. We received $44.9 million in cash proceeds from the sale of the 2021 Warrants. The 2021 Warrants could have a dilutive effeff ct on our earnings per share to the extent that the price of our common stock during a given measurement period exceeds the strike price of the 2021 Warrants, which is $80.00 per share. q 2.75% Senior Convertible Notes due 2017 On Ju ly 1, 2017, the 2017 Notes reached maturity and a majority of the holders elected to convert their outstanding notes. We ppaid $64.0 million in cash for the settlement of the outstanding principal amount including accrued interest and issued 650,070 shares for settlement of the conversion value over the principal amount of the notes. 2017 Notes ff In June 2011, we issued $402.5 million principal amount of the 2017 Notes with a stated interest rate of 2.75% and a maturity ng, after deducting initial purchasers’ discounts and costs directly related to the date of July 1, 2017. The net proceeds from the offeri ng, were approximately $359.2 million. The 2017 Notes provided for settlement in cash, stock, or a combination thereof, solely offeri ff at our discretion. The initial conversion rate of the 2017 Notes was 23.7344 shares per $1,000 principal amount, or equivalent to conversion price of approximately $42.13 per share, which is subject to adjustment. Beginning January 1, 2017 and until the close of business on the second scheduled trading day immediately preceding July 1, 2017, holders could convert their 2017 Notes at any time. Prior to January 1, 2017, holders could convert their 2017 Notes only under the conditions as described in Note 5 to the Consolidated Financial Statements included in this Annual Report, which includes our common stock trading at 130% of the conversion price for 20 out of 30 consecutive trading days. We settled such conversions through combination settlement, which involved satisfying the principal amount outstanding with cash and any note conversion value over the principal amount in shares of our common stock. The impact of the convertible feature was dilutive to our earnings per share when our average stock price for the period was greater than the conversion price. Interest on the 2017 Notes began accruing up on issuance and was payable semi-annually on January 1st and July 1st each year. q r In connection with the offering of the 2017 Notes, we entered into convertible note hedge transactions, which we refer to as the 2017 Hedge, with the initial purchasers of the 2017 Notes and/or their affiliates, which we refer to as the 2017 Counterparties, entitling us to purchase up to 9,553,096 shares of our common stock at an initial stock price of $42.13 per share, each of which was subject to adjustment. The cost of the 2017 Hedge was $80.1 million. The 2017 Hedge had an expiration date of July 1, 201 Th e 2017 Hedge reduced the equity dilution upon conversion of the 2017 Notes. Prior to its maturity, our assumed exercise of the 2017 Hedge was considered anti-dilutive since the effect of inclusion would always be anti-dilutive with respect to the calculation of diluted earnings per share. On July 1, 2017, we exercised the 2017 Hedge and received 4,160,789 shares of our own co mmon stock on a net t share bas Counterparties. from the 2017 7. is In addition, we sold warrants, which we refer to as the 2017 Warrants, rties to acquire up to 477,654 shares of our Series A Participating Preferred Stock, at an initial strike price of $988.51 per share, subjeb ct to adjud stment. Each share of Series A Participating Preferred Stock was initially convertible into 20 shares of our common stock, or up to 9,553,080 common shares in total. The 2017 Warrants were scheduled to expire on various dates from September 2017 through January 2018 with settlement in cash or net shares. All of the 2017 Warrants were settled on a net share basis as of July 2017 as described below. We received $47.9 million in cash proceeds from the sale of the 2017 Warrants. Prior to thet settlement, the 2017 Warrants could have had a dilutive effect on our earnings per share to the extent that the price of our common stock during a given measurement period (the quarter or year-to-date period) exceeded the strike price of the 2017 Warrants, which was $49.43 per share. to the 2017 Counterpar ff ff 57 On May 24, 2017, we entered into warrant termination agreements with the 2017 Counterparties to settle the outstanding 2017 Warrants by accelerating the expiration period to varying settlement dates from June 2017 through July 2017, which terminated the existing 2017 Warrants settlement period. The settlement was delivered in shares of our common stock, based on a fixed formulamm using the daily volume weighted average price as the settlement measure. As of December 31, 2017, all of the 2017 Warrants were settled on a net share basis, resulting in the issuance of 3,656,944 shares of our common stock to the 2017 Counterparties. Revolving Senior Credit Facility In April 2017, we entered into an Amended and Restated Credit Agreement (the “2017 Credit Agreement”) for a revolving . The senior credit facility (the “2017 Facility”), which replaced the previous credit agreement we had entered into in February 2016 2017 Credit Agreement provides for secured revolving loans, multicurrenrr cy loan options and letters of credit in an aggregate amount of up to $500.0 million. The 2017 Credit Agreement also contains an accordion feature, which allows us to increase the aggregate principal amount of the 2017 Facility provided we remain in complm iance with the underlying financial covenants, including but not limited to, compliance with the consolidated interest coverage ratio and certain consolidated leverage ratios. The 2017 Facilitytt matures in April 2022 (subjeb ct to an earlier springing maturity date), and includes a sublimit of $100.0 million for multicurrency borrowings, a sublimit of $50.0 million for the issuance of standbyd letters of credit, and a sublimit of $5.0 million for swingline loans. All of our assets including the assets of our material domestic subsidiaries are pledged as collateral under the 2017 Facility (subject to customary exceptions) pursuant to the term set forth in the Amended and Restated Security and Pledge Agreement (the “2017 Security Agreement”) executed in favor of the administrative agent. Each of our material domestic subsidiaries guarantees the 2017 Facility. In connection with the 2017 Facility, we incurred issuance costs which will be amortized over the term of th At December 31, 2017, wwe did not carry any outstanding revolving loans under the 2017 Facility. e 2017 Facility. rr Borrowings under the 2017 Facility bear interest, at our option, at a rate equal to an applicable margin plus: (a) the applicable Eurocurrency Rate (as defined in the 2017 Credit Agreement), or (b) a base rate determined by reference to the highest of (1) the federal funds effective rate plus 0.50%, (2) the Bank of America prime rate, and (3) LIBOR for an interest period of one month plus ff 1.00%. The margin for the 2017 Facility ranges, based on our consolidated leverage ratio, from 0.00% to 1.00% in the case of base rate loans and from 1.00% to 2.00% in the case of Eurocurrency Rate loans. The 2017 Facility includes an unused line fee ranging, based on our consolidated leverage ratio, from 0.20% to 0.35% per annum on the revolving commitment. The 2017 Credit Agreement contains affirmative, negative, permitted acquisition and financial covenants, and events of default customary for financings of this type. The financial covenants require us to maintain ratios of consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) in relation to consolidated interest expense and consolidated debt, respectively, as defined in the 2017 Credit Agreement. The 2017 Facility grants the lenders preferred first priority liens and security interests in capital stock, intercompany debt and all of our present and future property and assets including each guarantor. We are currently in compliance with the Credit Agreement covenants. 58 Contractual Obligations and Commitments Contractuatt l obligations and commitments represent future cash commitments and liabilities under agreements with third parties, including our 2021 Notes, operating leases and other contractual obligations. The following table summarizes our long-term contractual obligations and commitments as of December 31, 2017: (in thousands) Convertible Notes (1) Operating leases Capital leases Achieved milestones in connection with acquisitions Other long-term liabilities Total Total 701,188 186,282 1,276 9,000 3,030 900,776 $ $ $ $ Less Than 1 Year 14,625 12,550 640 9,000 852 37,667 Payments Due by Period 1 to 3 Years 29,250 $ 25,271 582 —— 2,178 57,281 $ 4 to 5 Years 657,313 $ 21,358 54 —— —— 678,725 $ Afteff r 5 Years —— $ 127,103 —— —— —— 127,103 $ (1) Convertible Notes includes the expected coupon interest payments on the outstanding debt. See Note 5 to the Consolidated Financial Statements included in this Annual Report for further discussion of the terms of the convertible notes. Total contractual obligations and commitments listed in the tabla e above excludes the following liabilities: • • Potential contingent consideration payments pursuant to certain merger, purchase, and product development agreements, other than the achieved milestone payment listed above pursuant to the purchase agreement for the acquisition of LessRay. See Notes 3 and 6 to the Consolidated Financial Statements included in this Annual Report for further discussion on the contingent consideration obligations and product development agreements, respectively. Potential performance based long-term cash incentive awards granted to certain executive officers. These awards are contingent upon futurett nce and totaled $3.0 million in the Consolidated Balance Sheet as of December 31, 2017. Company performar • Amounts related to uncertain tax benefits were excluded because we cannot make a reasonably reliable estimate regarding the timing of settlements with taxing authorities, if any. Such liabilities totaling $4.5 million are included in the Consolidated Balance Sheet as of December 31, 2017. See Note 8 to the Consolidated Financial Statements included in thit s Annual Report for further discussi on of our provision for income taxes. t • Certain amounts related to tax liabilities in foreign jurisdictions were excluded because we cannot make a reasonabla y reliabla e estimate regarding the timing of settlements with taxing authorities, if any. Such liabilities totaling $6.0 million, including interest and penalties, are included in the Consolidated Balance Sheet as of December 31, 2017. The expected timing of payments of the obligations discussed above is estimated based on current information. Timing of payment and actual amounts paid may be different depending on the time of receipt of services or changes to agreed-upon amounts for some obligations. Off-Balance Sheet Arrangements As of December 31, 2017, we did not have any off-balance sheet activities. tt Item 7A. Quantitattt ive and Qu tt alitll attt ive Disclosures About Market Riskii Interest Rate Sensitivity SS and Risk Our exposure to interest rate risk at December 31, 2017 is related to our investment portfolio which consists largely of cash equivalents in the form of debt instruments of high quality corporate issuers and the U.S. government and its agencies. Due to the short-term nature of these investments, we have assessed that there is no material exposure to interest rate risk arising from our investments. Fixed rate investments and borrowings may have their fair market value adversely impacted from changes in interest rates. At December 31, 2017, we do not hold any material asset-backed investment securities and in 2017, we did not realize any losses related to asset-backed investment securities. Based upon our overall interest rate exposure as of December 31, 2017, a change of 10 percent in interest rates, assuming the amount of our investment portfolio and overall economic environment remains constant, would not have a material effect on interest income. 59 The primary objective of our investment activities is to preserve the principal while at the same time maximizing yields without significantly increasing the risk. To achieve this objective, we maintain our portfolio of cash equivalents and investments in instruments that meet high credit quality standards, as specified in our investment policy. None of our investments are held for trading purposes. Our policy also limits the amount of credit exposure to any one issue, issuer and type of instrutt ment. m As of December 31, 2017, we only held investments in securities of a short-term nature classified as cash equivalents. During the periods presented, we did not hold any investments that were in a significant unrealized loss position and no impam irment charges were recorded. Realized gains and losses and interest income related to marketable securities were immaterial during all periods presented. Market Price Sensitive Instruments In order to reduce the potential equiq ty dilution, we entered into the 2021 Hedge in connection with the issuance of the 2021 Notes entitling us to purchase our common stock. Upon conversion of our convertible notes, the 2021 Hedge is expected to reduce the equity dilution if the daily volume-weighted average price per share of our common stock exceeds the strike price of the applicable hedge. We also entered into warrant transactions with the counterparr rties of the 2021 Hedge entitling them to acquire shares of our common stock. The warrant transactions could have a dilutive effect on our earnings per share to the extent that the price of our common stock during a given measurement period (the quarter or year to date period) exceeds the strike price of the warrant s. See Note 5 to the Consolidated Financial Statements included in this Annual Report for further discussion. rr Foreigni Currency Exchange Risk rr A substantial portion of our operations are located in the United States, and the majoa ritytt of our sales since inception have been made in the United States dollars. Accordingly, we have assessed that we do not have any material net exposure to foreign currency rate fluctuations. However, as our business in markets outside of the United States continues to increase, we will be exposed to foreign currency exchange risk related to our foreign operations. Fluctuations in the rate of exchange between the United States dollar and foreign currencies, primarily the pound sterling the euro, the Australian dollar 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. In addition, loss of financial stabia lity within these markets could lead to delays in reimbursm ement or inability to remit payment due to currency Specifically, we have operations in Puerto Rico, Brazil, Argentina and Venezuela that have financial instability or currency controls. t ls. We do not have any material financial exposure to one customer or one country that would significff antly hinder our liquidity. contrott q u d met . These adjust aries. Exchange rate fluctuations resulting from the translation of the short-term intercompany ba We translate the financial statements of our foreign subsidiaries with functional currencies other than the United States dollar into the United States dollar for consolidation using end-of-period exchange rates for assets and liabilities and average exchange rates during each reporting period for results of operations. Net gains or losses resulting from the translation of foreign finff ancial statements and the effect of exchange rate changes on intercompany receivables and payables of a long-term investment nature are recorded as a nts will affect net income only upon sale or liquidation of the underlying separate component of stockholders’ equity investment in foreign subsidi lances between domestic entities and our forff eign subsidiaries are recorded as foreign currency transaction gains or losses and are included in other income (expense) in the Consolidated Statement of Operations. For those short-term intercompany balances, we enter into the foreign currency forward contracts to partially offset the impact from fluctuat tion of the foreign currency rates. The notional amount of the outstanding foreign currency forward contracts was $14.3 million as of December 31, 2017, which was settled in January 2018. During the year ended December 31, 2017, a loss of $1.9 million was recognized in other income due to the change in the fair value of the derivative instruments, and the fair value of the hedge contratt cts we held was immaterial on our Consolidated Balance Sheet as of December 31, 2017. The notional principal amounts provide one measure of the transaction volume outstanding as of period end, but do not represent the amount of our exposure to market loss. The estimates of fair value are based on applicable and commonly used pricing models using prevailing financial market information. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the ions are monitored and managed by us as ann tt remaining life of integral part of our overall risk management program, which recognizes the unpredi ctability of financial markets and seeks to reduce ppotentially adverse effects on our results. the instruments. The financial exposures by exchange rate fluctuat m n ff Item 8. Financial Statements and Supplpp ementary Data ll The Consolidated Financial Statements and supplementary data required by this item are set fortht at the pages indicated in Item 15 of this Annual Report. Item 9. Changes in and Disagreements with Accountants on Accountintt g and n None. Item 9A. Controlsll and Procedures Disclosure ii Controls and Procedures tt 60 Financi ii ii al Discl osll ure We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (Exchange Act) is recorded, processed, summarized and reported within the timelines specified in the Commission’s rules and forms, and that such information is accumulm ated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any s and procedures, no control matter how well designed and operated, can only provide reasonable assurance of achieving the desired t objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in t control evaluating the cost-benefit relationship of possible controls and procedures. d q Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, s (as defined in SEC Rules 13a — 15(e) and 15d — 15(e) of the Exchange Act) as of December 31, 2017. Based on such evaluation, our management has concluded as of December 31, 2017, the Compam ny’s disclosure controls and procedures are effect we carried out an evaluation of the effectiveness of the Com ’s disclosure controls and procedured panym ive. ff ff ff Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequatq l over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Internarr l control over financial reporting refers to the process designed by, or under the supervision of,ff our Chief Executive Officer and Chief Financial Officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. e internal contrott t Management has used the framework set forth in the report entitled Internal amework published by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) to evaluate the effectiveness of the Company’s internal control over financial reporting. On May 14, 2013, the Committee of Sponsoring Organizations of the Treadway Commission published a 2013 framework and related illustrative documents. We adopted the new framework durd ing 2014. Management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2017, based on those criteria. Ernst & Young LLP, the Company’s independent registered public accounting firm, has issued an attestation report on the Company’s internal control over financial reporting which is included herein. l — Integrated Fr Contrott e rr ff Changes in IntII ernal Control over Financial Repoe rting We are involved in ongoing evaluations of internal controls. In anticipation of the filing of this Form 10-K, our Chief Executive Officer and Chief Financial Office r, with the assistance of other members of our management, performed an evaluation of any change in internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is likely to t, our internal controls over financial reporting. There has been no change to our internal control over financial materially affecff reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. aa ff 61 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of NuVasive, Inc. Opinion on Internal Control over Financial Reporting We have audited NuVasive, Inc.’s internal control over financial reporting as of December 31, 2017, based on criteria establa ished in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, NuVasive, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria. ff We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of NuVasive, Inc. as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and our report dated February 26, 2018 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal controt l over financial reporting and for its assessment of the effeff ctiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a publu ic accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance witht the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the l control over financial reporting was maintained in all material r effective internar audit to obtain reasonable assurance about whethet respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknek ss exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliabia lity of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the compam ny; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, e because of iveness to future periods are subject to the risk that controls may become inadequatq projections of any evaluation of effect changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. ff /s/ Ernst & Young LLP San Diego, California r February 26, 2018 Item 9B. Other Information None. Certain information required by Part III is omitted from this report because the Company will file a definitive proxy statement within 120 days after the end of its fiscal year pursuant to Regulation 14A (the Proxy Statement) for its 2018 annual meeting of stockholders, and certain information included in the Proxy Statement is incorporated herein by refereff nce. PART III 62 Item 10. Directors ,s Executive Officers and Corporate Governance i We have adopted a Code of Ethical Business Conduct for all officers, dire ctors and shareowners. The Code of Ethical Business Conduct is available on our website, www.nuvasive.com. We intend to disclose future amendments to, or waivers from, provisions of our Code of Ethical Business Conducdd t that apply to our Principal Executive Officer, Principal Financial Officer, Pri ncipal Accounting Officer, or Controller, or persons performing similar functions, within four business days of such amendment or waiver. ff ff 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 requiq red by this item will be set fortht in the Proxy Statement and is incorporated in this report by reference. Item 12. Securityii Ownershipii of Certain Beneficial ff Owners and Management and Relatll edtt Stockholder Matters The information requiq red by this item will be set fortht in the Proxy Statement and is incorporated in this report by reference. Item 13. Certain Relationships and Related Transactions, and Director IndII epdd endence The information requiq red by this item will be set fortht in the Proxy Statement and is incorporated in this report by reference. Item 14. Principal Accounting Fees and Services The information requiq red by this item will be set fortht in the Proxy Statement and is incorporated in this report by reference. 63 PART IV Item 15. Exhibits, Financial Statement Schedules (a) The following documents are filed as a part of this report: (1) Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2017 and 2016 Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015 Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017, 2016 m and 2015 Consolidated Statements of Equity for the years ended December 31 m , 2017, 2016 and 2015 Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015 Notes to Consolidated Financial Statements (2) Financial Statement Schedules: Scheduld e II — Valuation Accounts All other financial statement scheduld es have been omitted because they are not applicable, not required or the information required by such schedules is shown in the financial statements or the notes thereto. (2) Exhibits See Item 15, subsection (b) below. u (b) The following exhibits are filed as part of this report: Exhibit Number 2.1† 2.2 3.1 3.2 3.3 4 3.5 4.1 4.2 Description Agreement and Plan of Merger, dated January 4, 2016, by and among the Company, Magneto Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of the Company, Ellipse Technologies, Inc., and the equity holders’ Fortis Advisors LLC, a Delaware limited liability corporation, representative (incorporated by reference to our Current Report on Form 8-K filed with the Commission on February 11, 2016) in its capacity as Agreement and Plan of Merger, dated June 6, 2016, by and among the Company, Bionic Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of the Company, BNN Holdings Corp., and GPP I-BNN, LLC, a Delaware limited liability corporation, in its capacity as the security holders’ agent to BNN Holdings Corp. (incorporated by reference to our Current Report on Form 8-K filed with the Commission on July 5, 2016) Restated Certificate of Incorporation (incorporated by reference to our Quarterly Report on Form 10-Q filed with the Commission on August 13, 2004) Certificate of Amendment to the Restated Certificate of Incorporation (incorporated by reference to our Current Report on Form 8-K filed with the Commission on September 28, 2011) Restated Bylaws (incorporated by reference to our Current Report on Form 8-K filed with the Commission on January 6, 2012) Amendment No. 1 to the Restated Bylaws (incorporated by reference to our Current Report on Form 8-K filed with the Commission on May 19, 2014) Amendment No. 2 to the Restated Bylaws (incorporated by reference to our Current Report on Form 8-K filed with the SEC on August 1, 2016) Specimen Common Stock Certificate (incorporated by reference to our Annual Report on Form 10-K filed with the Commission on March 16, 2006) 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) 64 Exhibit Number 4.3 4.4 4.5 4.6 10.1# 10.2# 10.3# 10.4# .5# 10.6# 10.7# 10.8# 10.9# 10.10# 10.11# 10.12# 10.13# 10.14# Description Indenture dated June 28, 2011 between the Company and U.S. National Association (incorporated by reference to our Current Report on Form 8-K filed with the Commission on June 29, 2011) Form of 2.75% Convertible Senior Note due 2017 (incorporated by reference to our Current Report on Form 8-K filed with the Commission on June 29, 2011) Indenture, dated March 16, 2016, between the Company and Wilmington Trust, National Association, as Trustee (incorporated by reference to our Current Report on Form 8-K filed with the Commission on March 16, 2016) Form of 2.25% Convertible Senior Note due 2021 (incorporated by reference to our Current Report on Form 8-K filed with the Commission on March 16, 2016) 2004 Amended and Restated Equity Incentive Plan (incorporated by reference to our Quarterly Report on Form 10-Q filed with the Commission on July 26, 2012) Amendment No. 1 to the 2004 Amended and Restated Equity Incentive Plan (incorporated by reference to our Annual Report on Form 10-K filed with the Commission on March 3, 2014) Form of Stock Option Award Notice under the 2004 Amended and Restated Equity Incentive Plan (incorporated by reference to Amendment No. 1 to our Registration Statement on Form S-1 filed with the Commission on April 8, 2004) Form of Option Exercise and Stock Purchase Agreement under the 2004 Amended and Restated Equity Incentive Plan (incorporated by reference to Amendment No. 1 to our Registration Statement on Form S-1 filed with the Commission on April 8, 2004) Form of Restricted Stock Unit Award Agreement under the 2004 Amended and Restated Equity Incentive Plan (incorporated by reference to our Annual Report on Form 10-K filed with the Commission on February 26, 2010) Form of Restricted Stock Grant Notice and Restricted Stock Agreement under the 2004 Amended and Restated Equity Incentive Plan (incorporated by reference to Amendment No.1 to our Registration Statement on Form S-1 filed with the Commission on April 8, 2004) NuVasive, Inc. 2004 Amended and Restated Employee Stock Purchase Plan (incorporated by reference to our Quarterly Report on Form 10-Q filed with the Commission on October 30, 2014) 2014 Equity Incentive Plan (incorporated by reference to Exhibit A to our Definitive Proxy Statement filed with the Commission on March 27, 2014) Form of Performance Restricted Stock Unit Agreement (with accompanying Form Notice of Grant) under the 2014 Equity Incentive Plan (incorporated by reference to our Quarterly Report on Form 10-Q filed with the Commission on May 4, 2015) Form of Executive Restricted Stock Unit Agreement (with accompanying Form Notice of Grant) under the 2014 Equity Incentive Plan (incorporated by reference to our Quarterly Report on Form 10-Q filed with the Commission on May 4, 2015) Form of Performance Cash Award Agreement (with accompanying Form Notice of Grant) under the 2014 Equity Incentive Plan (incorporated by reference to our Quarterly Report on Form 10-Q filed with the Commission on May 4, 2015) Form of Performance Restricted Stock Unit Agreement (with accompanying Notice of Grant) for grants after February 11, 2016 under the 2014 Equity Incentive Plan (incorporated by reference to our Annual Report on Form 10- K filed with the Commission on February 11, 2016) Form of Executive Restricted Stock Unit Agreement (with accompanying Form Notice of Grant) for grants after February 11, 2016 under the 2014 Equity Incentive Plan (incorporated by reference to our Annual Report on Form 10- K filed with the Commission on February 11, 2016) Form of Performance Cash Award Agreement (with accompanying Form Notice of Grant) for grants after February 11, 2016 under the 2014 Equity Incentive Plan (incorporated by reference to our Annual Report on Form 10- K filed with the Commission on February 11, 2016) 65 Exhibit Number 10.15# 10.16# 10.17# 10.18# 10.19# 10.20# 10.21# 10.22# 10.23# 10.24# 10.25# 10.26# 10.27# 10.28# 10.29# 10.30# 10.31 Form of Performance Restricted Stock Unit Agreement (with accompanying Notice of Grant) for grants after February 8, 2017 under the 2014 Equity Incentive Plan (incorporated by reference to our Annual Report on Form 10- K filed with the Commission on February 9, 2017) Description Form of Executive Restricted Stock Unit Agreement (with accompanying Form Notice of Grant) for grants after February 8, 2017 under the 2014 Equity Incentive Plan (incorporated by reference to our Annual Report on Form 10- K filed with the Commission on February 9, 2017) Form of Performance Cash Award Agreement (with accompanying Form Notice of Grant) for grants after February 8, 2017 under the 2014 Equity Incentive Plan (incorporated by reference to our Annual Report on Form 10-K filed with the Commission on February 9, 2017) NuVasive, Inc. 2014 Executive Incentive Compensation Plan (incorporated by reference to Exhibit B to our Definitive Proxy Statement filed with the Commission on March 27, 2014) 2015 Ellipse Technologies, Inc. Incentive Award Plan (incorporated by reference to our Registration Statement on Form S-8 filed with the Commission on February 11, 2016) Form of Indemnification Agreement between the Company and its directors and certain executives thereof (incorporated by reference to our Current Report on Form 8-K filed with the Commission on May 19, 2014) NuVasive, Inc. Amended and Restated Executive Severance Plan (incorporated by reference to our Quarterly Report on Form 10-Q filed with the SEC on July, 27, 2017) Form of Change in Control Agreement between the Company and certain executives thereof (incorporated by reference to our Current Report on Form 8-K filed with the Commission on May 19, 2014) NuVasive, Inc. Deferred Compensation Plan (incorporated by reference to our Current Report on Form 8-K filed with the Commission on August 6, 2015) Letter Agreement dated May 22, 2015 between the Company and Gregory T. Lucier (incorporated by reference to our Current Report on Form 8-K filed with the Commission on May 26, 2015) Letter Agreement dated September 11, 2016 between the Company and Patrick S. Miles (incorporated by reference to our Quarterly Report on Form 10-Q filed with the Commission on October 26, 2016) Consulting and Services Agreement between the Company and Jason Hannon dated July 27, 2017 (incorporated by reference to our Current Report on Form 8-K filed with the SEC on July 27, 2017) Notice of Grant of Share Purchase Matching Performance Restricted Stock Units and Award Agreement granted to Gregory T. Lucier on May 22, 2015 (incorporated by reference to our Current Report on Form 8-K filed with the Commission on May 26, 2015) Notice of Grant of “Inducement” Performance Restricted Stock Units and Award Agreement granted to Gregory T. Lucier on May 22, 2015 (incorporated by reference to our Current Report on Form 8-K filed with the Commission on May 26, 2015) Notice of Grant of Share Purchase Matching Performance Restricted Stock Units and Award Agreement granted to Patrick S. Miles on September 11, 2016 (incorporated by reference to our Quarterly Report on Form 10-Q filed with the Commission on October 26, 2016) Non-Employee Director Cash Compensation Plan (incorporated by reference to our Annual Report on Form 10-K filed with the Commission on March 3, 2014) Lease for Sorrento Summit, dated as of August 28, 2017, by and between HCPI/Sorrento, LLC and the Company (incorporated by reference to our Current Report on Form 8-K filed with the SEC on August 29, 2017) 66 Exhibit Number 10.32 10.33 10.34 10.35 10.36 .37 10.38 10.39 10.40 10.41 10.42 10.43 .44† 21.1 23.1 31.2 Description Amended and Restated Credit Agreement, dated April 25, 2017, by and among the Company, as the Borrower, certain material subsidiaries of the Company, as guarantors, Bank of America, N.A. and each of those additional Lenders party thereto (incorporated by reference to our Current Report on Form 8-K filed with the SEC on April 25, 2017) Amended and Restated Security and Pledge Agreement, dated April 25, 2017, by and among the Company and certain material subsidiaries of the Company in favor of Bank of America, N.A. (incorporated by reference to our Current Report on Form 8-K filed with the SEC on April 25, 2017) Warrant Termination Agreement, dated as of May 24, 2017, between the Company and Bank of America, N.A. (incorporated by reference to our Quarterly Report on Form 10-Q filed with the SEC on July 27, 2017) Warrant Termination Agreement, dated as of May 24, 2017, between the Company and Goldman Sachs & Co. LLC (incorporated by reference to our Quarterly Report on Form 10-Q filed with the SEC on July 27, 2017) Confirmation for base call option transaction, dated March 10, 2016, by and between the Company and Bank of America, N.A. (incorporated by reference to our Current Report on Form 8-K filed with the Commission on March 16, 2016) Confirmation for additional call option transaction, dated March 11, 2016, by and between the Company and Bank of America, N.A. (incorporated by reference to our Current Report on Form 8-K filed with the Commission on March 16, 2016) Confirmation for base call option transaction, dated March 10, 2016, by and between the Company and Goldman, Sachs & Co. (incorporated by reference to our Current Report on Form 8-K filed with the Commission on March 16, 2016) Confirmation for additional call option transaction, dated March 11, 2016, by and between the Company and Goldman, Sachs & Co. (incorporated by reference to our Current Report on Form 8-K filed with the Commission on March 16, 2016) Confirmation for base warrant transaction, dated March 10, 2016, by and between the Company and Bank of America, N.A. (incorporated by reference to our Current Report on Form 8-K filed with the Commission on March 16, 2016) Confirmation for additional warrant transaction, dated March 11, 2016, by and between the Company and Bank of America, N.A. (incorporated by reference to our Current Report on Form 8-K filed with the Commission on March 16, 2016) Confirmation for base warrant transaction, dated March 10, 2016, by and between the Company and Goldman, Sachs & Co. (incorporated by reference to our Current Report on Form 8-K filed with the Commission on March 16, 2016) Confirmation for additional warrant transaction, dated March 11, 2016, by and between the Company and Goldman, Sachs & Co. (incorporated by reference to our Current Report on Form 8-K filed with the Commission on March 16, 2016) Settlement and Patent License Agreement dated July 13, 2016 between the Company and Medtronic plc together with its wholly owned subsidiaries Medtronic Sofamor Danek USA, Inc., Warsaw Orthopedic, Inc., Medtronic Puerto Rico Operations Co., and Medtronic Sofamor Danek Deggendorf GmbH (incorporated by reference to our Quarterly Report on Form 10-Q filed with the Commission on October 26, 2016) List of subsidiaries of the Company Consent of Independent Registered Public Accounting Firm Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended 67 Exhibit Number 32.1* 101.INS 101.SCH 101.CAL 101.LAB Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. section 1350 Description XBRL Instance Document XBRL Taxonomy Extension Schema Document XBRL Taxonomy Calculation Linkbase Document XBRL Taxonomy Label Linkbakk se Document 101.PRE XBRL Taxonomy Presentation Linkbase Document 101.DEF XBRL Taxonomy Definition Linkbase Document † # * 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 compem nsatory plan. These certifications are being furnished solely to accompam ny this annual report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of NuVasive, Inc., whether made before or after the date hereof, regardless of any general incorporation language in such filing. Item 16. Form 10-K Summaryr The Company has elected not to provide a summary. 68 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this t report to be signed on its behalf by the undersigned, thereunto duly authorize d. SIGNATURES Date: February 26, 2018 NUVASIVE, INC. By: /s/ Gregory T. Lucier Gregory T. Lucier Chairman and Chief Executive Officer (Principal Executive Officer) 69 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Gregory T. Lucier and Rajesh J. Asarpota, jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that n-fact, or his or her substitute or substitutes may do or cause to be done by virtue hereof. each of said attorneys-i r Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Gregory T. Lucier Gregory T. Lucier Chairman and Chief Executive Offiff cer (Principal Executive Officer) r February 26, 2018 /s/ Rajesh J. Asarpota Rajesh J. Asarpota /s/ Jereme M. Sylvain Jereme M. Sylvain /s/ Robert F. Friel Robert F. Friel /s/ Vickie L. Capps Vickie L. Capps /s/ Peter C. Farrell, Ph.D, AM Peter C. Farrell, Ph.D, AM /s/ Lesley H. Howe Lesley H. Howe /s/ Leslie V. Norwalk, Esq. Leslie V. Norwalk, Esq. /s/ Daniel J. Wolterman Daniel J. Wolterman /s/ Donald J. Rosenberg Donald J. Rosenberg /s/ Michael D. O'Halleran Michael D. O'Halleran Executive Vice President and Chief Financial Officer ) (Principal Financial Officer ff Vice President, Corporate Controller and Chief Accounting Officer (Principal Accounting Officer) r February 26, 2018 r February 26, 2018 Director February 26, 2018 Director r February 26, 2018 Director r February 26, 2018 Director r February 26, 2018 Director r February 26, 2018 Director r February 26, 2018 Director Februar ry 26, 2018 Director r February 26, 2018 70 NUVASIVE, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2017 and 2016..................................................................................................... Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015 .................................................... Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015................................ Consolidated Statements of Equity for the years ended December 31, 2017, 2016 and 2015 ........................................................... Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015 ................................................... Notes to Consolidated Financial Statements ...................................................................................................................................... 72 73 74 75 76 79 80 71 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of NuVasive, Inc. Opinion on the Financial Statements We have audited the accompam nying consolidated balance sheets of NuVasive, Inc. (the Compam ny) as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Compam ny’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 26, 2018 expressed an unqualified opinion thereon. framework) a nd our report dated February r rr Adoption of ASU No. 2016-16 As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for intra-entity r Than transfers of assets other than inventory in 2017 due to the adoption of ASU No. 2016-16, Intra-EntEE ity Transfers Inventory. of Assets Othett s Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Compam ny’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Compam ny in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence rr regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. t /s/ Ernst & Young LLP We have servedrr San Diego, California r February 26, 2018 as the Company’s auditor since 2000. 72 NUVASIVE, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except par value and shares) Current assets: ASSETS Cash and cash equivalents Restricted cash and investments Accounts receivable, net of allowances of $13,669 and $8,912, respectively Inventory, net Prepaid income taxes Prepaid expenses and other current assets Total current assets Property and equipment, net Intangible assets, net Goodwill Deferred tax assets Restricted cash and investments Other assets Total assets LIABILITIES AND EQUITY Current liabilities: Accounts payable and accrued liabilities Contingent consideration liabilities Accrued payroll and related expenses Litigation liabilities Income tax liabilities Short-term senior convertible notes Total current liabia lities Long-term senior convertible notes Deferred and income tax liabilities, non-currenr Other long-term liabilities Commitments and contingencies Stockholders’ equity: t Preferred stock, $0.001 par value; 5,000,000 shares auta horized, none outstanding Common stock, $0.001 par value; 120,000,000 shares authot and December 31, 2016, 56,164,060 and 55,184,660 issued and outstanding at December 31, 2017 and December 31, 2016, respectively Additional paid-in capia tal Accumulm ated other comprehensive loss Retained earnings (accumulated deficit) Treasury stock at cost; 5,001,886 shares and 4,758,828 shares at December 31, 2017 and December 31, 2016, respectively m rized at Decemberm 31, 2017 Total NuVasive, Inc. stockholders’ equiq ty Non-controlling interests Total equity Total liabilities and equity December 31, 2017 2016 $ $ $ 72,803 3,901 199,040 247,245 17,209 18,792 558,990 215,326 280,774 536,926 6,440 1,494 39,117 1,639,067 75,076 18,952 55,582 8,150 2,908 —— 160,668 582,920 18,786 77,539 153,643 —— 171,595 208,249 31,926 10,030 575,443 181,524 291,143 485,685 5,810 7,405 23,794 1,570,804 77,585 49,742 51,000 —— 2,469 61,701 242,497 564,412 18,607 44,764 —— —— 60 1,363,549 (6,933) 4,500 (565,867) 795,309 3,845 799,154 1,639,067 $ 55 1,010,238 (10,631) (66,859) (237,867) 694,936 5,588 700,524 1,570,804 $ $ $ $ See accompanying notes to Consolidated Financial Statements. 73 NUVASIVE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) Revenue Cost of goods sold (excluding below amortization of intangible assets) $ Gross profit Operating expenses: Sales, marketing and administrative Research and development Amortization of intangible assets Litigation liability loss (gain) Business transition costs Total operating expenses Interest and other expense, net: Interest income Interest expense Loss on repurchases of convertible notes Other (expense) income, net Total interest and other expense, net Income before income taxes Income tax benefit (expense) Consolidated net income Add back net loss attributable to non-controlling interests Net income attributable to NuVasive, Inc. Net income per share attributable to NuVasive, Inc.: Basic Diluted Weighted average shares outstanding: Basic Diluted $ $ $ $ $ 2017 1,029,520 269,008 760,512 Year Ended December 31, 2016 $ $ 962,072 240,093 721,979 2015 811,113 194,479 616,634 539,913 50,425 48,039 4,500 4,287 647,164 440 (38,021) —— (1,542) (39,123) 74,225 7,038 81,263 $ (1,743) $ $ 83,006 533,624 47,999 42,001 (43,310) 18,138 598,452 1,091 (40,520) (19,085) (305) (58,819) 64,708 (29,282) 35,426 $ (1,721) $ $ 37,147 1.63 1.50 $ $ 0.74 0.69 $$ $$ 50,874 55,193 50,077 54,102 457,280 35,833 12,516 (41,826) 13,748 477,551 1,589 (29,078) —— 425 (27,064) 112,019 (46,729) 65,290 (1,001) 66,291 1.36 1.26 48,687 52,424 mpanying notes to Consolidated Financial Statements. 74 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME NUVASIVE, INC. (in thousands) Consolidated net income Other comprehensive income (loss): Unrealized (loss) gain on marketable securities, net of tax Translation adjustments, net of tax Other comprehensive income (loss): Total consolidated comprehensive income Net loss attributabla e to non-controlling interests Comprehensive income attributable to NuVasive, Inc. $ 2017 Year Ended December 31, 2016 2015 $ 81,263 $ 35,426 $ 65,290 (1) 3,699 3,698 84,961 1,743 86,704 $ 330 1,151 1,481 36,907 1,721 38,628 $ (344) (2,098) (2,442) 62,848 1,001 63,849 See accompanying notes to Consolidated Financial Statements. ) 2 1 8 , 4 4 ( 4 6 3 , 5 2 4 4 4 , 0 1 1 9 2 , 6 6 —— —— —— —— ) 2 1 8 , 4 4 ( 4 6 3 , 5 2 4 4 4 , 0 1 1 9 2 , 6 6 ) 1 0 0 , 1 ( ) 2 4 4 , 2 ( —— ) 1 0 0 , 1 ( —— ) 2 4 4 , 2 ( —— —— —— —— —— —— —— —— —— —— ) 1 5 2 , 1 5 1 ( ) 3 8 0 , 3 ( —— —— —— —— —— 1 9 2 , 6 6 —— —— —— —— —— ) 2 4 4 , 2 ( —— —— —— 4 6 3 , 5 2 4 3 4 , 6 0 1 4 4 4 , 0 1 2 0 2 , 2 0 7 $$ 9 0 3 , 7 $ 3 9 8 , 4 9 6 $ ) 8 8 7 , 1 6 1 ( $ ) 6 1 3 , 3 ( ) 7 4 6 , 0 2 1 ( $ ) 2 1 1 , 2 1 ( $ 7 8 3 , 9 8 9 $$ 1 4 6 , 6 1 —— 1 4 6 , 6 1 —— —— 1 4 6 , 6 1 —— —— 5 —— —— —— —— —— 3 5 —— 8 5 3 , 8 4 6 $$ 0 1 3 , 8 $ 8 4 0 , 0 4 6 $ ) 7 3 5 , 0 1 ( $ ) 3 3 2 ( ) 8 3 9 , 6 8 1 ( $ ) 0 7 6 , 9 ( $ 5 4 1 , 7 4 8 $$ 8 4 $ y t i u q E s t s e r e t n I y t i u q E t n u o m A s e r a h S d e t a l u m u c c A ( ) t i c i f e D ) s s o L ( e m o c n I l a t i p a C t n u o m A - n o N l a t o T , e v i s a V u N . c n I d e t a l u m u c c A r e h t O l a n o i t i d d A l a t o T g n i l l o r t n o C ' s r e d l o h k c o t S k c o t S y r u s a e r T s g n i n r a E d e n i a t e R e v i s n e h e r p m o C n i - d i a P k c o t S n o m m o C . C N I , E V I S A V U N Y T I U Q E F O S T N E M E T A T S D E T A D I L O S N O C ) s d n a s u o h t n i ( 1 9 6 , 7 4 s e r a h S 5 2 9 , 4 —— —— —— —— —— 4 1 0 2 , 1 3 r e b m e c e D t a e c n a l a B d n a n o i t p o k c o t s r o t c e r i d d n a e e y o l p m e r e d n u k c o t s n o m m o c f o e c n a u s s I s n a l p e s a h c r u pp e s n e p x e n o i t a s n e p m o c d e s a b - k c o t S d e s a b - k c o t s o t d e t a l e r s t i f ff e n e b x a T s d r a w a n o i t a s n e p m m o c , e v i s a V u N o t e l b a t u b i r t t a e m o c n i t e N . c n I g n i l l o r t n o c - n o n o t e l b a a t u b i r t t a s s o l t e N s s o l e v i s n e h e r p m o c r e h t O s t s e r e t n i $ 6 1 6 , 2 5 5 1 0 2 , 1 3 r e b m e c e D t a e c n a l a B —— s a , 5 1 0 2 , 1 3 r e b m e c e D t a e c n a l a B e v i t c e p s o r t e r d e i f i d o m r o f t n e m t s u j d A d r a d n a t s g n i t n u o c c a f o n o i t p o d a 3 4 8 , 8 1 7 $$ 9 0 3 , 7 $ 4 3 5 , 1 1 7 $ ) 8 8 7 , 1 6 1 ( $ ) 6 1 3 , 3 ( ) 6 0 0 , 4 0 1 ( $ ) 2 1 1 , 2 1 ( $ 7 8 3 , 9 8 9 $$ 3 5 $ 6 1 6 , 2 5 d e t s u jjj d d a . s t n e m e t a t S l a i c n a n i F d e t a d i l o s n o C o t s e t o n g n i y n a p m mm o c c a e e S 6 7 . C N I , E V I S A V U N ) d e u n i t n o C ( – Y T I U Q E F O S T N E M E T A T S D E T A D I L O S N O C ) s d n a s u o h t n i ( - n o N l a t o T , e v i s a V u N . c n I d e t a l u m u c c A r e h t O l a n o i t i d d A l a t o T g n i l l o r t n o C ' s r e d l o h k c o t S k c o t S y r u s a e r T s g n i n r a E d e n i a t e R e v i s n e h e r p m o C n i - d i a P k c o t S n o m m o C y t i u q E s t s e r e t n I y t i u q E t n u o m A s e r a h S d e t a l u m u c c A ( ) t i c i f e D ) s s o L ( e m o c n I l a t i p a C t n u o m A s e r a h S 3 4 8 , 8 1 7 $$ 9 0 3 , 7 $ 4 3 5 , 1 1 7 $ ) 8 8 7 , 1 6 1 ( $ ) 6 1 3 , 3 ( ) 6 0 0 , 4 0 1 ( $ ) 2 1 1 , 2 1 ( $ 7 8 3 , 9 8 9 $$ 3 5 $ 6 1 6 , 2 5 s a , 5 1 0 2 , 1 3 r e b m e c e D t a e c n a l a B d e t s u j d d a ) 7 5 3 , 5 1 ( 1 8 9 , 4 2 4 7 3 , 3 1 1 6 7 , 5 —— 0 5 8 , 4 4 ) 0 5 1 , 1 1 1 ( 4 8 7 , 4 8 ) 4 2 5 , 0 0 1 ( ) 4 1 ( ) 1 3 9 , 1 ( 7 4 1 , 7 3 ) 1 2 7 , 1 ( 1 8 4 , 1 —— —— —— —— —— —— —— —— —— —— —— —— —— ) 1 2 7 , 1 ( ) 7 5 3 , 5 1 ( 1 8 9 , 4 2 4 7 3 , 3 1 1 6 7 , 5 —— 0 5 8 , 4 4 ) 0 5 1 , 1 1 1 ( 4 8 7 , 4 8 ) 4 2 5 , 0 0 1 ( ) 4 1 ( ) 1 3 9 , 1 ( 7 4 1 , 7 3 —— 1 8 4 , 1 —— —— —— —— —— —— —— —— —— —— —— —— —— —— —— —— —— —— —— —— —— —— —— —— —— —— ) 9 7 0 , 6 7 ( ) 3 4 4 , 1 ( —— —— —— —— —— —— —— —— —— —— —— —— —— 7 4 1 , 7 3 —— —— —— —— —— —— —— —— —— —— —— —— —— 1 8 4 , 1 0 2 7 , 0 6 1 8 9 , 4 2 4 7 3 , 3 1 1 6 7 , 5 —— 0 5 8 , 4 4 ) 0 5 1 , 1 1 1 ( 4 8 7 , 4 8 ) 4 2 5 , 0 0 1 ( ) 4 1 ( ) 1 3 9 , 1 ( —— —— —— 4 2 5 , 0 0 7 $$ 8 8 5 , 5 $ 6 3 9 , 4 9 6 $ ) 7 6 8 , 7 3 2 ( $ ) 9 5 7 , 4 ( ) 9 5 8 , 6 6 ( $ ) 1 3 6 , 0 1 ( $ 8 3 2 , 0 1 0 , 1 $$ 2 —— —— —— —— —— —— —— —— —— —— —— —— —— 5 5 . s t n e m e t a t S l a i c n a n i F d e t a d i l o s n o C o t s e t o n g n i y n a p m mm o c c a e e S 7 7 0 8 4 , 2 s n a l p e s a h c r u pp d n a n o i t p o k c o t s r o t c e r i d d n a e e y o l p m e r e d n u k c o t s n o m m o c f o e c n a u s s I —— —— 8 8 1 —— —— —— —— —— —— —— —— —— e t o n e l b i t r e v n o c o t d e t a l e r s t i f e n e b x a T e s n e p x e n o i t a s n e p m o c d e s a b - k c o t S n i k c o t s n o m m o c f o e c n a u s s I e s a h c r u p e r h g u o r h t k c o t s n o m m o c f o e c n a u s s I e l b a a y a p s e t o n f o n o i s r e v n o c t n e m e v e i h c a e g d e h e t o n e l b i t r e v n o C s t n a r r a w f o e l a S e t o n e l b i t r e v n o c f o t n e n o p m o c y t i u q E e c n a u s s i e t o n e l b i t r e v n o c f o t n e n o p m o c y t i u q E e s a h c r u p e r , e v i s a V u N o t e l b a t u b i r t t a e m o c n i t e N o t e l b a t u b i r t t a s t s o c e c n a u s s i t b e D s e e f n o i t a r t s i g e r s e i t i r u c e S e r u t a e f e l b i t r e v n o c . c n I g n i l l o r t n o c - n o n o t e l b a a t u b i r t t a s s o l t e N e m o c n i e v i s n e h e r p m o c r e h t O s t s e r e t n i e n o t s e l i m y t l a y o r h t i w n o i t c e n n o c $ 5 8 1 , 5 5 6 1 0 2 , 1 3 r e b m e c e D t a e c n a l a B ) 7 4 6 , 1 1 ( —— ) 7 4 6 , 1 1 ( —— —— ) 7 4 6 , 1 1 ( ) 7 7 8 , 1 ( 2 6 0 , 2 2 —— —— —— 1 3 1 , 5 6 0 0 , 3 8 —— —— —— —— — —— — —— — —— ) 3 4 7 , 1 ( 8 9 6 , 3 —— ) 3 4 7 , 1 ( ) 7 7 8 , 1 ( 2 6 0 , 2 2 —— —— —— 1 3 1 , 5 6 0 0 , 3 8 —— 8 9 6 , 3 —— —— —— ) 3 5 5 , 0 1 3 ( —— —— —— —— —— —— —— —— —— —— —— —— ) 7 4 4 , 7 1 ( ) 3 4 2 ( —— —— —— —— —— —— —— —— 6 0 0 , 3 8 —— —— —— —— —— —— —— —— —— 8 9 6 , 3 —— 9 6 5 , 5 1 2 6 0 , 2 2 ) 3 ( 1 3 1 , 5 3 5 5 , 0 1 3 ) 1 ( —— —— —— 4 5 1 , 9 9 7 $$ 5 4 8 , 3 $ 9 0 3 , 5 9 7 $ ) 7 6 8 , 5 6 5 ( $ ) 2 0 0 , 5 ( 0 0 5 , 4 $ ) 3 3 9 , 6 ( $ 9 4 5 , 3 6 3 , 1 $$ —— 1 —— 3 —— —— 1 —— —— —— 0 6 . s t n e m e t a t S l a i c n a n i F d e t a d i l o s n o C o t s e t o n g n i y n a p m mm o c c a e e S 8 7 4 2 5 , 0 0 7 $$ 8 8 5 , 5 $ 6 3 9 , 4 9 6 $ ) 7 6 8 , 7 3 2 ( $ ) 9 5 7 , 4 ( ) 9 5 8 , 6 6 ( $ ) 1 3 6 , 0 1 ( $ 8 3 2 , 0 1 0 , 1 $$ 5 5 $ y t i u q E s t s e r e t n I y t i u q E t n u o m A s e r a h S d e t a l u m u c c A ( ) t i c i f e D ) s s o L ( e m o c n I l a t i p a C t n u o m A - n o N l a t o T , e v i s a V u N . c n I d e t a l u m u c c A r e h t O l a n o i t i d d A l a t o T g n i l l o r t n o C ' s r e d l o h k c o t S k c o t S y r u s a e r T s g n i n r a E d e n i a t e R e v i s n e h e r p m o C n i - d i a P k c o t S n o m m o C . C N I , E V I S A V U N ) d e u n i t n o C ( – Y T I U Q E F O S T N E M E T A T S D E T A D I L O S N O C ) s d n a s u o h t n i ( —— —— 3 4 7 5 8 1 , 5 5 s e r a h S 0 9 7 5 6 , 3 ) 1 6 1 , 4 ( 0 5 6 —— —— —— 6 1 0 2 , 1 3 r e b m e c e D t a e c n a l a B e v i t c e p s o r t e r d e i f i d o m r o f t n e m t s u j d A d r a d n a t s g n i t n u o c c a f o n o i t p o d a r e d n u k c o t s n o m m o c f o e c n a u s s I d n a n o i t p o k c o t s r o t c e r i d d n a e e y o l p m e e s n e p x e n o i t a s n e p m o c d e s a b - k c o t S n i k c o t s n o m m o c f o e c n a u s s I s n a l p e s a h c r u pp e g d e h e t o n e l b i t r e v n o c f o t n e m e l t t e S e t o n e l b i t r e v n o c f o t n e n o p m o c y t i u q E t n e m e l t t e s , e v i s a V u N o t e l b a t u b i r t t a e m o c n i t e N . c n I g n i l l o r t n o c - n o n o t e l b a t u b i r t t a s s o l t e N e m o c n i e v i s n e h e r p m o c r e h t O s t s e r e t n i s t n a r r a w f o t n e m e l t t e S t n e m e v e i h c a e n o t s e l i m y t l a y o r h t i w n o i t c e n n o c $ 4 6 1 , 6 5 7 1 0 2 , 1 3 r e b m e c e D t a e c n a l a B NUVASIVE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Operating activities: Consolidated net income Adjustments to reconcile net income to net cash provided by operating activities: Year Ended December 31, 2016 2015 2017 $ 81,263 $ 35,426 $$ 65,290 Depreciation and amortization Deferred income tax (benefit) expense Loss on repurchases of convertible notes Amortization of non-cash interest Stock-based compensation Reserves on current assets Other non-cash adjustments Changes in operating assets and liabilities, net of effects from acquisitions: d ff Accounts receivable Inventory Prepaid expenses and other current assets Contingent consideration liabilities Accounts payable and accrued liabilities Accrued royalties Accrued payroll and related expenses Litigation liability Income taxes Net cash provided by operating activities Investing activities: Acquisition of Ellipse Technologies, net of cash acquired Other acquisitions and investments Purchases of intangible assets Proceeds from sales of property and equipment Purchases of property and equipment Purchases of marketable securities Proceeds from sales of marketable securities Proceeds from sales of restricted investments Purchases of restricted investments Net cash used in investing activities Financing activities: Incremental tax benefits related to stock-based compensation awards Proceeds from the issuance of common stock Payment of contingent consideration Purchase of treasury stock Proceeds from issuance of convertible debt, net of issuance costs Proceeds from sale of warrants Purchase of convertible note hedge Repurchases of convertible notes Proceeds from revolving line of credit Repayments on revolving line of credit Other financing activities Net cash (used in) provided by financing activities Effect of exchange rate changes on cash (Decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental disclosure of non-cash transactions: Issuance of common stock in connection with royalty milestone achievement Supplemental cash flow information: Interest paid Income taxes paid (refunded) 121,176 (12,384) —— 20,538 22,391 5,718 16,561 (29,389) (35,300) (10,671) (11,200) (5,580) 163 4,088 8,150 3,455 178,979 —— (62,370) (2,270) —— (110,221) —— —— —— —— (174,861) —— 9,991 (19,400) (11,860) —— —— —— (63,317) 60,000 (60,000) (2,442) (87,028) 2,070 (80,840) 153,643 72,803 5,131 15,897 1,459 $ $ $ $ 102,713 26,265 19,085 22,721 26,924 11,408 16,928 (33,250) (22,636) (5,665) —— 11,854 471 8,849 (88,450) 23,652 156,295 (380,080) (108,591) (5,918) —— (88,372) (128,956) 407,032 —— —— (304,885) —— 9,492 (422) (24,734) 634,140 44,850 (111,150) (439,519) 50,000 (50,000) (1,834) 110,823 (929) (38,696) 192,339 153,643 5,761 13,249 (20,499) $$ $ $$ $$ 65,915 34,757 —— 17,851 26,203 9,454 17,581 (9,463) (25,984) 1,239 —— 7,742 (46,092) (192) (36,270) (39,304) 88,727 —— (1,357) (32,020) 40 (75,772) (427,945) 411,471 180,694 (62,625) (7,514) 15,185 12,106 (514) (56,929) —— —— —— —— —— —— (192) (30,344) (917) 49,952 142,387 192,339 —— 11,069 36,303 $ $ $ $ pam nying notes to Consolidated Financial Statements. NUVASIVE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Significant Accounting Policies Description of Business offering includes a minimally-disrupti s in 2001. The Company’s principal productd NuVasive, Inc. (the “Company” or “NuVasive”) was incorporated in Delaware on July 21, 1997, and began commercializing its productd ve surgical platform called Maximum Access Surgery, or MAS. The MAS platform combines three categories of solutions that collectively minimize soft tissue disruption the during spine fusion surgery, provide maximum visualization and are designed to enabla e safe and reproducible outcomes forff surgeon and the patient. The platform includes the Company’s proprietary software-driven nerverr detection and avoidance systems and Intraoperative Monitoring (“IOM”) services and support; MaXcess, an integrated split-blade retractor system; and a wide variety of specialized implants and biologics. To assist with surgical procedures the Compam ny offers a technology platform called Integrated Global Alignment (“iGA”); in which products and computer assisted technology under the MAS platform help achieve more precise spinal alignment. The individual components of the MAS platform, and many of the Company’s products, can also be used in open or traditional spine surgery. The Company continues to focus research and development efforff 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. ts to expand its MAS productdd ff r The Company’s primaryrr business model is to loan its MAS systems to surgeons and hospitals that purchase implmm ants, biologics and disposables for use in individual procedures. In addition, for larger customers, the Company’s proprietary nerve monitoring systems, MaXcess and surgical ins ent sets are 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 monitoring systems to and fixation devices such as rods, plates and screws. The Company sells MAS instrument sets, MaXcess and nerve hospitals, however, such sales are immaterial to the Company’s results of operations. trumrr u aa The Company also designs and sells expandable growing rod implant systems that can be non-invasively lengthened following implmm antation with precise, incremental adjustments via an externarr l remote controller using magnetic technology called MAGnetic nt of early-onset and adolescent scoliosis. This technology External Contrott is also the basis for the Company’s PRECICE limb lengthening system, which allows for the correction of long bone limb lengtht discrepancy, as well as enhanced bone healing in patients that have experienced traumaticaa l, or MAGEC, which allows for the minimally invasive treatmet injurn y.rr dd The Company intends to continue development on a wide variety of projects intended to broaden surgical applications for integration of its MAS techniques and additional applications of the MAGEC technology. Such applications greater procedural include tumor, trauma, and deformity, as well as increased fixation options, sagittal alignment products, imaging and navigation. The Company also expects to continue expanding its other producd t and services offeri ngs as it executes on its strategy to offer customers an end-to-end, integrated procedural solution for spine surgery. The Company intends to continue to pursue business and technology acquisition targets and strategic partnerships. ff Basis of Presentation and Principles of Consolidatdd ion tt The accompanying Consolidated Financial Statements include the accounts of the Compam ny and its majority-owne d or sidiaries, collectively referred to as either NuVasive or the Company. The Compam ny translates the financial statements controlled sub of its foreign subsidiaries using end-of-period exchange rates for assets and liabilities and average exchange rates during each reporting period for results of operations. When there is a portion of equity in an acquired subsidiary not attributable, directly or indirectly, to the respective parent entity, the Company records the fair value of the non-controll ing interest at the acquisition date and classifies the amounts attributable to non-controlling interest separately in equity in the Compam ny's Consolidated Financial Statements. nancial interest in its subsidiary are Any subsequent changes in a parent's ownership interest while the parent retains its controlling fi accounted for as equity transactions. All significant intercompany balances and transactions have been eliminated in consolidation. a tt tt The Company has reclassified historically presented product line revenue to conforff m to the current period presentation. The on to “Recently Adopted Accounting Standards” below for Compam ny has also reclassified certain operating expenses into business transition costs. Both reclassifications have no impactm ppreviously reported information regarding historical financial information adjusted results of operations or financial position for a change in accounting policy. . Refer d Use of Estimates To prepare financial statements in conformity with generally accepted accounting principles (“GAAP”) accepted in the United the amounts reported in the financial statements and States, management must make estimates and assumptions that affeff ct accompam nying notes. Actual results could differ from those estimates. 80 RRecent Accounting Pronouncementstt Not Yet Adopted d tt ff ff r of the Effect es while also improvi ive Date, which deferred the effect In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update No. 2014-09, Revenue from Contratt cts with CusCC tomers (“ASU 2014-09”), which introduced Accounting Standards Codification 606 – Revenue from (“ASC 606”), an updated standard on revenue recognition. ASU 2014-09 provides enhancements to the Contracts with Customers ng comparability in the financial statements of quality and consistency of how revenue is reported by companim m companies reporting using International Financial Reporting Standards or GAAP. The main purporr se of the new standard is for compamm nies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprem hensively and improm ve guidance for multiple-element arrangements. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with ive date of the new revenue standard for periods beginning after Customers: Deferral December 15, 2016 to December 15, 2017, with early adoption permitted but not earlier than the original effective date. Accordingly, the updated standard is effeff ctive for the Company in the first quarter of fiscal 2018. In assessing the impam ct, the Company has reviewed all revenue generating activities, identified the performance obligations related to those activities, and determined the appropriate timing and measurement of revenue related to the performance obligations in accordance with the standard. The Company will adopt the new standard beginning January 2018 using the full retrospective method. The primary impact to the Company under ASC 606 will be the timing in which the Company recognizes revenue and related costs for hospital surgical procedures. Under ASC 606 the Company will record revenue and related costs upon submission of a charge sheet order, indicating a surgery has been complm eted with NuVasive products, rathet r than upon receipt of a purchase order or a charge sheet order acknok wledgment froff m the hospital. The change is ultimately a timing impact, with revenue recorded earlier upon the submission of a charge sheet order rather than upon written evidence from the customer. To retrospectively reflect this change in revenue recognition the Company will record an adjustment of $1.3 million to increase January 1, 2016 opening retained earnings and decrease 2016 net income for purchase orders received in 2016 for surgeries that occurred in 2015 that would have been recorded as revenue during the year ended December 31, 2015 under ASC 606. Similarly, an adjustment of $1.4 million will be made to increase 2016 net income and decrease 2017 net income for purchase orders received in 2017 on surgeries that occurred in 2016 that would have been recorded as revenue in 2016 under ASC 606. The impact of the net ASC 606 adjustment to the year ended December 31, 2016 results in an increase to net income of $0.1 million and zero change to both basic and dilutive earnings per share. The impam ct of the ASC 606 adjustment to the year ended December 31, 2017 results in a decrease to revenue and net income of $2.8 million and $1.4 million, respectively, and a decrease to basic and dilutive earnings per share of $0.03 and $0.02, respectively. Additionally, the Company will record reclassification adjustments in the Consolidated Balance Sheets related to variable consideration estimates for returnsr , rebates, credits, discounts, and incentives, as required by ASC 606. These adjud stments are immaterial to the Consolidated Balance Sheets for all years presented. rr In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which requires that (i) all equity investments, other than equity-method investments, in unconsolidated entities generally be measured at fair value through earnings and (ii) when the fair value option has been elected for financial liabilities, changes in fair value due to instrument-specific credit risk will be recognized separately in other comprehensive income. Additionally, ASU 2016-01 changes the disclosure requirements for financial instruments. The new standard will be effective for the Company starting in the first quarter of fiscal 2018. Early adoption is permitted for certain provisions. The Company does not expect the adoption to have any significant impam ct on its Consolidated Financial Statements. In Februaryr 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases, which outlines a comprehensive lease accounting model and supersedes the current lease guidance. The new accounting standard requires lessees to recognize lease liabia lities and corresponding right-of-use assets for all leases with lease terms of greater than twelve months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. The new accounting standard must be adopted using the modified retrospective approach and will be effective for the Company starting in the first quarter of fiscal 2019. Early adoption is permitted. The Company believes the adoption will modify its analyses and disclosures of lease agreements as operating leases are a significant portion of the Company’s total lease commitments. The Company is in the process of determining the impact the adoption will have on its Consolidated Financial Statements as well as whether to early adopt the new guidance. In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instrumentstt – Credit Losses, which changes the accounting for recognizing impairments of financial assets. Under the new guidance, credit losses for certain types of financial instruments will be estimated based on expected losses. The new guidance also modifies the impam irment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. The new guidance will be effective for the Company starting in the first quarter of fiscal 2021. Early adoption is permitted starting in the first quarter of fiscal 2020. The Company believes the adoption will modify the way the Company analyzes financial instruments, but it does not anticipate a material impact on results of operations. The Compam ny is in the process of determining the effects the adoption will have on its Consolidated Financial Statements as well as whethet r to early adopt the new guidance. 81 In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which eliminates the diversity in practice related to the classification of certain cash receipts and payments for debt prepayment or extinguishment costs, the maturing of a zero coupon bond, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, distributions from certain equity method investees and beneficial interests obtained in a financial asset securitization. ASU 2016-15 designates the appropriate cash flow classification, including requirements to allocate certain components of these cash receipts and payments among operating, investing and financing activities. The retrospective transition method, requiring adjustment to all comparative periods presented, is required unless it is impracticable for some of the amendments, in which case those amendments would be made prospectively as of the earliest date practicable. This update is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted, including adoption in an interim period. The Company does not expect the adoption to have any significant impam ct on its Consolidated Financial Statements. ff In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Restricted Cash, which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash pective transition method to equivalents in the statement of cash flows. The amendments in this update will be applied using a retros each period presented. This update is effecti ve for annual periods beginning after December 15, 2017, and interim periods within those fiscal years with early adoption permitted, including adoption in an interim period. The Company does not expect the adoption to have any significant impact on its Consolidated Financial Statements. ff tt ff In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Clari n of a Businessee , which clarifies and provides a more robust framework to use in determining when a set of assets and activities is a business. The amendments in this update should be applied prospectively on or after the effective date. This update is effective for annual periods beginning after December 15, 2017, and interim periods within those periods. Early adoption is permitted for acquisition or deconsolidation transactions occurring before the issuance date or effective date and only when the transactions have not been reported in issued or made available for issuance financial statements. The Company does not expect the adoption to have any significant impam ct on its Consolidated Financial Statements. g the Definitio fyini l ff In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles – Goodwill and Other, which eliminates the requirement to calculate the implim ed fair value of goodwill to measure a goodwill impam irment charge. Instead, entities will record an impam irment charge based on the excess of a reporting unit’s carrying amount over its fair value. The standard has tiered effective dates, starting in 2020 for calendar-year public business entities that meet the definition of an SEC filer. Early adoption is permitted for annual and interim goodwill impam irment testing dates after January 1, 2017. The Company is in the process of determining the effects the adoption will have on its Consolidated Financial Statements as well as whethet r to early adopt the new guidance. ff In February 2017, the FASB issued Accounting Standards Update No. 2017-05, Other I ncII ome – Gains and Losses from the Derecognition of Nonfinancial Assets , which clarifies the scope of asset derecognition and adds guidance for partial sales and nonfinancial assets. An entity is required to apply the amendments in this update at the same time that it applies the amendments in ASU 2014-09. For public entities, this update is effective for annual periods beginning after December 15, 2017, and interim periods within those periods. Publu ic entities may apply the guidance earlier but only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company will adopt the new standard beginning Januaryr 2018. The Company does not expect the adoption to have any significant impam ct on its Consolidated Financial Statements. tt In May 2017, the FASB issued Accounting Standards Update No. 2017-09, Compensation – Stock Compensation, which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as a modification. Entities will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. This update is effective for annual periods beginning after December 15, 2017, and interim periods within those periods. The Company does not expect the adoption to have any significant impam ct on its Consolidated Financial Statements. ff In July 2017, the FASB issued Accounting Standards Update No. 2017-11, Earningsgg Per Share, Distinguishing Liabilities fro m Equity,yy Derivatives and Hedging, which changes the accounting treatment and the earnings per share calculation for certain ents with down round features. The amendments in this update should be applied using a cumulative-effect adjustment as of instrumr the beginning of the fiscal year of adoption or retrospective adjustment to each period presented. This update is effeff ctive for annual periods beginning afteff r Decemberm 15, 2018, and interim periods within those periods. The Company is in the process of determining the impam ct the adoption will have on its Consolidated Financial Statements as well as whether to early adopt the new guidance. ii In August 2017, the FASB issued Accounting Standards Update No. 2017-12, Derivatives and Hedging, which is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting and increase transparency as to the scope and results of hedging programs. The amendments in this update will be applied using a cumulmm ative-effect adjustment as of the beginning of the fiscal year of adoption. This update is effective for annual periods beginning after December 15, 2018, and interim periods withit n those periods. The Company is in the process of determining the impact the adoption will have on its Consolidated Financial Statements as well as whether to early adopt the new guidance. 82 dd Recently Adopted Acc ounting Standardsr m m ents to Employee In March 2016, the FASB issued Accounting Standards Update 2016-09, Improvem Share-Based Paymentt AAccounting (“ASU 2016-09”), which simplm ifies the accounting for employee share-based payments. The new standard requires the immediate recognition of all excess tax benefits and deficiencies in the income statement, and requires classification of excess tax benefits as an operating activity as opposed to a financing activity in the statements of cash flows. The provisions of the new standard are effective for the Company beginning January 1, 2017, with early adoption permitted. The Company elected to early adopt ASU 2016-09 in the second quarter 2016, which requires any adjustments to be recorded as of the beginning of fiscal 2016. As a result, the Compam ny recorded a modified retrospective adjustmd ent of $16.6 million to deferred tax assets and accumulated deficit as of January 1, 2016, and a retrospective adjustment to the previously reported first quarter 2016 provision for income taxes of approximately $5.5 million for the recognition of excess tax benefits in the provision for income taxes rather than additional paid- in capital. This resulted in a decrease in net loss per share of $0.11 for the three months ended March 31, 2016. The Company elected to apply the change in classification for excess tax benefits in the statement of cash flows on a prospective basis, and elected to continue estimating stock-based compensation award forfeitures in determining the amount of compensm ation cost to be recognized each period. m In October 2016, the FASB issued Accounting Standards Update No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”), which aims to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. This amendment requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this update should be applied on a modified retrospective ate is basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. This updu effective for annual periods beginning after December 15, 2017, and interim periods within those fisff cal years with early adoption permitted, including adoption in an interim period. The Company elected to early adopt ASU 2016-16 in the first quarter 2017, which require s any adjustments to be recorded as of the beginning of fiscal 2017. As a result, the Company recorded a modified retrospective q adjustment of $11.6 million to deferred tax assets and accumulated deficit as of January 1, 2017. The early adoption resulted in a decrease of $3.9 million in income tax expense that would have amortized out of prepaid income taxes during the year ended December 31, 2017. The decrease in income tax expense resulted in an increase in basic and diluted earnings per share of $0.08 and $0.07, respectively, for the year ended December 31, 2017. ff In January 2017, the FASB issued Accounting Standards Update No. 2017-03, Accounting Changes and Error Corrections and Investmett ntstt – Equity Method and Joint Ventures (“ASU 2017-03”), which will require registrants to disclose the effect that recently issued accounting standards will have on their financial statements when adopted in a future period. This update is effective immediately. The Company is in the process of determining the impact o f recently issued accounting standards on its Consolidated mm Financial Statements. The Company will revise its disclosures for the standards not yet adopted as required by ASU 2017-03 as the Compam ny progresses through its impact assessments. Revenue Recognition gg In accordance with the Securities and Exchange Commission’s guidance, the Compam ny recognizes revenue when all four of the s and/or servirr ces has following criteria are met: (i) persuasive evidence that an arrangement exists; (ii) delivery of the productd occurred; (iii) the selling price is fixed or determinable; and (iv) collectability is reasonably assured. Specifically, revenue from the sale of implants, biologics and disposabla es is generally recognized upon receipt of a purchase order from the hospital or acknowledgment from the hospital to third-party customers who immediately accept title. Revenue from IOM services is recognized in the period the service is performed for the amount of payment expected to be received. Revenue from the sale of instrument sets and nerve monitoring systems is recognized upon receipt of a purchase order and the subsequent shipment to customers who immediately accept title. indicating product use or implant ation, or upon shipment m Accounts Receivable and Related Valuation Accounts Accounts receivable in the accompam nying Consolidated Balance Sheets are presented net of allowances for doubtful accounts. The Company performs credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers. The Company makes judgments as to its ability to collect outstanding receivables and 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 not specifically reviewed. In determining the provision for invoices not specifically reviewed, the Compam ny analyzes historical collection experience and current economic trends. In addition, the Company establishes a reserve for estimated sales returtt ns and to revenue. This reserve is maintained to account for the future return and price adjusd rr price adjustments that is recorded as a reduction tments of products sold in the current period. 83 Concentration of Credit Risk and Significant Customers i Financial instrumrr ents, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents, short-term and long-term marketable securities and accounts receivable. The Compam ny limits its exposure to credit loss by placing its cash and investments with high credit quality finff ancial institutions. Additionally, the Company has established guidelines regarding diversification of its investments and their maturities, which are designed to maintain principal and maximize liquidity. The Company has a diverse customer base and no single customer represented greater than ten percent of sales or accounts receivable for any of the periods presented. Fair Value of Financial Instruments The Company’s financial instruments consist principally of cash and cash equivalents, marketabla e securities, restricted investments, derivatives, contingent consideration liabilities, accounts receivable, accounts payable, accrued expenses, and Senior Convertible Notes. The Compamm ny measures certain assets and liabilities in accordance with authoritative guidance which requires fair value measurements to be classified and disclosed in one of the following three categories: Level 1: Quoted prices (unadjusted) in active d markets that are accessible at the measurement date for assets or liabilities. Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data. Level 3: Unobservable inputs are used when little or no market data is available. Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in thet ability to observe valuation inputs may result in a reclassification of levels for certain assets or liabilities within the fair value hierarchy. The Company did not have any transfers of assets and liabilities between the levels of the fair value measurement hierarchy during the years presented. Cash and Cash Equivalents The Company considers all highly liquid investments that are readily convertible into cash and have an original maturity of three months or less at the time of purchase to be cash equival q ents. Inventory Net inventory primarily consists of $232.4 million finished goods, which includes specialized implants and disposables, and is stated at the lower of cost or market determined by utilizing a standard cost method which approximates the weighted average cost. The Company’s inventory balance also includes $5.0 million and $9.8 million raw materials and work in progress, respectively. The Company reviews the components of its inventory on a periodic basis for excess and obsolescence and adjud sts inventory to its net realizable value as necessary. dd Goodwill and Intangible Assetstt The Company’s goodwill represents the excess of the cost over the fair value of net assets acquired from its business combinations. The determination of the value of goodwill and intangible assets arising from business combinations and asset acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair value of the net tangible and intangible assets acquired, including capitalized in-process research a nd development (IPR&D). Intangible assets livedd acquired in a business combination that are used for in-process research and development activities are considered indefinite until the completion or abandonment of the associated research and development efforts. Upon reaching the end of the relevant research and development project, the Company will amortize the acquired IPR&D over its estimated useful life or expense the acquired in-process research and development should the research and development project be unsuccessful with no future alternative use. capitalized ff Goodwill and IPR&D are not amortized; however, they are assessed for impam irment using fair value measurement techniques on nt such a review. The goodwill or IPR&D are considered to be an annual basis or more frequently if facts and circumstance warraaa impaired if the Compam ny determines that the carrying value of the reporting unit or IPR&D exceeds its respective fair value. 84 The ailability of discrete financial information. The Compam ny performs its goodwill impairment analysis at the reporting unit level, which aligns witht the Compam ny’s reporting structure and av Company performs its annual impairment analysis by either comparing a reporting unit’s estimated fair value to its carrying amount or doing a qualitative assessment of a reporting unit’s fair value from the last quantitative assessment to determine if there is potential impairment. The Company may do a qualitative assessment when the results of the previous quantitative test indicated the reporting unit’s estimated fair value was significantly in excess of the carrying value of its net assets and it does not believe there have been significant changes in the reporting unit’s operations that would significantly decrease its estimated fair value or significantly increase its net assets. If a quantitative assessment is performed the evaluation includes management estimates of cash flow projections based on internal futurtt e projectio ans nd/or use of a market approach by looking at market values of comparable companies. Key assumptm ions for these projections include revenue growth, futuret gross and operating margin growth, and its weighted cost of capital and terminal growth rates. The revenue and margin growtht is bbased on increased sales of new and existing products as the Company maintains investments in research and development. Additional assumed value creators may include increased efficiencies from capital spending. The resulting cash flows are discounted using a weighted average cost of capital. Operating mechanisms and requirements to ensure that growth and efficiency assumptions will ultimately be realized are also considered in the evaluation, including timing and probability of regulatory approvals for Company pproducts to be commercialized. The Company’s market capia talization is also considered as a part of its analysis. ff The Company’s annual evaluation for impamm irment of goodwill consists of two reporting units; the Progentix reporting unit and the remainder of the Company (the “primary reporting unit”). In accordance with the Company’s policy, the most recent annual evaluation for impairment using the discounted cash flow valuation methodology based on discounted cash flows as of October 1, 2017 was completed, and it was determined that no impamm irment existed and that no reporting unit of the Company was at risk fof impairment when assessing the unit’s fair value compared to its carrying value. In addition, no indicators of impam irments were noted through December 31, 2017 and consequently, no impaim rment charge has been recorded during the year. ff u Intangible assets with a finite life, suc h as acquired technology, customer relationships, manufacturing know-how , licensed agreements and certain trade names and trademarks, are amortized on a straight-line basis over their estimated technology, supply useful life, ranging from 2 to 17 years. In determining the useful lives of intangible assets, the Company considers the expected use of the assets and the effects of obsolescence, demand, competition, anticipated technological advances, changes in surgical techniques, market influences and other economic factors. For technology based intangible assets, the Company considers the expected life cycles of products which incorporate the corresponding technology. Trademarks and trade names that are related to products are assigned lives consistent with the period in which the products bearing each brand are expected to be sold. tt See Note 2 to the Consolidated Financial Statements included in this Annual Report for further discussion on goodwill and intangible assets. Property and Equipment Property and equipment are carried at cost less accumulm ated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, ranging from 2 to 20 years. The Company depreciates leasehold improvem ents over their estimated useful lives or the term of the applicabla e lease, whichever is shorter. Leased property meeting certain capiaa tal lease criteria is capitalized, and the net present value of the related lease payments is recorded as a liability. Amortization of assets under capital leases is recorded using the straight-line method over the shorter of the estimated useful lives or the lease terms. Maintenance and repairs are expensed as incurred. m The Company reviews property, plant and equipment for impamm irment whenever events or changes in circumstances indicate that discounted the carrying value of an asset may not be recoverable. An impairment loss would be recognized when estimated future un cash flows relating to the asset are less than its carrying amount. An impaim rment loss is measured as the amount by which the carrying amount of an asset exceeds its fair value. t Income Taxes The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected futff ure tax con sequences of temporary differences between the carrying amounts and the tax bases of assets and liabia lities. Tax law and rate changes are reflected in income in the period such changes are enacted. The Company includes interest and penalties related to income taxes, including unrecognized tax benefitsff , within income tax expense. t 85 On December 22, 2017, President Trump signed U.S tax reform legislation, commonly referred to as the Tax Cuts and Jobs Act (the “Act”), which became effective January 1, 2018. The Act significantly changes the fundamentals of U.S. corporate income taxation by, among many other things, reducing the U.S. federal corporate income tax rate to 21%, converting to a territorial tax system, and creating various income inclusion and expense limitation provisions. The Company has performed an in-depth review of the Act, and based on information available at December 31, 2017, has recorded certain provisional amounts related to the revaluation of its deferred taxes and the realization of certain tax credit carryforwards. Due to insufficient guidance on certain aspects of the Act, such as officer’s compensation, as well as uncertainty around the GAAP treatment associated with many other parts of the Act, such as the implm ementation of certain international provisions, the Compam ny cannot be certain that all deferred tax assets and liabia lities have been established for the future effects of the legislation. Therefore, the final accounting for these provisions is subject to change as further information becomes availablea and further analysis is complete. Additionally, given the uncertainty and complexity of these new international tax regimes, the Company is continuing to evaluate how these provisions will be accounted for under U.S. generally accepted accounting principles; therefore, the Compam ny has not yet adopted an accounting policy forff treating the effects of these provisions as either a component of income tax expense in the period the tax arises, or through adjusting its deferred tax assets and liabilities to account for the estimated future impam ct of the special international tax regimes. The Company’s income tax returns are based on calculations and assumptions that are subject to examination by the Internal Revenue Service and other tax authorities. In addition, the calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations. The Company recognizes liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. While the Company believes it has appropriate support , the Company regularly assesses the potential outcomes of examinations by tax authorities in determining the adequacy of its provision for income taxes. The Company continually assesses the likelihood and amount of potential revisions and adjud sts the income tax provision, income taxes payable and def red taxes in the period in which the facts that give rise to a revision become known. for the positions taken on its tax returns erff uu a tt Significant judgment is requiq red in determining the Company’s provision for income taxes, deferred tax assets and liabilities and the valuation allowance recorded against net deferred tax assets. Deferred tax assets and liabilities are determined using the enacted tax rates in effect for the years in which those tax assets are expected to be realized. A valuation allowance is established when it is more likely than not the future realization of all or some of the deferred tax assets will not be achieved. The evaluation of the need for a valuation allowance is performed on a jurisdiction-by-jurisdiction basis, and includes a review of all available positive and negative evidence. Factors reviewed include projections of pre-tax book income for the foreseeable future, determination of cumulative pre-tax book income after permanent differences, earnings history, and reliability of forecasting. Based on its review, the Company concluded that it was more likely than not that they would be able to realize the benefit of its domestic and foreign deferred tax assets, with the primary exception of California, in the future. This conclusion was based on historical and projected operating performance, as well as the Company’s expectation that its operations will generate sufficient taxable income in futurtt e periods to realize the tax benefitsff associated with the deferred tax assets within the statutory carryover periods. But, due to the inclusion of foreign losses, lower state apportionment, and the generation of research credits in Californirr a, the Company concluded that it is not more likely than not that it will be able to utilize its Californir a deferred tax assets. Therefore, the Compam ny maintained a full valuation allowance on its California deferred tax assets as of December 31, 2017 and 2016. The Company will continue to assess the need for a valuation allowance on its deferred tax assets by evaluating both positive and negative evidence that may exist. Any adjustment to the net deferred tax asset valuation allowance would be recorded in the statement of operations for the period that the adjustment is determined to be required. See Note 8 to the Consolidated Financial Statements included in this Annual Report for furthet r discussion on income taxes. Loss Contingencies An estimated loss contingency is accrued and disclosed in the Compam ny’s financial statements if it is probabla e or disclosed if it is reasonably possible that a liability has been incurred and the amount of the loss can be reasonably estimated. Based on the Compam ny’s assessment, it has adequately accrued an amount for contingent liabilities currently in existence. The Company does not accrue amounts for liabilities that it does not believe are probable and only discloses those matters it considers material to its overall financial position. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded. The Company is involved in a number of legal actions arising in the normal course of business. The outcomes of these legal actions are not within the Company’s complmm ete control and may not be known for prolonged periods of time. In some actions, the claimants seek damages as well as other relief,ff including injunctions barring the sale of products that are the subject of the lawsuit, that could require significant expenditurt es or result in lost revenues. Litigation is inherently unpredictable, and unfavorabla e resolutions could occur. As a result, assessing contingencies is highly subjective and requires judgment about futurt e events. The amount of ultimate loss may exceed the Compam ny’s current accruals, and it is possible that its cash flows or results of operations could be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies. 86 See Note 10 to the Consolidated Financial Statements included in this Annual Report for further discussion on legal proceedings. Comprehensive Income Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income includes net of tax, unrealized gains or losses on the Company’s marketable securities and foreign currency translation adjustments. The cumulative translation adjustments included in accumulm ated other comprmm ehensive loss were $6.9 million, $10.6 million, and $11.6 million at December 31, 2017, 2016, and 2015, respectively. Research and Development Research and development costs are expensed as incurred. To the extent the Company purchases research and development assets with a future alternative use the Company will capia talize and amortize the assets over its useful life.ff Product Shipment Coststt Product shipment costs, included in sales, marketing and administrative expense in the accompanying Consolidated Statements of Operations, were $24.0 million, $24.5 million, and $21.6 million for the years ended December 31, 2017, 2016, and 2015, respectively. The majoa rity of the Company’s shipping costs are related to the loaning of instrument sets, which are not typically sold as part of the Compamm ny’s core sales offering. Amounts billed to customers for shipping and handling of products are reflected in revenues and are not significff ant for any period presented. Business Transition Costs The Company incurs certain costs related to acquisition, integration and business transition activities, which include severance, relocation, consulting, leasehold exit costs, third-party merger and acquisition costs, contingent consideration fair value adjustments and other costs directly associated with such activities. ff by $(1.3) million of fair value adjustme During the year ended December 31, 2017, the Company incurred $4.3 million of such costs, which consisted primarily of nts on contingent consideration liabilities acquisition and integration activities, offset associated witht the Company’s 2017 and 2016 acquisitions. During the year ended Decembem r 31, 2016, the Company incurred $18.1 million of business transition costs, which consisted primarily of acquisition and integration activities, and $7.3 million of fair value d ments on contingent consideration liabilities associated with the Company’s 2016 acquiq sitions. During the year ended December adjust 31, 2015, the Company incurred $13. 7 million of business transition costs, which included $3.0 million in restructuring and impairment charges associated with the exit of its New Jersey location and termination of the respective lease, and $3.4 million charge the resignation of the Company’s former Chief Executive Officer and Chairman of the Board. The $3.4 million charge associated witht tures of previously recognized equity-based includes certain severance and compem nsation-related charges, net of certain forfeiff compemm nsation. d rr Stock-based Compensation Stock-based compensation expense for equity-classified awards, principally related to restricted stock units (“RSUs”) and performance restricted stock units (“PRSUs”), is measured at the grant date based on the estimated fair value of the award and is recognized over the employee’s requisite service period on an accelerated basis. The fair value of equity instruments that are expected to vest is recognized and amortized over the requisite service period. The Company has granted awards with up to five year graded or monetaryrr ting terms (in each case, with service through the date of vesting being required). No exercise price or other cliff ves payment is required for receipt of the shares issued in settlement of the respective award; instead, consideration is furnished in the form of the participant’s service to the Company. ff t The fair value of RSUs including PRSUs with pre-defined performance criteria is based on the stock price on the date of grant whereas the expense for PRSU with pre-definff ed performance criteria is adjusted with the probability of achievement of such performance criteria at each period end. The fair value of the PRSUs that are earned ba sed on the achievement of pre-defined market conditions forff total shareholder return is estimated on the date of grant using a Monte Carlo valuation model. The key assumptions in applying this model are an expected volatility and a risk-free interest rate. r Stock-based compensation expense is adjuste d from the grant date to exclude expense for awards that are expected to be forfeited. The forfeiture estimate is adjusted as necessary through the vesting date so that full compensation cost is recognized only for awards that vest. The Compam ny assesses the reasonableness of the estimated forfeiturt e rate at least annually, with any change to be made on a cumulm ative basis in the period the estimated forfeiture rates change. The Company considered its historical experience of tures on awards by each homogenous group of shareowners as the basis to arrive at its estimated annual pre-vesting pre-vesting forfeiff forfeiture rates. d 87 The Company estimates the fair value of stock options issued under its equity incentive plans and shares issued to shareowners under its employee stock purchase plan (“ESPP”) using a Black-Scholes option-pricing model on the date of grant. The Black-Scholes option-pricing model incorporates various and highly sensitive assumptions including expected volatility, expected term and risk-freeff interest rates. The expected volatility is based on the historical volatility of the Company’s common stock over the most recent period commensurate with the estimated expected term of the Company’s stock options and ESPP which is derived from historical experience. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield in effect at the time of grant. The Company has never declared or paid dividends and has no plans to do so in the foreseeable future. ff ff See Note 7 to the Consolidated Financial Statements included in this Annual Report for further discussion on stockholder equiq ty and stock-based compensation. Net Income Per Share The Company computes basic net income per share using the weighted-average number of common shares outstanding during the period. Diluted net income assumes the conversion, exercise or issuance of all potential common stock equiq valents, unless the effect of inclusion would be anti-dilutive. For purposes of this calculation, common stock equivalents include the Company’s stock options, unvested RSUs, including those with performance and market conditions, warrants, and the shares to be issued upon the conversion of the Senior Convertible Notes. The contingently issuable shares are included in basic net income per share as of the date a that all necessary conditions have been satisfied and are included in the denominator for dilutive calculation for the entire period if such shares would be issuable as of the end of the reporting period assuming the end of the reporting period was the end of the contingency period. The following tabla e sets forth the computation of basic and diluted earnings per share: (in thousands, except per share data) Numerator: Net income available to NuVasive, Inc. Denominator for basic and diluted net income per share: Weighted average common shares outstanding for basic Dilutive potential common stock outstanding: Stock options and ESPP RSUs Warrarr nts Senior Convertible Notes Weighted average common shares outstanding for diluted Basic net income per share attributable to NuVasive, Inc. Diluted net income per share attributable to NuVasive, Inc. Year Ended December 31, 2016 2015 2017 $ 83,006 $ 37,147 $ 66,291 50,874 50,077 48,687 141 1,083 1,494 1,601 314 1,273 1,297 1,141 1,089 1,157 177 1,314 55,193 54,102 52,424 $ $ 1.63 1.50 $ $ 0.74 0.69 $$ $$ 1.36 1.26 following weighted outstanding common stock equivalents were not included in the calculation of net income per diluted share because their effects were anti-dilutive: (in thousands) Stock options, ESPP, and RSUs Warrarr nts Senior Convertible Notes Total Year Ended December 31, 2016 2015 2017 147 10,865 2,716 13,728 912 13,253 7,550 21,715 40 4,777 —— 4,817 88 2. Balance Sheet Details Property and Equipment,t net Property and equipment, net, consisted of the following: (in thousands, except years) Instrument sets Machinery and equipment Computer equipment and software Leasehold improvements Furniture and fixtures Building and improvem Land ents m Less: accumulated depreciation and amortization Useful Life 4 5 to 7 3 to 7 2 to 15 3 to 7 10 to 20 — December 31, 2017 2016 $ $ 287,435 49,142 102,729 23,532 8,311 20,146 1,277 492,572 (277,246) 215,326 $ $ 249,592 37,837 71,258 21,278 7,625 16,558 541 404,689 (223,165) 181,524 Property and equipment mainly consisted of instrument sets, which are loaned to surgeu ons and hospitals that purchase implmm ants, biologics and disposables for use in individual surgical procedures. Depreciation expense was $69.5 million, $57.1 million, and $49.8 million for the years ended December 31, 2017, 2016 and 2015, respectively. At Decembem r 31, 2017 and 2016, gross assets recorded under capital leases of $1.8 million and $1.5 million, respectively, are included in machinery and equipment. Depreciation of the assets under capital leases is included in depreciation expense. The Compam ny depreciates leasehold improvements over their estimated useful lives or the term of the applicable lease, whichever is shorter. Capitalized internal-use software costs include only those direct costs associated with the actuat l development or acquisition of computer software for internal use, including costs associated with the design, coding, installation, and testing of the system. At December 31, 2017 and 2016, the Compam ny had $29.9 million and $24.2 million in unamortized capitalized internal-use softwff are costs, respectively. Amortization expense related to capia talized internal-use software costs was $10.1 million, $7.4 million and $7.3 million for the years ended Decemberm 31, 2017, 2016 and 2015, respectively. Goodwill and Intangible Assetstt Goodwill and intangible assets as of December 31, 2017 consisted of the following: (in thousands, except years) Intangible Assets Subject to Amortization: Developed technology Manufacturing know-how and trade secrets Trade name and trademarks Customer relationships Total intangible assets subject to amortization Intangible Assets Not Subject to Amortization: Goodwill Total goodwill and intangible assets, net Weighted- Average Amortization Period (in years) Gross Amount Accumulated Amortization Intangible Assets, net 8 13 9 9 9 $ $ 271,748 30,653 25,200 122,249 449,850 $ $ (98,693) $ (15,542) (10,559) (44,282) (169,076) $ 173,055 15,111 14,641 77,967 280,774 536,926 817,700 $ 89 Goodwill and intangible assets as of December 31, 2016 consisted of the following: (in thousands, except years) Intangible Assets Subject to Amortization: Developed technology Manufacturing know-how and trade secrets Trade name and trademarks Customer relationships Total intangible assets subject to amortization Intangible Assets Not Subject to Amortization: Goodwill Total goodwill and intangible assets, net Weighted- Average Amortization Period (in years) Gross Amount Accumulated Amortization Intangible Assets, net 8 13 9 9 9 $ $ 247,148 20,572 25,200 117,018 409,938 $ (66,833) $ (13,604) (7,478) (30,880) $ (118,795) $ 180,315 6,968 17,722 86,138 291,143 485,685 776,828 $ Total expense related to the amortization of intangible assets which is recorded in both cost of goods sold and operating expenses in the Consolidated Statements of Operations depending on the functional naturt e of the intangible, was $51.7 million, $45.6 million and $16.1 million for the years ended December 31, 2017, 2016 and 2015, respectively. During the year ended December 31, 2017, in connection with acquisitions, including changes in purchase price allocations, and other investments, the Company recorded additions to definite-lived intangig ble assets and gog odwill of $39.8 million and $51.2 million, respectively. Goodwill recorded in business combinations is primarily attributable to synergies expected to arise after the acquiq sition. See Note 4 to the Consolidated Financial Statements included in this Annual Report for further discussion on assets acquired in business combinations and asset acquisitions. The changes to goodwill are comprised of the following: (in thousands) December 31, 2016 Gross goodwill Accumulated impam irment loss Changes to gross goodwill Increases recorded in business combim nations Changes in purchase price allocation Changes resulting from foreign currency fluctuations December 31, 2017 Gross goodwill Accumulated impam irment loss $ $ 493,985 (8,300) 485,685 50,789 386 66 51,241 545,226 (8,300) 536,926 Total future amortization expense related to intangible assets subject to amortization at December 31, 2017 is set forth in the table below: (in thousands) 2018 2019 2020 2021 2022 Thereafter through 2031 Total future amortization expense 90 $ $ 50,612 49,123 48,618 46,566 39,155 46,700 280,774 tt Accounts Paya ble and Accrued Liabilities Accounts payabla e and accrued liabilities consisted of the following: (in thousands) Accrued expenses Other taxes payaa blea Distributor commissions payable Royalties payable Accounts payable Others Accounts payable and accrued liabilities 3. Fair Value Measurements December 31, 2017 2016 42,340 $ 12,692 7,649 5,040 4,366 2,989 75,076 $ 42,355 7,789 8,836 4,877 9,121 4,607 77,585 $ $ ff The fair values of the Company’s assets and liabilities, including cash equivalents, marketable securities, restricted investments, derivatives, and contingent considerations are measured at fair value on a recurring basis. As of December 31, 2017 and December 31, 2016, the Company held investments in securities classified as cash equivalents. During the periods presented, the Company did not hold any investments that were in a significant unrealized loss position and no impam irment charges were recorded. Realized gains and losses and interest income related to marketable securities were immaterial during all periods presented. Cash equivalents are determined under the fair value categories as follows: (in thousands) December 31, 2017: q Cash Equival ents: Money market funds Total cash equivalents December 31, 2016: q Cash Equival ents: Money market funds Corporate notes Commercial paper Securities of government-sponsored entities Total cash equivalents Quoted Price in Active Market (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total $ $ $ $ 27,000 27,000 72,866 4,551 21,471 5,995 104,883 $ $ $ $ 27,000 27,000 72,866 —— —— —— 72,866 $ $ $ $ —— $ —— $ —— $ 4,551 21,471 5,995 32,017 $ —— —— —— —— —— —— —— The carrying amounts of certain financial instruments such as cash and cash equivalents , accounts receivable, prepaid expenses, other current assets, accounts payable, accrued expenses, and other current liabilities as of December 31, 2017 and Decembem r 31, 2016 approximate their related fair values due to the short-term maturities of these instruments. q The fair value of certain finff ancial instruments was measured and classified within Level 1 of the fair value hierarchy based non quoted prices. Certain financial instruments classified within Level 2 of the fair value hierarchy include the types of instrumr ents that trade in markets that are not considered to be active, but are valued based on quoted market prices, broker or dealer quotations, or alternar tive pricing sources with reasonabla e levels of price transparency. Foreigni Currency and Derivative Financial Instruments To manageg foreign currency exposure risks, the Co g y p intercompany receivables and payables denominated in a currency other than the entity’s functional curren on a quoted market price (Level 1). mppanyy uses derivatives for activities in entities that have short-termm based The fair value is cy. The Company translates the financial statements of its foreign subsiu diaries using end-of-period exchange rates for assets and liabilities and average exchange rates during each reporting period for results of operations. 91 Some of the Company’s reporting entities conduct a portion of their business in currencies other than the entity’s functional currency. These transactions give rise to receivables and payabla es that are denominated in currencies other than the entity’s functional currency. The value of these receivables and payables is subject to changes in currency exchange rates from the point at which the transactions are originated until the settlement in cash. Both realized and unrealized gains and losses in the value of these receivables and payables are included in the determination of net income. Net currency exchange (losses) gains, which includes gains and losses from derivative instruments, were $(0.9) million, $(0.3) million and $0.3 million for the years ended Decembem r 31, 2017, 2016 and 2015, respectively, and are included in other (expense) income in the Consolidated Statements of Operations. A s of December 31, 2017, 2016, and 2015 a notional principal amount of $14.3 million, $15.1 million, and $8.5 million respectively, was outstanding to hedge currency risk relative to foreign receivables and payables. Derivative instrument net (losses) gains on the Company’s forward exchange contracts we re $(1.9) million, $0.7 million, and $1.7 million for the years ended December 31, 2017, 2016 and 2015, respectively, and are included in other (expense) income in the Consolidated Statements of Operations. The fair value of the forward contract exchange derivative instrument liability was $(0.1) million as of December 31, 2017 and $(0.2) million as of December 31, 2016. The derivative instruments are recorded in other current assets or other current liabilities in the Consolidated Balance Sheets commensurate with the nature of the instrument at period end. tt The Company’s currency exposures vary, but are primarily concentrated in the pound sterling, the euro, the Australian dollar, the Singapore dollar, and the yen. The Company will continuously monitor the costs and the impamm ct of foreign currency risks upon the financial results as part of the Company’s risk management program. The Company does not use derivative financial instruments forr speculation or trading purposes or for activities other than risk management. The Company does not require and is not required to ppledge collateral for these financial instruments and does not carry any master netting arrangements to mitigate the credit risk. Fair Value of Senior Convertible Notes , On July 1, 2017 the Company’s Senior Convertible Notes due 2017 were settled via combination settlement, which involvedd satisfying the principal amount outstanding with cash and any note conversion value over the principal amount in shares of the Company’s common stock. The fair value, based on a quoted market price (Level 1), of the Company’s outstanding Senior Convertible Notes due 2017 at Decemberm 31, 2016 was approximately $102.7 million. The fair value, based on a quoted market price (Level 1), of the Compam ny’s outstanding Senior Convertible Notes due 2021 at December 31, 2017 and December 31, 2016 was approximately $779.5 million and $827.6 million, respectively. See Note 5 to the Consolidated Financial Statements included in this Annual Report for furff ther discussion on the carrying value of the notes and the settlement of the Senior Convertible Notes due 2017. ContCC ingent Consideration Liabilities The fair value of contingent consideration liabilities assumed in business combinations is recorded as part of the purchase price consideration of the acquisition, and is determined using a discounted cash floff w model or probability simulmm ation model. The significant inputs of such models are not observable in the market, such as certain financial metric growth rates, volatility rates, projections associated with the applicable milestone, the interest rate, and the related probabia lities and payment structurett in the contingent consideration arrangement. Fair value adjustments to contingent consideration liabilities are recorded through operating expenses in the Consolidated Statement of Operations. Contingent consideration arrangements assumed by an asset purchase will be measured and accrued when such contingency is resolved. Contingent consideration liabilities were $67.9 million and $67.5 million as of Decembem r 31, 2017 and December 31, 2016, respectively, and were recorded in the Consolidated Balance Sheet commensurate with the respective payment terms. The following table sets forth the changes in the estimated fair value of the Company’s liabilities measured on a recurring basis using significant unobservable inputs (Level 3): (in thousands) Fair value measurement at January 1 Contingent consideration liability recorded upon acquisition Change in fair value measurement Changes resulting from foreign currency fluctuations Contingent consideration paid or settled Fair value measurement at December 31 2017 2016 $ $ 67,501 32,559 (1,295) (224) (30,600) 67,941 $ $ —— 61,242 7,265 126 (1,132) 67,501 the year ended December 31, 2017, the Company recorded additional contingent consideration liabia lities of $32.6 million in connection with certain acquisitions. Such acquisitions include the acquisition in Septembem r 2017 of a medical device company that developed interbody implants for spinal fusion using patented porous polyetheretherketone technology, which will be incorporated into the Company’s portfolio of interbody implm ants. The Company recorded a preliminary purchase accounting fair value estimate of $31.4 million for contingent consideration liabilities associated with this acquisition. 92 During the year ended December 31, 2016, the Company received a purchase order from an organization established by certain former stockholders of Ellipse Technologies for the purchase of $4.8 million of products with their stated purpose to be donated for use in spinal deformity procedures for children in underprivileged communities. As the order complied with the Company’s standards and procedures, and the purchaser fully paid for the order in advance of shipment, the Company processed and delivered the order and recognized the revenue associated with the order during the year ended December 31, 2016 in accordance with ASC 605, Revenue Recognition. In April 2017, thhe Company paid the $30.0 million outstanding milestone obligation associated with the Ellipse Technologies acquisition. In accordance with the guidance outlined in ASU 2016- million of the $30.0 million represented tthe initial ppurchase price allocation and is presented as a cash outflow for financing activities on the Consolidated Statement of Cash Flows, and the remaining $11.2 million related to increased fair value adjustments is presented as a cash outflow in operati e Note 3 to the Consolidated Financial Statements included in this Annual Report for further discussion on contingent consideration liabilities assumed in business combinations. ng activities. $18.8 15, Se Non-financial assets and liabilities measured on a nonrecurring basis Certain non-finff ancial assets and liabilities are measured at fair value, usually with Level 3 inputs including the discounted cash flow method or cost method, on a nonrecurrirr ng basis in accordance with authoritative guidance. These include items such as nonfinancial assets and liabilities initially measured at fair value in a business combination and non-financial long-lived assets measured at fair value for an impam irment assessment. In general, non-financial assets, including goodwill, intangible assets and property and equipment, are measured at fair value when there is an indication of impairment and are record ed at fair value only when any impam irment is recognized. The carrying values of the Company’s capital lease obligations approximated their estimated fair value as of December 31, 2017 and 2016. The Company has obligations und er certain consultancy arrangements based on achievement of specified milestones. There was no accrual as of December 31, 2017 or 2016, related to these obligations. m m 4. Business Combinations The Company recognizes the assets acquired, liabilities assumed, and any non-controlling interest at fair value at the date of acquisition. Certain acquisitions contained contingent consideration arrangements that required the Companym to assess the acquisition date fair value of the contingent consideration liabilities, which was recorded as part of the purchase price allocation of the acquisition, with subsequent fair value adjustments to the contingent consideration recorded in the Consolidated Statements of Operations. See Note 3 to the Consolidated Financial Statements included in this Annual Report for further discussion on contingent consideration liabia lities. ii Acquisitio n of Ellipse Technologies, Inc. On February 11, 2016, the Company acquired all of the stock interest in Ellipse Technologies, Inc., which now operates as a wholly owned subsidiary of the Company under the renamed legal entity NuVasive Specialized Orthopedics, Inc. (“NSO”), for a purchase price of $380.0 million (including holdbad cks for retained employment of Ellipse Technologies leadership that is to be expensed and is not considered part of the final purchase price) and a milestone payment of $30.0 million payable in cash in 2017 related to the achievement of a specific revenue target. A cash payment of $382.2 million, which included additional amounts for cash on hand and traditional working capital adjud stments, was transferred at the closing. Subsequent to the closing payment, the Company received $0.6 million from the escrow for traditional working capital adjust d ments finalized after the closing. ff NSO designs and sells expandable growing rod implant syst ems that can be non-invasively lengthened following implm antation with precise, incremental adjustments via an external remote controller using magnetic technology called MAGnetic External Control, or MAGEC. The technology platform provides the basis of NSO’s core product offeri ngs, including MAGEC-EOS, which allows for ff the minimally invasive treatmet nt of early-onset and adolescent scoliosis, as well as the PRECICE limb lengthening system, which allows for the correction of long bone limbm length discrepancy, as well as enhanced bone healing in patients that have experienced traumatic injurn y.rr m 93 The Company applied certain assumptions and findings in the valuation outcome for the assets acquired and liabilities assumed, for which the allocation of the purchase price is based on the fair values, as follows: (in thousands) Cash paid for purchase Accounts receivable Inventory Other current assets Property, plant and equipment, net Definite-lived intangible assets: Developed technology Customer relationships Trade names Goodwill Deferred tax assets Other assets Contingent consideration liability Deferred tax liabilities Other liabilities assumed $ 381,579 7,148 22,451 1,855 6,725 133,900 33,200 16,200 241,905 18,471 1,868 18,800 75,160 8,184 381,579 $ Goodwill recognized in this transaction is not deductible for income tax purposes. Goodwill larggely coy nsists of expep cted revenue d to elimination of redundant facilities, functions syny erggies resultingg from the combination of prp oduct portfo blm ed and staffing; use of the Company’s existing commercial infrastructure to expand sales of NSO’s product workforce. The intangible assets acquired will be amortized on a straight-line basis over weighted-average usefulff lives of seven years, nine years and seven years for technology-based intangible assets, customer-related intangible assets, and trade name intangible assets, respectively. The estimated fair values of the intangible assets acquired were primarily determined using the income le market data. approach based on significant inputs that were not observabrr lios, cost syny ergies relate and the assem s; g p In connection with the acquisition, a contingent liability of $18.8 million was recorded as of the acquisition date for the potential revenue-based milestone payment. The liability was fair valued using the Monte Carlo simulation based on specific revenue achievement scenarios and discount factors. Changes in fair value of the liabia lity over the measurement period were recorded in the results of operations in the Consolidated Statements of Operations. The revenue-based milestone was achieved as of December 31, 2016, and the Company adjusted the milestone liability to $30.0 million, which represented the full amount of the milestone obligation under the merger agreement. The Company paid the milestone in April 2017, and no additional consideration is owed related to the acquisition. Acquisition costs of $4.0 million were recognized in business transition costs as incurred. The Company’s results of operations included the operating results of NSO, since the date of acquisition, of $57.5 million of revenue for the year ended Decembem r 31, 2016 and net income of $3.9 million for the year ended December 31, 2016 in the Consolidated Statement of Operations. ff m ion adjud stments would have been included in the year ended Decemberm 31, 2015 by naturet The following table presents the results for the year ended December 31, 2017 and the unaudited pro forma results for the year bim nes the results of operations of NuVasive and Ellipse ended December 31, 2016. The unaudited pro forma financial information com 1, 2015 and therefore many of the non-recurring business Technologies as though the compamm nies had been combim ned as of January of such adjud stments instead of the combinat periods presented. The pro forma information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at such times. The year ended Decembem r 31, 2016 includes adjustments directly attributable to the business combination including a $(14.7) million adjustment for the increased fair value of acquired inventory, an adjustment of $4.0 million for acquisition related expenses, immaterial adjustments to revenue for deferred revenue adjustments and related tax effects to pre-tax income. The pre-acquisition accounting policies of Ellipse Technologies were materially similar to the Company, with the differences adjusted to reflect the accounting policies of the Company in the unaudited pro forma results presented. aa 94 (in thousands, except per share amounts) Revenues Net income attributable to NuVasive, Inc. Net income per share attributable to NuVasive, Inc.: Basic Diluted Other Acquisitions Years Ended December 31, 2017 1,029,520 83,006 1.63 1.50 $ $ $ 2016 (unaudited) 968,179 38,045 0.76 0.70 $ $ $ On July 1, 2016, the Company acquired all of the stock interest in BNN Holdings Corp., for a purchase price of $98.0 million. BNN Holdings Corp., through its subsidiaries and affiliates, owns and operates Biotronic NeuroNetwork, a patient-centric healthcare organization that provides intraoperative neurophysiological monitoring services to surgeons and healthcare facilities across the U.S. A cash payment of $94.0 million was transferred at the closing, which represented the total purchase consideration, net of amounts retained for certain acquired provisional obligations, additional amounts for cash on hand and traditional working capia tal adjustments. Subsequent to the closing payment, the Company paid an additional $0.4 million from the escrow for traditional workir ng capital adjustments finalized after the closing. The acquisition was not considered material to the overall Consolidated Financial Statements. The Company combined m newly created division NuVasive Clinical Services. the service offeri ff ngs of Biotronic NeuroNetwork with its Impulse Monitoring, Inc. business under the The Company has completed other acquisitions that were not considered material to the overall Consolidated Financial Statements during the years ended December 31, 2017 and 2016. These acquisitions have been included in the Consolidated Financial Statements from the respective dates of acquisition. The Company does not believe that collectively the acquisitions made during the periods presented, excluding NSO, are material to the overall financial statements. For certain acquisitions completed during the year ended December 31, 2017 the Company is still in the process of finalizing the purchase price allocation given the timing of the acquisitions and the size and scope of the assets and liabilities subject to valuation. While the Company does not expect material changes in the valuation outcome, certain assumptions and findings that were in place at the date of acquisition could result in changes in the purchase price allocation. Variable Interest Entities ll Progentix Orthobiology, B.V. In 2009, the Company purchased of forty percent (40%) of the capital stock of Progentix Orthobiology B.V. (“Progentix”), a compamm ny organized under the laws of the Netherlands, from existing shareholders pursuant to a Preferred Stock Purchase Agreement for $10.0 million in cash (the “Initial Investment”). As of December 31, 2017, the Company has loaned Progentix cumulatively $5.3 million at an interest at a rate of 6% per year. The Company is not obligated to provide additional funding. Concurrently, with the Initial Investment, the Company and Progentix entered into a Distrit bution Agreement (as amended, the “Distribution Agreement”) for a term of ten years, whereby Progentix appointed the Company as its exclusive distributor for certain Progentix producd ts. In accordance with authoritative guidance, the Company has determined that Progentix is a variable interest entity (“VIE”), as it does not have the ability to finance its activities without additional subordinated financial support and its equity investors will not absorb their proportionate share of expected losses and will be limited in the receipt of the potential residual returtt ns of Progentix. Total assets and liabia lities of Progentix included in the accompanying Consolidated Balance Sheets are as follows: (in thousands) Total current assets Identifiable intangible assets, net Goodwill Accounts payable & accrued expenses Deferred tax liabilities, net Non-controlling interests $ December 31, 2017 2016 $ 670 8,752 12,654 562 331 3,845 334 10,900 12,654 551 880 5,588 95 The following is a reconciliation of equity attributable to the non-controlling interests: (in thousands) Non-controlling interests at beginning of period Less: Net (loss) attributable to the non-controlling interests Non-controlling interests at end of period Year Ended December 31, 2017 2016 $ $ 5,588 (1,743) 3,845 $ $ 7,309 (1,721) 5,588 In January 2018, the Company completed the acquisition of the remaining 60% of the capital stock of Progentix, which subsequent to the acquisition will operate as a wholly-owned subsidiary of the Company. See Note 12 to the Consolidated Financial Statements included in this Annual Report for further discussion. NuVasive Clinical Services and Physician Practices The Company’s NuVasive Clinical Services division, which provides IOM services to surgeons and healthcare facilities across the U.S., maintains contractual relationships with several physician practices (“PCs”). In accordance with authoritative guidance, the Company has determined that the PCs are VIEs and therefore, the accompanying Consolidated Financial Statements include the accounts of the PCs from the date of acquisition. During the periods presented, the results of the PCs were immaterial to the Company’s financials. The creditors of the PCs have claims only on the assets of the PCs, which are not material, and the assets of the PCs are not available to the Company. 5. Indebtedness The carrying values of the Company’s Senior Convertible Notes are as follows: (in thousands) 2.75% Senior Convertible Notes due 2017: Principal amount Unamortized debt discount Unamortized debt issuance costs 2.25% Senior Convertible Notes due 2021: Principal amount Unamortized debt discount Unamortized debt issuance costs Total Senior Convertible Notes Less: Current portion Long-term Senior Convertible Notes 2.25% Senior Convertible Notes due 2021 December 31, 2017 December 31, 2016 $ $ $ —— $ —— —— —— 650,000 (56,839) (10,241) 582,920 582,920 —— 582,920 $ $ 63,317 (1,417) (199) 61,701 650,000 (72,713) (12,875) 564,412 626,113 (61,701) 564,412 In March 2016, the Company issued $650.0 million principal amount of unsecured Senior Convertible Notes with a stated interest rate of 2.25% and a maturity date of March 15, 2021 (the "2021 Notes"). The net proceeds from the offering, after deducting initial purchasers' discounts and costs directly related to the offering, were appro ximately $634.1 million. The 2021 Notes may be settled in cash, stock, or a combinam tion thereof, solely at the Company's discretion. It is the Company's current intent and policy to settle all conversions through combination settlement, which involves satisfying the principal amount outstanding with cash and any note conversion value over the principal amount in shares of the Company's common stock. The initial conversion rate of the 2021 Notes is 16.7158 shares per $1,000 principal amount, which is equivalent to a conversion price of approximately $59.82 per share, subject to adjud stments. The Company uses the treasury share method for assumed conversion of the 2021 Notes to compute the share. The Compamm ny also entered into transactions for weighted average shares of common stock outstanding for diluted earnings per convertible note hedge (the "2021 Hedge") and warrants (the "2021 Warrants") concurrently with the issuance of the 2021 Notes. a ff The cash conversion feature of the 2021 Notes required bifurcation from the notes and was initially accounted for as an equity instrument classified to stockholders’ equity, which resulted in recognizing $84.8 million in additional paid-in-capia tal during 2016. 96 The interest expense recognized on the 2021 Notes during the year ended December 31, 2017 includes $14.6 million, $15.9 million and $2.6 million for the contractual coupon interest, the accretion of the debt discount and the amortization of the debt respectively. The interest expense recognized on the 2021 Notes during the year ended December 31, issuance costs, 2016 includes $11.5 million, $12.1 million and $1.9 million for the contractual coupon interest, the accretion of the debt discount and the amortization of the debt issuance costs, respectively. The effective interest rate on the 2021 Notes is 5.8%, which includes the interest on the notes, amortization of the debt discount and debt issuance costs. Interest on the 2021 Notes began accruing upon issuance and is payable semi-annually. m Prior to Septembem r 15, 2020, holders may convert their 2021 Notes only under the following conditions: (a) during any calendar quarter beginning June 30, 2016, if the reported sale price of the Company's common stock for at least 20 days out of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than 130% of the conversion price (b) during the five business day period in which the trading price of the 2021 Notes falls below 98% of on each applicable trading day;aa the product of (i) the last reported sale price of the Company's common stock and (ii) the conversion rate on that date; and (c) upon the occurrence of specified corporate events, as defined in the 2021 Notes. From Septembem r 15, 2020 and until the close of business on the second scheduled trading day immediately preceding March 15, 2021, holders may convert their 2021 Notes at any time (regardless of the foregoing circumstances). The Company may not redeem the 2021 Notes prior to March 20, 2019. The Company may redeem the 2021 Notes, at its option, in whole or in part on or after March 20, 2019 until the close of business on the business day immediately preceding September 15, 2020 if the last reported sale price of the Com pam ny’s common stock has been at least 130% fof the conversion price then in effect for at least 20 trading days during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Compam ny delivers written notice of a redemption. The redemptm ion price will be equal to 100% of the principal amount of such 2021 Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemptm ion da . No princip al payments are due on the 2021 Notes prior to maturity. Other than restrictions relating to certain fundamental changes and consolidations, mergers or asset sales and customary anti-dilution adjustments, the 2021 Notes do not contain any financial covenants and do not restrict the Company from paying dividends or issuing or repurchasing any of its other securities. The Company is unaware of any current events or market conditions that would allow holders to convert the 2021 Notes. m ff te aa 2021 Hedge In connection with the offering of the 2021 Notes, the Company entered into the hedge transaction with the initial purchasers of rties") entitling the Company to purchase up to 10,865,270 shares of the the 2021 Notes and/or their affiliates (the "2021 Counterparr Company's common stock at an initial stock price of $59.82 per share, each of which is subject to adjud stment. The cost of the 2021 Hedge was $111.2 million and accounted for as an equity instrument by recognizing $111.2 million in additional paid-in- capital during 2016. The 2021 Hedge will expire on March 15, 2021. The 2021 Hedge is expected to reduce the potential equity dilution upon conversion of the 2021 Notes if the daily volume-weighted average price per share of the Compam ny's common stock exceeds the strike price of the 2021 Hedge. An assumed exercise of the 2021 Hedge by the Company is considered anti-dilutive since the effect of the inclusion would always be anti-dilutive with respect to the calculation of diluted earnings per share. 2021 Warrantstt r The Company sold warrants to the 2021 Counterpart ’s common stock. The 2021 Warrants will expire on various dates from June 2021 through December 2021 and may be settled in cash or net shares. It is the Company's current intent and policy to settle all conversions in shares of the Company’s common stock. The Company received $44.9 million in cash proceeds from the sale of the 2021 Warrants, which was recorded in additional paid-in-capital. The the Company's earnings per share to the extent that the price of the Company's common 2021 Warrants could have a dilutive effect on stock during a given measurement period exceeds the strike price of the 2021 Warrants, which is $80.00 per share. The Compam ny uses the treasury share method for assumed conversion of its 2021 Warrarr nts to compute the weighted average common shares outstanding for diluted earnings per share. ies to acquire up to 10,865,270 shares of the Companym ff 2.75% Senior Convertible Notes due 2017 ff In June 2011, the Company issued $402.5 million principal amount of the 2017 Notes with a stated interest rate of 2.75% and a maturity date of July 1, 2017. The net proceeds from the offering, after deducting initial purchasers’ discounts and costs directly related to the offeri ng, were approximately $359.2 million. The 2017 Notes provided for settlement in cash, stock, or a combination thereof, solely at the Company’s discretion. The initial conversion rate of the 2017 Notes was 23.7344 shares per $1,000 principal amount, which is equival nts. The Company uses the the weighted average shares of common stock treasury share method for assumed conversion of the 2017 Notes to computemm outstanding for diluted earnings per share. The Company also entered into transactions for convertible note hedge (thet “2017 Hedge”) and warrants (the “2017 Warrarr nts”) concurrently with the issuance of the 2017 Notes. ent to a conversion price of approximately $42.13 per share, subject to adjud stmet q u 97 The interest expense recognized on the 2017 Notes during the year ended December 31, 2017 includes $0.9 million, $1.4 million and $0.2 million for the contractual coupon interest, the accretion of the debt discount and the amortization of the debt issuance costs, respectively. The interest expense recognized on the 2017 Notes during the year ended December 31, 2016 includes $4.9 million, $7.5 million and $1.0 million for the contractual coupou n interest, the accretion of the debt discount and the amortization of the debt issuance costs, respectively. The effective interest rate on the 2017 Notes was 8.0%, which includes the interest on the notes, amortization of the debt discount and debt issuance costs. Interest on the 2017 Notes began accruing upon issuance and was payable semi-annually. Prior to January 1, 2017, holders could convert their 2017 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 out of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than 130% of the conversion price on each applicable trading day; (b) during the fivff e business day period in which 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) the conversion 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 close of business on the second scheduled trading day immediately preceding July 1, 2017, holders could convert their 2017 Notes at any time (regardless of the foregoing circumstances). The Compam ny could not redeem the 2017 Notes prior to maturity. Other than restrictions relating to certain fundamental changes and consolidations, mergers or asset sales and customary anti-dilution adjud stments, the 2017 Notes did not contain any financial covenants and did not restrict the Company froff m payina g dividends or issuing or repurchasing any of its other securities. A minimal amount of holders of the 2017 Notes elected to convert their notes prior to maturity. The Company settled such conversions through combination settlement, which involved satisfying the principal amount outstanding with cash and any note conversion value over the principal amount in shares of the Company’s common stock. 2017 Hedge ff In connection with the offeri ng of the 2017 Notes, the Company entered into the 2017 Hedge with the initial purchasers of the 2017 Notes and/or their affiliates (the “2017 Counterparties”) entitling the Company to 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. The cost of the 2017 Hedge was $80.1 million and accounted for as derivative assets upon issuance of the 2017 Notes. Upon obtaining stockholder appa roval for the additional authorized shares of the Company’s common stock, the derivative asset was reclassified to stockholders’ equity, which resulted in recognizing cumulatively $37.1 million in other expense for the change in fair value measurement and $43.0 million in additional paid-in-capital during 2011. The 2017 Hedge had an expiration date of July 1, 2017. The 2017 Hedge reduced the equity dilution upon conversion of the 2017 Notes. Prior to its maturity, an assumed exercise of the 2017 Hedge by the Compam ny was considered anti-dilutive since the effect of inclusion would always be anti-dilutive with respect to the calculation of diluted earnings per share. 2017 Warrantstt r 2017 Counterpart The Company sold warrants to thet ies to acquire up to 477,654 shares of the Company’s Series A Participating Preferred Stock at an initial strike price of $988.51 per share, subject to adjustment. Each share of Series A Participating Preferff rerr d Stock was convertible into 20 shares of the Company’s common stock, or up to 9,553,080 common shares in total. The 2017 Warrants were scheduled to expire on various dates from Septembem r 2017 through January 2018 with settlement in cash or net shares. All of the 2017 Warrants were settled on a net share basis as of July 2017 as described below. The Compamm ny received $47.9 million in cash proceeds from the sale of the 2017 Warrants, which was recorded in additional paid-in-capital. Prior to settlement, the 2017 Warrants on the Company’s earnings per share to the extent that the price of the Compam ny’s common stock could have had a dilutive effect during a given measurement period exceeded the strike price of the 2017 Warrants. The Compam ny used the treasury share method for assumed conversion of its 2017 Warrants to compute the weighted average common shares outstanding for diluted earnings per share. aa ff Repurchases of Senior Convertible Notes due 2017 tt In March 2016, the Company used approximately $345.2 million of the net proceeds from the 2021 Notes offering to repurchase approximately $276.8 million principal amount outstanding of the Senior Convertible Notes due 2017 (the “2017 Notes”), the associated conversion feature of the repurchased notes (which is recorded in additional paid-in capital), and the accrued interest on the repurchased notes. In the fourtht quarter of 2016, the Company used approximately $96.3 million of cash on hand to repurchase an additional $62.3 million in principal amount outstanding of 2017 Notes, the associated conversion feature of the repurchased notes (which is recorded in additional paid-in capital), and the accrued interest on the repurchased notes. The repurchases of 2017 Notes in 2016 resulted in a cumulative loss of approximately $19.1 million recorded in other expense on the accompanying Consolidated Statements of Operations for the year ended December 31, 2016. The loss on the repurchases included the related debt issuance costs that were previously capitalized in connection with the issuance of the 2017 Notes. The remaining balances resulting from the aggregate repurchase of a portion of the 2017 Notes were $63.3 million, $1.4 million, and $0.2 million of principal outstanding, debt discount, and debt issuance costs, respectively, immediately following the repurchase. 98 Settlement of 2017 Notes, 2017 Hedgedd and 2017 Warrants On July 1, 2017, the 2017 Notes reached maturity and a majority of the holders elected to convert their outstanding notes. The Compam ny paid $64.0 million in cash for the settlement of the outstanding principal amount including accrued interest and issued 650,070 shares for settlement of the conversion value over the principal amount of the notes. On the same date, the Compam ny exercised the 2017 Hedge and received 4,160,789 shares of its own common stock on a net share basis from the 2017 Counterparties. On May 24, 2017, the Company entered into warrant termination agreements with the 2017 Counterparr rties to settle the outstanding 2017 Warrants by accelerating the expiration period to varying settlement dates from June 2017 through July 2017, which terminated the existing 2017 Warrants settlement period. The settlement was delivered in shares of Company common stock, based on a fixed formula using the daily volume weighted average price as the settlement measure. All of the 2017 Warrants were settled on a net share basis, resulting in the issuance of 3,656,944 shares of the Company’s common stock to the 2017 Counterparties. Revolving Senior Credit Facility r In April 2017, the Company entered into an Amended and Restated Credit Agreement (the “2017 Credit Agreement”) for a revolving senior credit facility (the “2017 Facility”), which replaced the previous Credit Agreement the Company had entered into in 16. The 2017 Credit Agreement provides for secured revolving loans, multicurrency loan options and letters of credit in February 20 an aggregate amount of up to $500.0 million. The 2017 Credit Agreement also contains an expansion feature, which allows the Company to increase the aggregate principal amount of the 2017 Facility provided the Company remains in compliance with the underlying financial covenants, including but not limited to, compliance with the consolidated interest coverage ratio and certain consolidated leverage ratios. The 2017 Facility matures in April 2022 (subject to an earlier springing maturity date), and includes a sublimit of $100.0 million for multicurrency borrowings, a sublimit of $50.0 million for the issuance of standby letters of credit, and a sublimit of $5.0 million for swingline loans. All assets of the Company and its material domestic subsidiaries are pledged as collateral under the 2017 Facility (subject to customary exceptions) pursuant to the term set forth in the Amended and Restated Security dand Pledge Agreement (the “2017 Security Agreement”) executed in favor of the administrative agent by the Compam ny. Each of the Company’s material domestic subsidiaries guarantees the 2017 Facility. In connection with the 2017 Facility, the Company incurr ded issuance costs which will be amortized over the term of the mber 31, 2017 the Compam ny did not carry any outstanding revolving loans under the 2017 Facility. 2017 Facility. At Dece Borrowings under the 2017 Facility are used by the Company to provide financing for working capital and other general corporate purposes, including potential mergers and acquisitions. Borrowings under the 2017 Facility bear interest, at the Company’s option, at a rate equal to an applicable margin plus: (a) the applicable Eurocurrency Rate (as defined in the 2017 Credit Agreement), or (b) a base rate determined by reference to the highest of (1) the federal funds effective rate plus 0.50%, (2) the Bank of America prime rate, and (3) LIBOR for an interest period of one month plus 1.00%. The margin for the 2017 Facility ranges, based on the Company’s consolidated leverage ratio, from 0.00% to 1.00% in the case of base rate loans and from 1.00% to 2.00% in the case of Eurocurrency Rate loans. The 2017 Facility includes an unused line fee ranging, based on the Company’s consolidated leverage ratio, from 0.20% to 0.35% per annum on the revolving commitment. The 2017 Credit Agreement contains affirmative, negative, permitted acquisition and financial covenants, and events of default customary for financings of this type. The financial covenants require the Company to maintain ratios of consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) in relation to consolidated interest expense and consolidated debt, respectively, as defined in the 2017 Credit Agreement. The 2017 Facility grants the lenders preferred first priority liens and security interests in capita al stock, intercompany debt and all of the present and future property and assets of the Compam ny and each guarantor. The Company is currently in compliance with the 2017 Credit Agreement covenants. 6. Commitments Leases ff The Company leases office facilities and equip ment under various operating and capital lease agreements. The initial terms of these leases range from 2 year to 17 years and generally provide for periodic rent increases and renewal options. Certain leases require the Company to pay taxes, insurance and maintenance. In connection witht certain operating leases, the Compam ny has security deposits recorded and maintained as restricted cash totaling $5.4 million as of December 31, 20 17. m Rent expense is recognized on a straight-line basis over the term of the lease. Accordingly, rent expense recognized in excess of rent paid is reflected as a liability in the accompanym ing Consolidated Balance Sheets. Rent expense, including costs directly associated with the facility leases, was approximately $12.6 million, $10.6 million, and $9.3 million for the years ended Decembem r 31, 2017, 2016, and 2015, respectively. 99 On August 28, 2017, the Companym entered into a 17 year operating lease agreement with HCPI/Sorrento, LLC (the “Lease”) for the purpose of expanding and restructuring its corporate headquarters located in San Diego, California , from approximately 145,000 square feet to approximately 252,000 square feet. The Lease and its terms supersede the existing Lease Agreement between the Company and HCPI/Sorrento, LLC with respect to the currently occupied office buildings comprm ising the Company’s corporate headquarters. The renovation and expansion of the corporate headquarters is expected to be completed in three phases over a period of two years. Rental payments escalate annually at 3% for the term of the Lease upon the anniversary of completion of each phase of expansion and rent expense is recognized on a straight-line basis over the term of the Lease. ff The Company’s future minimum annual lease payments under capital and operating leases, including payments for costs directly associated with the facility leases, for years ending after Dece ff mber 31, 2017 are as follows: (in thousands) 2018 2019 2020 2021 2022 Thereafter Total minimumm lease payments Less amount representing interest Present value of obligations under capital leases Less current portion Long-term capital lease obligations LLicensing and Purchasing Agreements Capital p Leases ingg p Operat Leases 12,550 12,840 12,431 10,847 10,511 127,103 186,282 $ $ $ $ $ 640 498 84 39 15 —— 1,276 (111) 1,165 (581) 584 The Comppany is contingently obligated to make payments of up to $13.4 million in cash if specifieff d future events occur ror conditions are met as provided in certain consulting, purchase and/or product develop agreements. Not all of the respective agreements p yment timelines The Company has also entered into certain consulting arrangements to pay up to approximately specifyff milestone pa $8.5 million in the aggregate in the event that specified revenue-based milestones are achieved prior to 2024. Any such payment will be made in a combination of cash and the Company’s common shares as provided in the agreements. Any payments in satisfaction of theses contingent obligations are considered a cost of goods sold and are recognized as and if milestones are achieved. These agreements expire on various dates through 2024. g g . Executive Severance Plans The Compam ny has employment contracts with key executives and maintains severance plans that provide for the payment of if terminated for reasons other than cause, as defined in those agreements and plans. Certain agreements severance and other benefitsff call for payments that are based on historical compensation, accordingly, the amount of the contractual commitment will change over time commensurate with the executive’s applicable earnings. At Decembem r 31, 2017, future commitments for such key executives were approximately $29.0 million. In certain circumstances, the agreements call for the acceleration of equity vesting. Those figures are not reflected in the above information. 7. Stockholders’ Equity Common Stock There were 120,000,000 shares of common stock authot rized at December 31, 20 m 17 and 2016. Preferred Stock There are 5,000,000 shares of preferff red stock authorized and none issued or outstanding at December 31, 2017 and 2016. ration to designate 477,654 shares of the Company’s authori On June 28, 2011, in connection with the issuance of the 2017 Warrants, the Compam ny amended its Restated Certificate of zed preferred stock, par value $0.001 per share, as Series A Incorporr Stock will automatically convert into shares of Participating Preferred Stock (the “Series A Preferred Stock”). The Series A Preferred lders) are entitled to receive the Company’s common stock. The holders of Series A Preferred Stock (collectively, the Preferff r red Ho nce and in priority to any dividends when and if declared by the Board of Directors. The preferre dividends on the Company’s common stock. Shares of Series A Preferred Stock are co nvertible into 20 shares of common stock, subject to certain anti-dilution adjustments. Preferred Holders vote on an 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 have priority and are made in preference to any payments to the holders d dividends are payable in prefereff of common stock. a ff ff ff t 100 Stock-based Compensation m In March 2014, the Compensation Committee (the "Compensat ion Committee") of the Board of Directors of the Company adopted the 2014 Equity Incentive Plan of NuVasive, Inc. (the "2014 EIP"), replacing the 2004 Amended and Restated Equity Incentive Plan (thet “2004 EIP”). No further awards may be granted under the 2004 EIP; however, that plan continues to govern all awards previously issued under it (of which awards remain outstanding). The 2014 EIP provides the Company with the ability to grant various typeyy s of equity awards to its workforce (including, without limitation, restricted stock units (“RSUs”), restricted stock awards, performance awards, and deferred stock awards). The 2014 EIP also provides for the issuance of performance RSUs (“PRSUs”) to be granted subjeu ct to time- and/or perforff mance-based vesting requirements. In addition, the award agreements under the 2014 EIP generally provide for the acceleration of 50% of the unvested equity awards of all shareowners upon a change in control and the vesting of the remaining unvested equity awards for those shareowners that are involuntarily terminated within a year of the change in control. Each of the 2004 EIP and the 2014 EIP allow for “net share settlement” of certain equity awards whereby, in lieu of (i) making cash payments in satisfaction of the exercise price owed respective to non-qualified stock option awards, or (ii) open market selling award shares to generate cash proceeds for use in satisfaction of statutory tax obligations respective to an award’s settlement or being settled in a respective transaction by the number of shares of company stock witht ff exercise, the company offsets the award shares a value equalq to the respective obligation, and, in the case of taxes, making a cash payment to the respective taxing authority on behalf of the shareowner using Company cash. The net share settlement is accounted forff with the cost of any award shares that are net settled being included in treasury stock and reported as a reduction in total equity at the time of settlement. In connection with the acquisition of Ellipse Technologies in February 2016 (see Note 4 to the Consolidated Financial Statements included in this Annual Report for further discussion), the Company assumed the Ellipse Technologies, Inc. 2015 Incentive Award Plan and the shares thereunder, subject to an equity exchange adjustmett awards by the Company. nt, for futurett The compensation cost that has been included in the statement of operations for the Company’s stock-based compensation plans was as follows: (in thousands) Sales, marketing and administrative expense Research and development expense Cost of goods sold Stock-based compensation expense beforff e taxes Related income tax benefits Stock-based compensation expense, net of taxes Year Ended December 31, 2017 2016 2015 20,596 1,445 350 22,391 (8,509) 13,882 $ $ 25,466 1,231 227 26,924 (10,770) 16,154 $ $ 24,817 1,157 229 26,203 (10,481) 15,722 $ $ As of December 31, 2017, there was $22.9 million and $18.9 million of unrecognized compensation expense for RSUs and PRSUs, respectively, which is expected to be recognized over a weighted-average period of approximately 1.9 years for both RS Us and PRSUs. In addition, as of December 31, 2017, there was $1.0 million of unrecognized compem nsation expense for shares expected to be issued under the ESPP which is expected to be recognized through April 2018. There was no unamortized expense for stock options as of Decemberm 31, 2017. t In 2016, the Company adopted ASU 2016-09, Impr Share-Based Payment Accounting, which provided for the change in classification for excess tax benefits in the Consolidated Statements of Cash Flows on a prospective basis. The excess tax benefits reported as a financing cash inflow for the year ended December 31, 2015 was $15.2 million. The Compamm ny did not report such financing cash flows for the year ended December 31, 2016 and 2017. See Note 1 to the Consolidated Financial Statements included in this Annual Report for further discussion. ovements to Employeeo II Restricted Stock Units The total fair value of RSUs that vested during the year ended December 31, 2017, 2016, and 2015 was $19.9 million, $31.2 million and $39.0 million, respectively. Following is a summary of RSU r activity for the year ended December 31, 2017: (in thousands, except per share amounts) Outstanding at December 31, 2016 Granted Vested Forfeited Outstanding at December 31, 2017 101 Number of Shares Weighted Average Grant Date Fair Value 1,096 377 (283) (194) 996 $ $ 41.16 70.24 32.64 49.87 52.90 a For the majori ty of RSUs, shares are issued on the vesting dates net of the amount of shares needed to satisfy statutory tax withholding requirements to be paid by the Company on behalf of the employees. The total shares withheld related to vested RSUs were approximately 103,000, 227,000, and 330,000 in 2017, 2016, and 2015, respectively, and were based on the value of the awards on their vesting dates as determined by the Company’s closing stock price. Total payments for the employm ees’ tax obligations to the taxing authorities related to vesting RSUs were $7.2 million, $11.4 million and $15.4 million in 2017, 2016 and 2015, respectively. Performance-Based Restricted Stock Units The Company has granted PRSUs since 2012 for which the ultimate issuance amount is determined by the Company’s Compensation Committee upon its certificff ation of Company performance against a pre-determined matrix, including targets for revenue, operating margin, earnings per share and total shareholder return over pre-determined periods of time. Share payout levels range from 0% to 312.5% depending on the respective terms of an award. Based upon the compam ny’s actual performff ance against the performance conditions, approximately 117,000 shares of common stock vested on March 1, 2015 for PRSUs granted in 2012, and approximately 470,000 shares of common stock vested on February 1, 2015 for PRSUs granted in 2013, in each case in the aggregate nce against the perforff mance for all award recipients. On February 1, 2016 and 2017, based upon the company’s actual performar conditions, approximately 102,000 and 39,000 shares of common stock vested for PRSUs granted in 2014, respectively. Since 2015, the Company has granted PRSUs with performance periods of one year or less that payout at 0% or 100%, of which approximately 43,000 and 37,000 shares of common stock vested in 2016 and 2017, respectively. In 2015, the Company granted PRSU awards with five year cliff vesting terms to its Chief Executive Officer for which the performance criteria was not based on Compam ny specific performance metrics, and as such, the Company recorded the award as a long-term liability as expense d over the service period. No amounts have been paid out on this award, or are expected to become due until 2020. a ff The total fair value of performance awards vested during 2017, 2016 and 2015 was $10.3 million, $12.6 million and $27.1 million, respectively. Following is a summary of PRSU activity for the year ended December 31, 2017: (in thousands, except per share amounts) Outstanding at December 31, 2016 Awarded at target Vested Forfeited Outstanding at December 31, 2017 Shares Maximum Number of Shares Eligible to be Issued Average Grant Date Fair Value 871 203 (76) (233) 765 1,553 396 (89) (398) 1,462 $ $ 46.76 73.68 41.61 55.42 52.62 a For the majori ty of PRSUs, shares are issued on the vesting dates net of the amount of shares needed to satisfy statutory tax withholding requirements to be paid by the Company on behalf of the employees. The total shares withheld related to vesting PRSUs were approximately 35,000, 58,000 and 292,000 in 2017, 2016 and 2015 respectively, and were based on the value of the awards on their vesting dates as determined by the Company’s closing stock price. Total payments for the employmm ees’ tax obligations to the taxing authorities related to vesting PRSUs were $2.5 million, $2.7 million, and 13.5 million in 2017, 2016, and 2015 respectively. Stock Options The Company has not granted any stock options since 2011. The stock options previously granted are exercisable for a period of up to ten years after the date of grant. The aggregate intrinsic value of outstanding stock options at December 31, 2017 is based on the Company’s closing stock price on December 31, 2017 of $58.49. The Company received $2.4 million, $3.0 million and $6.2 million in proceeds from the exercise of stock options during the years ended Decemberm 31, 2017, 2016 and 2015, respectively. The total intrinsic value of stock options exercised was $8.3 million, $29.0 million, and $63.4 million during the years ended December 31, 2017, 2016 and 2015, respectively. There were no stock options that vested during the year ended December 31, 2017 or 2016. The total fair value of stock options that vested during the year ended December 31, 2015 was $0.3 million. 102 Following is a summary of stock option activity for the year ended December 31, 2017 under all stock plans: (in thousands, except years and per Outstanding at December 31, 2016 rr share amounts) Exercised Cancelled Outstanding at December 31, 2017 Exercisable at December 31, 2017 Vested or expected to vest at December 31, 2017 *De minimis amount of options cancelled. Weighted Avg. Exercise Shares Price 410 (232) * 178 178 178 $ $ $ 34.93 34.59 23.24 35.41 35.41 35.41 Weighted- Average Remainingg Contractual Term (Years) Aggregate Intrinsic Value 2.47 $ 13,292 1.33 1.33 1.33 $ $ $ 4,105 4,105 4,105 a For the majority of stock option s, shares are issued on the exercise dates net of the amount of shares needed to satisfy each of the exercise price (in lieu of cash) and statutory tax withholding requirements, the latter to be paid by the Company on behalf of the employee. The total shares withheld related to exercised stock options were approximately 105,000, 1,157,000, and 2,461,000 in 2017, 2016, and 2015, respectively, and were based on the value of the stock options on their exercise dates as determined by the Company’s closing stock price. Total cash payments for the employm ees’ tax obligations to the taxing authorities related to exercised stock options were $2.1 million, $10.7 million, and $28.0 million in 2017, 2016, and 2015, respectively. Employee Stock Purchase Plan The NuVasive, Inc. 2004 Amended and Restated Employee Stock Purchase Plan (thet “ESPP”), provides eligible employees with a means of acquiring equity in the Company at a discounted purchase price using their own accumulated payra oll deducd tions. Under the terms of the ESPP, employees can elect to have up to 15% of their annual compensation, up to a maximumm of $21,250 per year, withheld to purchase shares of Compam ny common stock for a purchase price equaq l to 85% of the lower of the fair market value per share (at closing) of Compam ny common stock on (i) the commencement date of the two-year or six-month offering period (depending on the purchase period enrolled) or (ii) the respective purchase date. In the years ended December 31, 2017, 2016 and 2015, 154,000, 152,000, and 209,000 shares, respectively, were purchased under the ESPP. The weighted average assumptm ions used to estimate the fair value of stock options granted and stock purchase rights under the ESPP are as follows: ESPP Volatility Expected term (years) Risk free interest rate Expected dividend yield 2017 Year Ended December 31, 2016 2015 26% 0.5 0.9% ——% 29% 0.5 0.4% ——% 40% 1.2 0.2% ——% Common Stock Reserved for Future Issuance The following table summarizes common shares reserved for issuance on exercise or conversion at December 31, 2017: (in thousands) Issued and outstanding stock options Issued and outstanding RSUs and PRSUs Available for issuance under the ESPP Available for future grant 2021 Notes 2021 Warrants Total shares reserved for future issuance 178 1,861 1,243 4,248 14,396 32,596 54,522 Pursuant to the terms of the 2014 EIP, shares subject to awards granted under the 2004 EIP may be utilized for futurett grants of awards under the 2014 EIP, to the extent such awards are terminated, cancelled or they expire, or shares subject thereto are withheld to cover taxes. During the year ended December 31, 2016, the Compam ny filed a registration statement with the Securities and Exchange Commission with respect to 2.2 million of such shares for future issuance under the 2014 EIP. These shares are reflected in the number of shares available for future grants. 103 8. Income Taxes Total income before income taxes summarized by region for the years ended December 31 is as follows: (in thousands) United States Foreign Total income before income taxes Year Ended December 31, 2017 2016 $ $ 78,343 (4,118) 74,225 $ $ 77,538 (12,830) 64,708 $ $ 2015 128,489 (16,470) 112,019 The income tax (benefit) provision for the years ended December 31 c m onsists of the following: (in thousands) Current: Federal State Foreign Total current provision Deferred: Federal State Foreign Total deferred provision Changes in tax rate Changes in valuation allowance Total (benefit) provision Year Ended December 31, 2017 2016 2015 $ $ $ 5,972 776 2,793 9,541 (14,837) $ 1,283 2,350 (11,204) (913) (4,217) (2,223) (7,353) (14,929) 5,703 (7,038) $ 40,338 1,453 (2,583) 39,208 (216) 1,494 29,282 $ 1,480 178 2,090 3,748 42,719 4,433 (698) 46,454 266 (3,739) 46,729 The differen ff x ces between the income tax provision at the United States federal statutory tax rate and the Compam ny’s effective ta ff rate for the years ended December 31 are the following: Year Ended December 31, 2017 2016 2015 $ $ $ 25,979 (19,540) (14,929) 5,703 (5,619) (3,462) 3,240 (1,939) 1,184 (489) 306 2,528 (7,038) $ 22,648 —— (216) 1,494 (8,013) (3,426) 3,243 (1,079) 759 5,167 6,290 2,415 29,282 $ $ 39,207 —— 266 (3,739) (2,115) (1,754) 4,264 (1,062) 2,301 —— 9,039 322 46,729 (in thousands) Tax provision at federal statutot ry rate covery of tax basis in United States subsiu diary Change in tax rates Valuation allowance Compensation expense Income tax credits and incentives State income tax Returt n to prov Income tax reserves Acquisition related charges Globalization initiative Other ision adjustments r Total (benefit) provision 104 ff Significant components of the Compam ny’s deferred tax assets and liabilities at December 31 are composed of the following: (in thousands) Deferred tax assets: ation General business and other credit carryforwards Net operating loss carryforwards Stock-based compensm Inventory Amortization of intangibles Original issue discount Deferred rent Other Gross deferred tax assets Less valuation allowance Net deferred tax assets Deferred tax liabia lities: Acquired intangibles Depreciation Other Total deferred tax liabia lities Consolidated net deferred tax liabilities Add deferred tax liabia lity, net, attributable to non-controlling interests Net deferred tax liabia lities December 31, 2017 2016 18,928 14,991 13,502 10,075 6,742 4,606 2,532 14,943 86,319 (16,247) 70,072 (53,076) (23,132) (1,752) (77,960) (7,888) 199 (7,689) $ $ $ 21,215 9,976 18,227 16,324 10,871 8,817 4,347 9,718 99,495 (10,544) 88,951 (69,428) (29,888) (1,687) (101,003) (12,052) 528 (11,524) $ $ $ The following table summarizes the activity related to the Company’s unrecognized tax benefits: at January 1 (in thousands) Gross unrecognized tax benefitsff Increases in tax positions for prior years Decreases in tax positions for prior years Increases in tax positions for current year relating to ongoing operations Decreases in tax positions as a result of a lapsa e of statute of limitations Increases in tax positions for current year relating to acquisitions Decreases in tax positions due to settlements with taxing authorities Gross unrecognized tax benefits at December 31 Year Ended December 31, 2017 2016 2015 $ $ 23,322 $ 1,692 (24) 968 (402) —— (200) 25,356 $ 12,448 $ 1,716 (270) 6,205 —— 3,223 —— 23,322 $ 12,372 2,614 (3,156) 618 —— —— —— 12,448 At December 31, 2017, 2016, and 2015, $24.1 million, $12.5 million, and $7.2 million, respectively, of the Company’s total unrecognized tax benefits, if recognized, would affect ff ff the effective income tax rate. In accordance with the disclosure requirements as described in ASC Topico , the Compam ny has classified uncertain tax positions as non-current income tax liabia lities unless expected to be paid in one year. The Company’s continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. For the years ended Decembem r 31, 2017, 2016, and 2015, the Company recognized approximately $(0.1) million, $0.3 million, and $0.1 million, respectively, in interest and penalties as income tax expense (benefit)ff in the Consolidated Statements of Operations. The Company had approximately $0.4 million and $0.5 million for the payment of interest and penalties accrued at Decembem r 31, 2017 and December 31, 2016, respectively, in the Consolidated Balance Sheets. 740, Income Taxesaa The Company believes it is reasonably possible that approximately $6.5 million of its remaining unrecognized tax positions may be recognized by the end of 2018 as certain statute of limitations expire, the amount of which is primarily attributable to tax positions involving the valuation of intercompany transactions. The Company is subject to routine compliance reviews on various tax matters around the world in the ordinary course of business. Currently, income tax audits are being conducted in the state of New York, the state of Louisiana and Germany. U.S. and most forff eign jurisdictions remain subject to examination in all years due to prior year net operating losses and R&D credits. 105 rr On December 22, 2017, President Trump si gned into law the Tax Cuts and Jobs Act (the “Act”) which among many other things reduces the U.S. federal corporate income tax rate from 35% to 21%, effeff ctive January 1, 2018. Based on information available at December 31, 2017, the Compam ny recorded a provisional tax benefit in the amount of approximately $14.9 million associated with the revaluation of its deferred taxes offset by an increase in valuation allowance of $2.7 million for a net benefit of $12.2 million for the corporate tax rate reduction. The final accounting is subjeb ct to change as further guidance on the U.S. GAAP treatment of this and other provisions of the Act become available and further analysis is complemm te. ff The Compam ny’s foreign subsiu , based on the Companym diaries had a cumulative net deficit in earnings and profits in aggregate as of December 31, 2017. Thereforeff ’s provisional assessment, the mandatory one-time repatriation provision under the Act had an immaterial impact to the net deficit in earnings and profits of the Company’s foreign subsidiaries and no impam ct on the Company’s tax expense. In the event the Company is required to repatriate funds from outside of the United States, such repatriation would not tax generate additional United States tax liabilities, but could be subject consequences in the subsiu laws and customs generating immaterial diaries’ jurisdictions. to local At December 31, 2017, the Company had $34.5 million, $93.3 million and $8.7 million of federal, state and foreign net operating loss carryforwards, respectively, which will begin to expire in 2018. Valuation allowance reserves of $53.4 million are recorded against Californi a net operating losses of $53.4 million due to uncertainty surrounding their realization. ff There were also federal and Californi ff federal credits will begin to expire in 2020. The Californi ff $20.7 million are recorded against the California credits due to uncertainty surrounding their realization. a income tax credit carryforwards of $21.4 million and $20.7 million, respectively. The s of a credits can be carried forward indefinitely. Valuation allowance reserverr ff Due to the “change of ownership” provision of the Tax Reform Act of 1986, utilization of the Compam ny’s net operating loss and credit carryforwards may be subject to an annual limitation against taxable income in future periods. As a result of any future ownership changes, the annual limitation of loss and credit carryforwards may cause them to expire before ultimately becoming available to reduce future income tax liabilities. 9. Business Segment, Product and Geographic Information ing ing The Company operates in one segment based upon the Company’s organizational structuret , the way in which the operations and of availabilityy of discrete ngg level, and manufacturing,g come and expep nses, and net income at the Comppanyy wide level to allocate resources and assess the Comppanyy’s overall informationn g garding the g y decision-making reg ssessed on a consolidated basis. As such, the each of its producdd t line offerings to provide investments are managed and evaluated byy the chief operating decisio financial information at a lower level. The Comppanyy’s CODM reviews revenue at the prp oductd operat p pperp formance. The Comppanyy shares common, centralized suppopp rt functions, includingg finance, human resources, legal,g g technology, and corpo p rate marketing, all of which mance and allocation of Comppany resources is a p Compapm nyy’s overall operating perfor Comppany operates as one re the reader of the financial statements transparency into the operations of the Company. g p pop rtingg seggment. The Comppanyy has disclosed the revenues forff repop rt directly to the CODM. Accordingly, ) n maker ((“CODM”) as well as the lack line offeri y p gy y y g p g ff The Company reports under two distinct product lines; spinal hardware and surgical support. The Company’s spinal hardware ngs include IOM ngs include implm ants and fixation products. The Company’s surgical support product offeri ff ff product line offeri services, disposables and biologics, all of which are used to aid spinal surgery. Revenue by product line was as follows: (in thousands) Spinal Hardwad re Surgical Support Total Revenue Revenue and property and equipment, net, by geographic area were as follows: Year Ended December 31, $ 2017 732,038 297,482 $ 1,029,520 $ $ 2016 674,057 288,015 962,072 $ $ 2015 559,388 251,725 811,113 (in thousands) United States International (excludes Puerto Rico) Total Revenue Year Ended December 31, 2016 831,718 130,354 962,072 $ $ $ $ $ 2017 853,245 176,275 $ 1,029,520 Property and Equipment, Net December 31, 2017 179,891 35,435 215,326 $ $ 2016 148,227 33,297 181,524 $ $ 2015 714,768 96,345 811,113 106 10. Contingencies The Company is subjeb ct to potential liabilities under government regulations and various claims and legal actions that are pending or may be asserted from time-to-time. These matters arise in the ordinary course and conducd t of the Company’s business and ent matters. The Company intends to include, for example, commercial, intellectual property, environmental, securities and employm continue to defenff d itself vigorously in such matters and when warranted, take legal action against othet rs. Furthermore, the Company regularly assesses contingencies to determine the degree of probabia lity and range of possible loss for potential accrual in its financial statements. m During the year ended Decembem r 31, 2017, the Company paid $4.5 million for the settlement of fees associated with the c, Inc., Medtronic Sofamor Danek USA, Inc. and other Medtronic related outcome of the litigation matter with Warsaw Orthopedi entities (collectively, “Medtronic”). t During the year Decembem r 31, 2016, the Company settled its ongoing litigation with Medtronic. As a result of the settlement, the Company paid $45.0 million to Medtronic and accordingly recorded a gain of $43.3 million related to the settlement by reducing its previous accrual of $88.3 million related to the matter. During the year ended December 31 2015, the Compamm ny had a gain of $56.4 million related to a litigation accrual change resulting from the legal proceedings in the first phase of the Medtronic litigation whereby the damages awarded by the jury was overturned, and a gain of $2.8 million in litigation accrual change related to settlement of the NeuroVision trademark litigation. These amounts were offset by a litigation charge of $13.8 million related to the Office of the Inspector General of the U.S. Department of Health and Human Services (“OIG”) investigation and a $3.6 million litigation charge in a general litigation matter. An estimated loss contingency is accrued in the Company’s financial statements if it is probable that a liability has been incurrerr d and the amount of the loss can be reasonably estimated. Based on the Company’s assessment, it has adequatel y accrued an amount for contingent liabilities currently in existence. The Compam ny does not accrue amounts for liabilities that it does not believe are probable or that it considers immaterial to its overall financial position. Litigation is inherently unpredictable, and unfavorable resolutions could occur. As a result, assessing contingencies is highly subju ective and require events. The amount of ultimate loss may exceed the Compam ny’s current accruals, and it is possible that its cash flows or results of operations could be materially affected in any particular period by the unfavorabla e resolution of one or more of these contingencies. s judgment about futurett q q Legal Proceedings Medtronic Sofamor Danek USA,SS Inc. Litigation In August 2008, Medtronic filed a patent infringement lawsuit against the Company (the “Medtronic Litigation”), alleging that certain of the Company’s products or methods, including the XLIF procedure, infringe, or contribute to the infringement of, various U.S. patents assigned or licensed to Medtronic. The Company brought counterclaims against Medtronic alleging infringement of certain of the Company’s patents. On July 13, 2016, the Company entered into a settlement and patent license agreement (the “2016 Settlement Agreement”) with Medtronic to settle the Medtronic Litigation. The Company no longer has any remaining liability or restricted cash related to this matter. The Medtronic Litigation was administratively broken into three phases. The initial trial on the first phase of the case concluded in September 2011 in the U.S. District Court for the Southernrr District of California (the “District Court”), and a juryrr delivered an to certain Medtronic patents and a favorable verdict with respect unfavorable verdict against to one Company patent, including a monetary damages award of approximately $101.2 million to Medtronic. the Company with respect tt Both parties appealed the verdict, and the Company entered into an escrow arrangement and transferred $113.3 million of cash into a restricted escrow account in March 2012 to secure the amount of judgment, plus prejue dgment interest, during pendency of the appeal. In March 2015, the U.S. Court of Appeals for the Federal Circuit issued a decision upholding the jury’s findings of liability as to all patents, but overturni “Court of Appeals Decision”). The case was remanded back to the District Court for further proceedings and a retrit al to determine a proper damages award. As a result of the Court of Appeals Decision, the parties agreed to release all of the escrow funds related to this matter back to the Company. During the year red all of the funds in escrow related to this matter, approximately $114.1 million, ended December 31, 2015, the Compam ny transferff from long-term restricted cash and investments into its unrestricted investment accounts. In March 2015, the Company sought reexamination of certain claims of one of the Medtronic patents at issue and for which the Company was found to have infringed. On June 15, 2016, the District Court stayed remand proceedings and retrial of this first phase of the case pending the reexamination. ng the damage award against the Company as improper (the m The second phase of the case involved one Medtronic cervical plate patent. In April 2013, the Company and Medtronic entered into a settlement agreement fully resolving the second phase of the case. As part of the settlement, the Company received a license to practice various patent families that collectively represent a majori ty of Medtronic’s patent rights related to cervical plate technology. In exchange for these license rights, the Companym made a one-time payment to Medtronic of $7.5 million in May 2013. In addition, Medtronic will receive a royalty on certain cervical plate products sold by the Company, including the Helix and Gradient lines of products. a 107 The third phase of the case involved Medtronic filing additional patent claims in the U.S. District Court for the Northern District of Indiana in August 2012 alleging that certain Company spinal implmm ants (including its CoRoent XL family of spinal implants), the Company’s Osteocel Plus bone graft producd t, and the Company’s XLIF procedure and use of MaXcess IV retractor during the XLIF ff procedure infringe several Medtronic patents. Under the terms of the 2016 Settlement Agreement, the Company paid Medtronic $45.0 million, and the parties released each other from, inter alia, any and all past patent infriff ngement arising from the Medtronic Litigation. As a result, the Company adjusted its litigation accrual from $88.3 million to $45.0 million and recorded a $43.3 million gain in the Consolidated Statement of Operations during the nine months ended Septembem r 30, 2016. Pursuant to the 2016 Settlement Agreement, the parties granted each other irrevocable, worldwide, nonexclusive, paid-up, royalty-free licenses to practice certain of their respective patents as to certain of their respective existing product lines, subject to specified exceptions and limitations. The 2016 Settlement Agreement also provides that, a period of seven years, neither party will assert against the other certain claims subject to certain limitations and exceptions, and forff for patent infringem than through a specified dispute resolution process, with the right to thereafter pursue claims outside that process subject to certain limitations and exceptions. Further, Medtronic has agreed that, for a period of five years, and subject to limitations and exceptions, it will not assert against the Company certain other claims for patent infringement other than through a specified dispute resolution process, witht s and related instruments, biologics and neuromonitoring) other the right to thereafter pursue claims outside that process subject ent (generally claims related to spinal implant to certain limitations and exceptions. m u d ff tt Trademark Infrn ingement Litigation On September 25, 2009, Neurovision Medical Products, Inc. (“NMP”) filed a lawsuit against the Company in the U.S. District ment and unfair competmm ition. Court for the Central District of California (the “Central District Court”) alleging trademark infringe NMP sought cancellation of NuVasive’s “NeuroVision” trademark registrations, injunctive relief and damages based on NMP’s common law use of the “NeuroVision” mark. The matter was tried in October 2010 and an unfavorable jury verdict was delivered against the Company. The verdict awarded damages to NMP of $60.0 million, and the Compam ny appealed the judgment. The judgment was reversed and vacated on appeal, and a new trial was conducted in the Central District Court. In April 2014, a jury returned a verdict in favor of NMP on its claims against the Compam ny in the amount of $30.0 million. The Central District Court also entered an order canceling the Company’s NeuroVision trademark registrations. In July 2015, the Company agreed to settle all outstanding matters with NMP for $27.2 million. The Company adjusted its litigation accrual fro m $30.0 million to $27.2 million at d June 30, 2015, which resulted in a $2.8 million gain which was recorded in the Consolidated Statement of Operations during the three months ended June 30, 2015. The Company previously escrowed funds totaling $32.5 million to secure the amount of judgment, and cover potential attorney’s fees and costs. Those funds accrued interest and were included in short-term restricted cash and investments in the Consolidated Balance Sheets until funding of the settlement which occurred during the three months ended September 30, 2015. The Company no longer has any remaining liability or restricted cash related to this matter. ff Securities Litigat i ion ff On August 28, 2013, a purported securities class action lawsuit was filed in the U.S. District Court for the Southernr District of California na ming the Company and certain of its current and former executive officers for allegedly making false and materially misleading statements regarding the Company’s business and financial results, specifically relating to the purported improper submission of false claims to Medicare and Medicaid. The operative complaint asserts a putative class period stemming from October 22, 2008 to July 30, 2013. The complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder and seeks unspecifieff d monetary relief, interest, and attorneys’ fees. On Februar ry 13, 2014, Brad Mauss, the lead plaintiff in the case, filed an Amended Class Action Complaint for Violations of the Federal Securities Laws. The Company answered the complaint on August 25, 2016, and discovery commenced. The plaintiffs filed motions for class certification on October 28, 2016 and the Company’s opposition papers were filed on January 9, 2017. On March 22, 2017, the court issued an order granting class certification. The Company filed a petition to appeal the order granting class certification with the U.S. Court of Appeals for the Ninth Circuit (thet “Ninth Circuit”) on April 5, 2017 and the plaintiffs filed an opposition to the petition. On August 15, 2017, the Ninth Circuit denied the Company’s petition. The Company filed a motion for summary judgment on Septembem r 8, 2017. On February 1, 2018, the court entered an order denying the Company’s motion for summary judgment. On Februar ry 13, 2018, the Company entered into a memorandum of understanding with the plaintiffs to settle the case for $7.9 million. The Company expects the settlement will be fully funded by insurance proceeds. The settlement includes the dismissal of all claims against the Company and the named individuals in the lawsuit without any liability or wrongdoing attributed to them. The settlement is subjeb ct to formal documentation, court approval and other customary conditions. There can be no assurance that a settlement will be finalized and approved or as to the ultimate outcome of this litigation. However, in connection with the proposed settlement and in accordance with authoritative guidance, the Company has recorded the loss contingency of $7.9 million as a current litigation liability and the expected insurance proceeds of $7.9 million as a current receivable in the Consolidated Balance Sheet as of December 31, 2017. 108 Shareholder De dd rivative Litigation On September 28, 2016, a shareholder derivative complmm aint was filed by James Borta in the Superi the County of San Diego naming certain of the Company’s current and former executive officers and directors for allegedly breaching their fiduciary duties by, among other things, making allegedly false and misleading statements about the Company’s business, operations, and prospects. The derivative complaint is based upon the same factual allegations as the securities class action litigation and names the Company as a nominal defendant. The plaintiff fi led an Amended Complaint on March 1, 2017. The Company demurm red to the Amended Complaint on April 7, 2017 and the court sustained the Company’s demurrer and provided the plaintiffff thirty days to file an amended complaint. On June 30, 2017 the plaintiff filed a Second Amended Derivative Complaint, to which the Company demurred. On September 29, 2017 the court sustained the Company’s demurrer and dismissed the case with prejue dice, entering judgment. On October 10, 2017, the plaintiff filed a motion for reconsideration and to vacate the judgment. The court denied the motion on December 15, 2017. At Decembem r 31, 2017, the probable outcome of this litigation cannot be determined, nor can the Company estimate a range of potential loss. In accordance with authoritative guidance on the evaluation of loss contingencies, the Company has not recorded an accrual related to this litigation. or Court of California for u ff ff Madsendd Medical, Inc. Litigation ff On Februarr ry 19, 2016, an unfavff orable jury verdict was delivered against the Company in its litigation in the U.S. District Courtt Madsen Medical, Inc. (“MMI”), a former sales agent. Specifically, the jury award ded for the Southern District of California against million in punitive damages, andd MMI $7.5 million in lost profits for tortious interference, $14.0 million for unjust enrichment, $20.0 approximately $0.3 million in damages for breach of co ntract. On March 18, 2016, the trial court entered judgment in favor of MMI in the amount of $27.8 million, which amount excluded the $14.0 million disgorgement awarded by the jury. On July 5, 2016, the trial court also awarded MMI attorney’s fees and costs of approximately $1.1 million. The Company’s post-trial motions for judgment as a matter of law and/or for a new trial were denied, and the Company has appealed both the verdict and the court’s subsequent award fof attorney’s fees and costs. However, the Company did not appeal the judgment with respect to breach of contract and accordingly accrued the $0.3 million in damages during the year ended December 31, 2017. The appeal hearing has been set for April 12, 2018. During pendency of any appeals, the Company has secured a bond to cover the amount of the judgment and attorneys’ fees and costs. On March 18, 2016, t n Historically the Company had believed the likelihood of a loss in this case was remote given the underlying facts of the case, however, during the quarter ended March 31, 2016, the judgment entered caused the Company to reassess its position. The Company,nn bbased on its own assessment as well as that of outside counsel, believes that upon appeal the judgment will be vacated and have deemed it probabla e that is the outcome for all appealed judgments. The Company continues to believe for all judgments under appeal bem r 31, 2017, the Company believes that the outcome of the case does that such judgments will be vacated, and ac not constitute a probable nor an estimable loss associated with the litigation but rathet r a reasonably possible loss rather than a remote loss as historically contemplamm ted. Therefore, for all judgments under appeal the Company has not recorded a loss contingency but has assessed a reasonable range of potential loss, which would be from zero to the current amount entered as a judgment, as well as attorney’s fees and interest, in accordance with the accounting guidance required by ASC 450, Contingencies. cordingly, at Decem 11. Regulatory Matters On August 31, 2015, the Company received a civil investigative demand (“CID”) issued by the Department of Justice (“DOJ”) pursuant to the federal False Claims Act. The CID requires the delivery of a wide range of documents and information related to an investigation by the DOJ concerning allegations that the Company assisted a physician group customer in submu aims s to the physician groupu in violation of the Anti-Kickback Statute. The Company is for reimbursement and made improper payment cooperating with the DOJ. No assurance can be given as to the timing or outcome of this investigation. At December 31, 2017, the probable outcome of this matter cannot be determined, nor can the Compam ny estimate a range of potential loss. In accordance with authoritative guidance on the evaluation of loss contingencies, the Company has not recorded an accrual related to this matter. mm itting improper cl m ms submitted to Medicare and Medicaid. The subpoena see On June 9, 2017, the Compam ny received a subpoena from the OIG in connection with an investigation into possible false or otherwise improper clai ks discovery of documents for the period January mm 2014 through June 2017, primarily associated with sales to a particular customer and relationships related to that customer account. The Company is workir ng with the OIG to understand the scope of the subpoena and its request for documents, and the Company intends to fully cooperate with the OIG's request. No assurance can be given as to the timing or outcome of this investigation. At December 31, 2017, the probable outcome of this matter cannot be determined, nor can the Company estimate a range of potential loss. In accordance with authoritative guidance on the evaluation of loss contingencies, the Company has not recorded an accrual related to this matter. u 12. Subsequent Events In January 2018, the Company drew $50.0 million from the 2017 Facility to be used for working capital, general corporate purposes, and strategic investments and acquisitions, including the acquisition of SafePassage, a privately-held provider of IOM services. The closing of the acquisition occurred on January 17, 2018 and SafePassage now operates as a wholly-owned subsidiary of the Company. 109 Additionally, in January 2018, the Company acquired the remaining 60% of the capital stock of Progentix. Subsequent to the acquisition the Compam ny now owns 100% of the capital stock in Progentix, and therefore the variable interest entity accounting and non-controlling interest associated with Progentix will no longer be applicable post-acquisition. 13. Quarterly Data (unaudited) The following quarterly financial data, in the opinion of management, reflects all adjustmet nts, consisting of normal recurrir ng adjustments necessary, for a fair presentation of results for the periods presented: (in thousands, except per share amounts) Revenue Gross profit Consolidated net income Net income attributable to NuVasive, Inc. Basic net income per common share attributable to NuVasive, Inc. Diluted net income per common share attributabla e to NuVasive, Inc. Revenue Gross profit Consolidated net (loss) income Net (loss) income attributable to NuVasive, Inc. Basic net (loss) income per common share attributable to NuVasive, Inc. Diluted net (loss) income per common share attributable to NuVasive, Inc. Year Ended December 31, 2017 (1) First Quarter Second Quarter Third Quarter Fourth Quarter $ $ 249,864 188,251 12,325 12,768 0.25 $ 260,573 194,152 12,229 12,661 0.25 247,431 181,848 33,185 33,617 0.66 $ 271,652 196,261 23,524 23,960 0.47 0.22 0.22 0.64 0.46 First Quarter (3)(4) 215,104 $ 160,878 (3,825) (3,368) Year Ended December 31, 2016 (2) Second Quarter(5) Third Quarter $ $ 236,210 176,465 29,790 30,213 239,649 180,453 3,495 3,926 Fourth Quarter(4)(6) 271,109 $ 204,183 5,966 6,376 (0.07) (0.07) 0.60 0.57 0.08 0.07 0.13 0.11 (1) The unaudited quarterly financial data set forth for the year ended December 31, 2017 includes the operations and results of the Company’s 2017 acquisitions from their respective dates of acquisition. See Note 4 to the Consolidated Financial Statements included in this Annual Report for further discussion. (2) The unaudited quarterly financial data set forth for the year ended December 31, 2016 includes the operations and results of Ellipse Technologies, BNN Holdings and the Company’s other acquisitions from their respective dates of acquisition. See Note 4 to the Consolidated Financial Statements included in this Annual Report for further discussion. (3) The Company elected to early adopt ASU 2016-09 in the second quarter of 2016. As a result, the Compam ny recorded a retrospective adjud stment to the previously reported first quarter 2016 provision for income taxes of approximately $5.5 million for the recognition of excess tax benefits in the provision for income taxes rather than additional paid-in capital and a decrease in net loss per share of $0.11 for the three months ended March 31, 2016. See Note 1 to the Consolidated Financial Statements included in this Annual Report for further discussion. (4) Consolidated financial results include losses from repurchases of Senior Convertible Notes due 2017 of $17.4 million and $1.7 million in the first and fourtht quarters of fiscal year 2016, respectively. (5) Consolidated financial results include a litigation liability gain of $43.3 million in connection with the settlement of all outstanding litigation matters with Medtronic. (6) Consolidated financial results include a purchase order for $4.8 million from an organization established by certain former stockholders of Ellipse Technologies. 110 NuVasive, Inc. Corporate Information Executive Officers Gregory T. Lucier Chairman and Chief Executive Officer Rajesh J. Asarpota Executive Vice President and Chief Financial Officer Harry Skip Kiil Executive Vice President, Global Commercial Peter M. Leddy, Ph.D. Executive Vice President, People and Culture Matthew W. Link Executive Vice President, Strategy, Technology, and Corporate Development Stephen Rozow III Executive Vice President, Global Process Transformation Joan B. Stafslien, Esq. Executive Vice President, General Counsel and Corporate Secretary Board of Directors Gregory T. Lucier Chairman and Chief Executive Officer Vickie L. Capps Former Chief Financial Officer, DJO Global, Inc. John A. DeFord, Ph.D. Senior Vice President, R&D, Becton, Dickinson and Company Peter C. Farrell, Ph.D., AM Founding Chairman and former Chief Executive Officer, ResMed Inc. Robert F. Friel Chairman, Chief Executive Officer and President, PerkinElmer, Inc. Lesley H. Howe Former Audit Partner, KPMG Peat Marwick LLP Leslie V. Norwalk, Esq. Strategic Counsel, Epstein Becker & Green, P.C. Michael D. O’Halleran Former Executive Chairman of Aon Benfield and Senior Executive Vice President of Aon plc Donald J. Rosenberg, Esq. Executive Vice President, General Counsel and Corporate Secretary, QUALCOMM Incorporated Daniel J. Wolterman Former President and Chief Executive Officer, Memorial Hermann Health System Annual Meeting of Stockholders Transfer Agent May 3, 2018 at 8:00 a.m. PST NuVasive, Inc. Corporate Headquarters 7475 Lusk Boulevard, San Diego, CA 92121 Computershare P.O. Box 30170, College Station, TX 77841 Shareholder Services: 1-800-962-4284 Stock Information NuVasive, Inc. common stock is listed on the NASDAQ—Global Select market (NASDAQ: NUVA) Transforming spine surgery and beyond. Changing lives every day. NuVasive, Inc. Corporate Headquarters 7475 Lusk Boulevard San Diego, CA 92121 Forward looking statements Non-GAAP Information The letter to shareholders and this annual report contain forward-looking statements that involve risks, uncertainties, assumptions and other factors which, if they do not materialize or prove correct, could cause our results to differ from historical results or those expressed or implied by such forward-looking statements. In some cases, you can identify these forward looking statements by words like “may”, “will”, “should”, “could”, “expect”, “plan”, “anticipate”, “believes”, “estimates”, “predicts”, “potential”, “intends”, or “continues” (or the negative of those words and other comparable words). Forward-looking statements include, but are not limited to, statements about: our intentions, beliefs and expectations regarding our expenses, sales, operations and future financial performance; our operating results; our plans for future products and enhancements of existing products; and anticipated growth and trends in our business. These statements are not guarantees of future performance or events, and actual results may differ materially from those discussed herein. These and other risks and uncertainties are further described in our news releases and periodic filings with the Securities and Exchange Commission, including in Item 1(a) of our Annual Report on Form 10-K for the year ended December 31, 2017. NuVasive’s public filings with the Securities and Exchange Commission are available at www.sec.gov. NuVasive assumes no obligation to update any forward-looking statement to reflect events or circumstances arising after the date on which it was made. The letter to shareholders and this annual report include financial information that is not calculated in accordance with GAAP. Non-GAAP operating profit margin and non-GAAP earnings per share are non-GAAP financial measures that exclude amortization of intangible assets, leasehold related charges, integration related expenses associated with acquired businesses, one-time restructuring and acquisition related items, CEO transition related costs, certain litigation charges and non-cash interest expense (excluding debt issuance cost) and or losses on convertible notes. Management also uses certain non-GAAP measures which are intended to exclude the impact of foreign exchange currency fluctuations. The measure constant currency is the use of an exchange rate that eliminates fluctuations when calculating financial performance numbers. Management calculates the non-GAAP financial measures excluding these costs and uses these non-GAAP financial measures to enable it to further and more consistently analyze the period-to-period financial performance of its core business operations. Management believes that providing investors with these non-GAAP measures gives them additional information to enable them to assess, in the same way management assesses, the Company’s current and future continuing operations. These non-GAAP measures are not in accordance with, or an alternative for, GAAP, and may be different from non-GAAP measures used by other companies. Reconciliations of the non-GAAP financial measures to the comparable GAAP financial measure can be found in the Investor Relations tab of the Company’s website, www.nuvasive.com. © 2018. NuVasive, Inc. All rights reserved. LessRay, XLIF, Advanced Materials Science, NuVasive Spine Foundation, SafePassage and Surgical Intelligence are registered trademarks of NuVasive, Inc. 

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