nuva-10q_20190331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to                

Commission File Number: 000-50744

 

 

NUVASIVE, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

33-0768598

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

7475 Lusk Boulevard

San Diego, CA 92121

(Address of principal executive offices)

(858) 909-1800

(Registrant’s telephone number, including area code)

 

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

☐  

  

Small 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  

As of April 29, 2019 there were 51,885,880 shares of the registrant’s common stock (par value $0.001 per share) outstanding.

 

 


NuVasive, Inc.

Quarterly Report on Form 10-Q

March 31, 2019

 

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

3

 

Consolidated Balance Sheets

3

 

Consolidated Statements of Operations

4

 

Consolidated Statements of Comprehensive Income (Loss)

5

 

Consolidated Statements of Equity

6

 

Consolidated Statements of Cash Flows

8

 

Notes to Unaudited Consolidated Financial Statements

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34

Item 4.

Controls and Procedures

34

 

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

35

Item 1A.

Risk Factors

35

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35

Item 3.

Defaults Upon Senior Securities

35

Item 4.

Mine Safety Disclosures

35

Item 5.

Other Information

35

Item 6.

Exhibits

36

 

SIGNATURES

37

 

 

 

2


Table of Contents

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NUVASIVE, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except par values and share amounts)

 

 

March 31, 2019

 

 

December 31, 2018

 

ASSETS

 

(Unaudited)

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

93,391

 

 

$

117,840

 

Accounts receivable, net of allowances of $16,125 and $16,171, respectively

 

 

194,358

 

 

 

196,487

 

Inventory, net

 

 

288,539

 

 

 

273,244

 

Prepaid income taxes

 

 

16,484

 

 

 

16,905

 

Prepaid expenses and other current assets

 

 

13,555

 

 

 

13,733

 

Total current assets

 

 

606,327

 

 

 

618,209

 

Property and equipment, net

 

 

247,533

 

 

 

238,841

 

Intangible assets, net

 

 

240,663

 

 

 

252,048

 

Goodwill

 

 

561,235

 

 

 

561,366

 

Operating lease right-of-use assets

 

 

61,400

 

 

 

 

Deferred tax assets

 

 

4,369

 

 

 

5,263

 

Restricted cash and investments

 

 

2,395

 

 

 

2,395

 

Other assets

 

 

27,180

 

 

 

29,737

 

Total assets

 

$

1,751,102

 

 

$

1,707,859

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

99,991

 

 

$

105,877

 

Contingent consideration liabilities

 

 

6,637

 

 

 

7,560

 

Accrued payroll and related expenses

 

 

44,824

 

 

 

59,960

 

Operating lease liabilities

 

 

6,320

 

 

 

 

Litigation liabilities

 

 

2,045

 

 

 

1,415

 

Income tax liabilities

 

 

1,964

 

 

 

4,648

 

Total current liabilities

 

 

161,781

 

 

 

179,460

 

Senior convertible notes

 

 

607,607

 

 

 

602,526

 

Deferred and income tax liabilities

 

 

5,641

 

 

 

4,964

 

Operating lease liabilities

 

 

67,112

 

 

 

 

Other long-term liabilities

 

 

68,955

 

 

 

86,384

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 5,000,000 shares authorized, none outstanding

 

 

 

 

 

 

Common stock, $0.001 par value; 120,000,000 shares authorized at March 31, 2019 and December 31, 2018, 57,119,047 and 56,648,077 issued and outstanding at March 31, 2019 and December 31, 2018, respectively

 

 

61

 

 

 

61

 

Additional paid-in capital

 

 

1,402,797

 

 

 

1,397,829

 

Accumulated other comprehensive loss

 

 

(9,122

)

 

 

(8,628

)

Retained earnings

 

 

26,627

 

 

 

17,241

 

Treasury stock at cost; 5,262,478 shares and 5,116,496 shares at March 31, 2019 and December 31, 2018, respectively

 

 

(580,357

)

 

 

(571,978

)

Total equity

 

 

840,006

 

 

 

834,525

 

Total liabilities and equity

 

$

1,751,102

 

 

$

1,707,859

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

 

3


Table of Contents

 

NUVASIVE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 

 

 

Three Months Ended March 31,

 

(unaudited)

 

2019

 

 

2018

 

Revenue

 

 

 

 

 

 

 

 

Product revenue

 

$

243,823

 

 

$

233,515

 

Service revenue

 

 

30,953

 

 

 

27,007

 

Total revenue

 

 

274,776

 

 

 

260,522

 

Cost of revenue (excluding below amortization of intangible assets)

 

 

 

 

 

 

 

 

Cost of products sold

 

 

54,486

 

 

 

55,191

 

Cost of services

 

 

20,008

 

 

 

18,623

 

Total cost of revenue

 

 

74,494

 

 

 

73,814

 

Gross profit

 

 

200,282

 

 

 

186,708

 

Operating expenses:

 

 

 

 

 

 

 

 

Sales, marketing and administrative

 

 

145,076

 

 

 

146,766

 

Research and development

 

 

17,575

 

 

 

14,491

 

Amortization of intangible assets

 

 

13,625

 

 

 

12,425

 

Litigation liability loss

 

 

 

 

 

28,995

 

Business transition costs

 

 

3,833

 

 

 

2,253

 

Total operating expenses

 

 

180,109

 

 

 

204,930

 

Interest and other expense, net:

 

 

 

 

 

 

 

 

Interest income

 

 

409

 

 

 

134

 

Interest expense

 

 

(9,513

)

 

 

(9,467

)

Other (expense) income, net

 

 

(366

)

 

 

(9,703

)

Total interest and other expense, net

 

 

(9,470

)

 

 

(19,036

)

Income (loss) before income taxes

 

 

10,703

 

 

 

(37,258

)

Income tax (expense) benefit

 

 

(1,317

)

 

 

10,126

 

Consolidated net income (loss)

 

$

9,386

 

 

$

(27,132

)

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.18

 

 

$

(0.53

)

Diluted

 

$

0.18

 

 

$

(0.53

)

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

51,675

 

 

 

51,226

 

Diluted

 

 

52,480

 

 

 

51,226

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

 

 

4


Table of Contents

 

NUVASIVE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

 

 

 

Three Months Ended March 31,

 

(unaudited)

 

2019

 

 

2018

 

Consolidated net income (loss)

 

$

9,386

 

 

$

(27,132

)

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

Translation adjustments, net of tax

 

 

(494

)

 

 

2,579

 

Other comprehensive (loss) income

 

 

(494

)

 

 

2,579

 

Total consolidated comprehensive income (loss)

 

$

8,892

 

 

$

(24,553

)

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

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NUVASIVE, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-in

 

 

Comprehensive

 

 

 

 

 

 

Treasury Stock

 

 

Stockholders'

 

(unaudited)

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Retained Earnings

 

 

Shares

 

 

Amount

 

 

Equity

 

Balance at December 31, 2018

 

 

56,648

 

 

$

61

 

 

$

1,397,829

 

 

$

(8,628

)

 

$

17,241

 

 

 

(5,116

)

 

$

(571,978

)

 

$

834,525

 

Issuance of common stock under employee and director equity option and purchase plans

 

 

399

 

 

 

 

 

 

202

 

 

 

 

 

 

 

 

 

(146

)

 

 

(8,379

)

 

 

(8,177

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

4,766

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,766

 

Issuance of common stock in connection with royalty milestone achievement

 

 

72

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,386

 

 

 

 

 

 

 

 

 

9,386

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(494

)

 

 

 

 

 

 

 

 

 

 

 

(494

)

Balance at March 31, 2019

 

 

57,119

 

 

$

61

 

 

$

1,402,797

 

 

$

(9,122

)

 

$

26,627

 

 

 

(5,262

)

 

$

(580,357

)

 

$

840,006

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

6


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NUVASIVE, INC.

CONSOLIDATED STATEMENTS OF EQUITY – (Continued)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NuVasive, Inc.

 

 

Non-

 

 

 

 

 

 

 

Common Stock

 

 

 

 

Paid-in

 

 

 

 

Comprehensive

 

 

Retained Earnings

 

 

Treasury Stock

 

 

Stockholders'

 

 

Controlling

 

 

Total

 

(unaudited)

 

Shares

 

 

Amount

 

 

 

 

Capital

 

 

 

 

Loss

 

 

(Accumulated Deficit)

 

 

Shares

 

 

Amount

 

 

Equity

 

 

Interests

 

 

Equity

 

Balance at December 31, 2017

 

 

56,164

 

 

$

60

 

 

 

 

$

1,363,549

 

 

 

 

$

(6,933

)

 

$

4,762

 

 

 

(5,002

)

 

$

(565,867

)

 

$

795,571

 

 

$

3,845

 

 

$

799,416

 

Issuance of common stock under employee and director equity option and purchase plans

 

 

172

 

 

 

 

 

 

 

 

2,012

 

 

 

 

 

 

 

 

 

 

 

(76

)

 

 

(3,833

)

 

 

(1,821

)

 

 

 

 

 

(1,821

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

5,419

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,419

 

 

 

 

 

 

5,419

 

Consolidated net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(27,132

)

 

 

 

 

 

 

 

 

(27,132

)

 

 

 

 

 

(27,132

)

Consideration paid in excess of non-controlling interests

 

 

 

 

 

 

 

 

 

 

(12,221

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,221

)

 

 

 

 

 

(12,221

)

Non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,845

)

 

 

(3,845

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,579

 

 

 

 

 

 

 

 

 

 

 

 

2,579

 

 

 

 

 

 

2,579

 

Balance at March 31, 2018

 

 

56,336

 

 

$

60

 

 

 

 

$

1,358,759

 

 

 

 

$

(4,354

)

 

$

(22,370

)

 

 

(5,078

)

 

$

(569,700

)

 

$

762,395

 

 

$

 

 

$

762,395

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

 

7


Table of Contents

 

NUVASIVE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands) 

 

 

 

Three Months Ended March 31,

 

(unaudited)

 

2019

 

 

2018

 

Operating activities:

 

 

 

 

 

 

 

 

Consolidated net income (loss)

 

$

9,386

 

 

$

(27,132

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

34,054

 

 

 

32,090

 

Impairment of strategic investment

 

 

 

 

 

9,003

 

Amortization of non-cash interest

 

 

5,210

 

 

 

4,925

 

Stock-based compensation

 

 

5,717

 

 

 

4,134

 

Reserves on current assets

 

 

3,785

 

 

 

4,080

 

Other non-cash adjustments

 

 

2,816

 

 

 

4,456

 

Deferred income taxes

 

 

1,547

 

 

 

(12,671

)

Changes in operating assets and liabilities, net of effects from acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

1,620

 

 

 

16,933

 

Inventory

 

 

(19,292

)

 

 

(12,126

)

Prepaid expenses and other current assets

 

 

(1,399

)

 

 

(1,737

)

Accounts payable and accrued liabilities

 

 

(2,523

)

 

 

1,579

 

Accrued payroll and related expenses

 

 

(14,815

)

 

 

(18,493

)

Litigation liability

 

 

630

 

 

 

30,040

 

Income taxes

 

 

(2,261

)

 

 

1,294

 

Net cash provided by operating activities

 

 

24,475

 

 

 

36,375

 

Investing activities:

 

 

 

 

 

 

 

 

Acquisitions and investments

 

 

 

 

 

(51,794

)

Purchases of intangible assets

 

 

(6,827

)

 

 

(2,657

)

Purchases of property and equipment

 

 

(33,929

)

 

 

(29,109

)

Net cash used in investing activities

 

 

(40,756

)

 

 

(83,560

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from the issuance of common stock

 

 

 

 

 

336

 

Purchases of treasury stock

 

 

(8,177

)

 

 

(2,155

)

Payment of contingent consideration

 

 

(1,435

)

 

 

(8,900

)

Proceeds from revolving line of credit

 

 

 

 

 

65,000

 

Repayments on revolving line of credit

 

 

 

 

 

(10,000

)

Other financing activities

 

 

1,556

 

 

 

(141

)

Net cash (used in) provided by financing activities

 

 

(8,056

)

 

 

44,140

 

Effect of exchange rate changes on cash

 

 

(112

)

 

 

982

 

Decrease in cash, cash equivalents and restricted cash

 

 

(24,449

)

 

 

(2,063

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

120,235

 

 

 

78,198

 

Cash, cash equivalents and restricted cash at end of period

 

$

95,786

 

 

$

76,135

 

 

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported on our Unaudited Consolidated Statements of Cash Flows for the periods presented:

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Cash and cash equivalents

 

$

93,391

 

 

$

73,741

 

Restricted cash

 

 

2,395

 

 

 

2,394

 

Total cash, cash equivalents and restricted cash shown in the Unaudited Consolidated Statement of Cash Flows

 

$

95,786

 

 

$

76,135

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

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NUVASIVE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.    Description of Business and Basis of Presentation

Description of Business

NuVasive, Inc. (the “Company” or “NuVasive”) was incorporated in Delaware on July 21, 1997, and began commercializing its products in 2001. The Company’s principal product offering includes a minimally disruptive surgical platform called Maximum Access Surgery, or MAS. The MAS platform combines three categories of solutions that collectively minimize soft tissue disruption during spine fusion surgery, provide maximum visualization and are designed to enable safe and reproducible outcomes for the surgeon and the patient. The platform includes the Company’s proprietary software-driven nerve detection and avoidance systems and Intraoperative Monitoring (“IOM”) services and support; MaXcess, an integrated split-blade retractor system; and a wide variety of specialized implants and biologics. To assist with surgical procedures, the Company 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 efforts to expand its MAS product platform and advance the applications of its unique technology into procedurally-integrated surgical solutions. The Company dedicates significant resources toward training spine surgeons on its unique technology and products.

The Company’s procedurally integrated solutions use innovative, technological advancements and the MAS platform to provide surgical efficiency, operative reliability, and procedural versatility. The Company offers a range of implants for spinal surgery, which include its porous titanium and polyetheretherketone (“PEEK”) implants under its Advanced Materials Science portfolio, fixation devices such as customizable rods, plates and screws, bone allograft in patented saline packaging, allogeneic and synthetic biologics, and disposables used in IOM. The Company makes available MAS instrument sets, MaXcess and neuromonitoring systems to hospitals to facilitate surgeon access to the spine to perform restorative and fusion procedures using the Company’s implants and fixation devices. The Company sells MAS instrument sets, MaXcess and neuromonitoring systems to hospitals, however, such sales are immaterial to the Company’s results of operations.

The Company also designs and sells expandable growing rod implant systems that can be non-invasively lengthened following implantation with precise, incremental adjustments via an external remote controller using magnetic technology called MAGnetic External Control, or MAGEC, which allows for the minimally invasive treatment of early-onset and adolescent scoliosis. This technology is also the basis for the Company’s Precice limb lengthening system, which allows for the correction of long bone limb length discrepancy, as well as enhanced bone healing in patients that have experienced traumatic injury.

The Company continues to develop a wide variety of projects which broaden its MAS and other product platforms and advance the applications of its unique technology into procedurally integrated surgical solutions that improve clinical and economic outcomes, including Pulse, a surgical automation platform which incorporates neuromonitoring, surgical planning, rod bending, imaging, navigation, and other automation. Pulse is a combined hardware and software platform designed to achieve surgical efficiencies via real-time feedback to aid in clinical decision making and to optimize the procedural workflow in the operating room. The Company continues to pursue business and technology acquisition targets and strategic relationships.

Basis of Presentation and Principles of Consolidation

The accompanying Unaudited Consolidated Financial Statements include the accounts of the Company and its majority-owned or controlled subsidiaries, collectively referred to as either NuVasive or the Company. The Company translates the financial statements of its foreign subsidiaries using end-of-period exchange rates for assets and liabilities and average exchange rates during each reporting period for results of operations. When there is a portion of equity in an acquired subsidiary not attributable, directly or indirectly, to the respective parent entity, the Company records the fair value of the non-controlling interest at the acquisition date and classifies the amounts attributable to non-controlling interest separately in equity in the Company's Consolidated Financial Statements. Any subsequent changes in a parent's ownership interest while the parent retains its controlling financial interest in its subsidiary are accounted for as equity transactions. All significant intercompany balances and transactions have been eliminated in consolidation.

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The accompanying Unaudited Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Pursuant to these rules and regulations, the Company has condensed or omitted certain information and footnote disclosures it normally includes in its annual Consolidated Financial Statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for any other interim period or for the full year. These Unaudited Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K filed with the SEC. In the opinion of management, the Unaudited Consolidated Financial Statements and notes thereto include all adjustments that are of a normal and recurring nature that are necessary for the fair presentation of the Company’s financial position and of the results of operations and cash flows for the periods presented.

Use of Estimates

To prepare financial statements in conformity with GAAP, management must make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Recent Accounting Pronouncements Not Yet Adopted

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-13, Financial Instruments – 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 impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. This update is effective for annual periods beginning after December 15, 2019, and interim periods within those periods, and early adoption is permitted. The Company 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 Company is in the process of determining the effects the adoption will have on its Consolidated Financial Statements as well as whether to early adopt the new guidance.

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles – Goodwill and Other, which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. This update is effective for annual periods beginning after December 15, 2019, and interim periods within those periods, and early adoption is permitted. The Company is in the process of determining the effects the adoption will have on its Consolidated Financial Statements as well as whether to early adopt the new guidance.

In August 2018, the FASB issued Accounting Standards Update No. 2018-13, Fair Value Measurement: Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which adds and modifies certain disclosure requirements for fair value measurements. Under the new guidance, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, or valuation processes for Level 3 fair value measurements. However, public companies will be required to disclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and related changes in unrealized gains and losses included in other comprehensive income. This update is effective for annual periods beginning after December 15, 2019, and interim periods within those periods, and early adoption is permitted. The Company is 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 September 2018, the FASB issued Accounting Standards Update No. 2018-15, Intangible – Goodwill and Other – Internal-Use Software, which requires a customer in a cloud computing arrangement to determine which implementation costs to capitalize as assets or expense as incurred. Under the new guidance, capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. This update is effective for annual periods beginning after December 15, 2019, and interim periods within those periods, and early adoption is permitted. The Company 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.

Recently Adopted Accounting Standards 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02 – Leases, which introduced a new comprehensive lease accounting model. The standard effectively replaces Accounting Standards Codification 840 with Accounting Standards Codification 842 (“ASC 842”). In summary, the changes to the guidance for lease accounting under ASC 842 requires lessees to recognize right-of-use assets and corresponding lease liabilities for all leases with lease terms of greater than twelve months on the Consolidated Balance Sheet. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. 

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The Company adopted ASC 842 as of January 1, 2019, electing the optional transition method that allows for a cumulative-effect adjustment in the period of adoption and did not restate prior periods. The Company elected the package of practical expedients permitted under the transition guidance. As a result of the adoption, the Company recorded right-of-use assets and liabilities, and their corresponding deferred tax assets and liabilities on its Unaudited Consolidated Balance Sheet. As of March 31, 2019 the Company’s right-of-use assets and liabilities were $61.4 million and $73.4 million, respectively, associated with its operating leases. See Note 10 to the Unaudited Consolidated Financial Statements for further discussion on leases.

In July 2017, the FASB issued Accounting Standards Update No. 2017-11, Earnings Per Share, Distinguishing Liabilities from Equity, Derivatives and Hedging (“ASU 2017-11”), which changes the accounting treatment and the earnings per share calculation for certain instruments with down round features. The amendments in this update are to be applied using a cumulative-effect adjustment as of the beginning of the fiscal year of adoption or retrospective adjustment to each period presented. The Company adopted ASU 2017-11 as of January 1, 2019. The adoption did not have any significant impact on the Company’s Unaudited Consolidated Financial Statements.

In August 2017, the FASB issued Accounting Standards Update No. 2017-12, Derivatives and Hedging (“ASU 2017-12”), 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 are to be applied using a cumulative-effect adjustment as of the beginning of the fiscal year of adoption. The Company adopted ASU 2017-12 as of January 1, 2019. The adoption did not have any significant impact on its Unaudited Consolidated Financial Statements.

Revenue Recognition

In accordance with Accounting Standards Codification 606 Revenue from Contracts with Customers (“ASC 606”), the Company recognizes revenue upon the transfer of goods or services to a customer at an amount that reflects the expected consideration to be received in exchange for those goods or services. The principles in ASC 606 are applied using the following five steps: (i) identify the contract with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenue when (or as) the Company satisfies its performance obligation(s). Specifically, revenue from the sale of implants and disposables is generally recognized at an amount that reflects the expected consideration upon notice that the Company’s products have been used in a surgical procedure or upon shipment to a third-party customer assuming control of the products. Revenue from neuromonitoring services is recognized in the period the service is performed for the amount of consideration expected to be received. Revenue from the sale of instrument sets is generally recognized upon receipt of a purchase order and the subsequent shipment to a customer who assumes control. In certain cases, the Company does offer the ability for customers to lease instrumentation primarily on a non-sales type basis. Instrument sales and leasing revenue represent an immaterial amount of the Company’s total revenue in all periods presented. Revenue associated with products holding rights of return or trade-in are recognized when the Company concludes there is not a risk of significant revenue reversal in future periods for the expected consideration in the transaction. Costs incurred by the Company associated with sales contracts with customers are deferred over the performance obligation period and recognized in the same period as the related revenue, with the exception of contracts that complete within one year or less, in which case the associated costs are expensed as incurred.

Inventory

Net inventory as of March 31, 2019 consisted of $274.8 million of finished goods, $6.5 million of work in progress and $7.2 million of raw materials. Net inventory as of December 31, 2018 consisted of $259.4 million of finished goods, $5.0 million of work in progress and $8.8 million of raw materials.

Finished goods include specialized implants and disposables and are stated at the lower of cost or market determined by utilizing a standard cost method, which includes capitalized variances, which approximates the weighted average cost. Work in progress and raw materials represent the underlying material, and labor for work in progress, that ultimately yield finished goods upon completion and are subject to lower of cost or market. The Company reviews the components of its inventory on a periodic basis for excess and obsolescence and adjusts inventory to its net realizable value as necessary.

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 accumulated other comprehensive loss were $9.1 million and $8.6 million at March 31, 2019 and December 31, 2018, respectively.

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Product Shipment Costs

Product shipment costs, included in sales, marketing and administrative expense in the accompanying Unaudited Consolidated Statements of Operations, were $6.4 million and $5.9 million for the three months ended March 31, 2019 and March 31, 2018, respectively. The majority of the Company’s shipping costs are related to the loaning of instrument sets, which are not typically sold as part of the Company’s core sales offering. Amounts billed to customers for shipping and handling of products are reflected in revenues and are not material for any period presented.

Business Transition Costs

The Company incurs certain costs related to acquisition, integration and business transition activities, which include severance, relocation, consulting, leasehold exit costs, third-party merger and acquisition costs, contingent consideration fair value adjustments and other costs directly associated with such activities.

The Company incurred $3.8 million of such costs during the three months ended March 31, 2019, which consisted primarily of acquisition, integration and business transition activities, but also included $0.4 million of fair value adjustments on contingent consideration liabilities associated with the Company’s 2017 and 2016 acquisitions.

The Company incurred $2.3 million of such costs during the three months ended March 31, 2018, which consisted primarily of acquisition, integration and business transition activities, but also included $0.1 million of fair value adjustments on contingent consideration liabilities associated with the Company’s 2017 and 2016 acquisitions.

2.    Net Income (Loss) Per Share

The following table sets forth the computation of basic and diluted consolidated net income (loss) per share:

 

 

Three Months Ended March 31,

 

(in thousands, except per share data)

 

2019

 

 

2018

 

Numerator:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

9,386

 

 

$

(27,132

)

Denominator for basic and diluted net income (loss) per share:

 

 

 

 

 

 

 

 

Weighted average common shares outstanding for basic

 

 

51,675

 

 

 

51,226

 

Dilutive potential common stock outstanding:

 

 

 

 

 

 

 

 

Stock options and employee stock purchase plan

 

 

15

 

 

 

 

Restricted stock units

 

 

790

 

 

 

 

Weighted average common shares outstanding for diluted

 

 

52,480

 

 

 

51,226

 

Basic net income (loss) per share

 

$

0.18

 

 

$

(0.53

)

Diluted net income (loss) per share

 

$

0.18

 

 

$

(0.53

)

The following weighted-average outstanding common stock equivalents were not included in the calculation of net income (loss) per diluted share because their effects were anti-dilutive: 

 

 

Three Months Ended March 31,

 

(in thousands)

 

2019

 

 

2018

 

Stock options, employee stock purchase plan, and restricted stock units

 

 

266

 

 

 

1,056

 

Warrants

 

 

10,865

 

 

 

10,865

 

Senior Convertible Notes

 

 

10,865

 

 

 

10,865

 

Total

 

 

21,996

 

 

 

22,786

 

 

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3.    Financial Instruments and Fair Value Measurements

Foreign Currency and Derivative Financial Instruments

The Company translates the financial statements of its foreign subsidiaries using end-of-period exchange rates for assets and liabilities and average exchange rates during each reporting period for results of operations.

Some of the Company’s reporting entities conduct a portion of their business in currencies other than the entity’s functional currency. These transactions give rise to receivables and payables that are denominated in currencies other than the entity’s functional currency. The value of these receivables and payables is subject to changes in currency exchange rates from the point at which the transactions are originated until the settlement in cash. Both realized and unrealized gains and losses in the value of these receivables and payables are included in the determination of net income. Net currency exchange gains (losses), which include gains and losses from derivative instruments, were $(0.3) million for both the three months ended March 31, 2019 and March 31, 2018 and are included in other (expense) income, net in the Unaudited Consolidated Statements of Operations.

To manage foreign currency exposure risks, the Company uses derivatives for activities in entities that have short-term intercompany receivables and payables denominated in a currency other than the entity’s functional currency. The fair value is based on a quoted market price (Level 1). As of March 31, 2019 and December 31, 2018 a notional principal amount of $28.3 million and $26.8 million, respectively, was outstanding to hedge currency risk relative to the Company’s foreign receivables and payables. Derivative instrument net gains (losses) on the Company’s forward exchange contracts were $0.4 million and $(0.4) million for the three months ended March 31, 2019 and March 31, 2018, respectively, and are included in other (expense) income, net in the Unaudited Consolidated Statements of Operations. The fair value of the forward contract exchange derivative instrument asset (liability) was de minimis and $(0.3) million as of March 31, 2019 and December 31, 2018, respectively. The derivative instruments are recorded in other current assets or other current liabilities in the Unaudited Consolidated Balance Sheets commensurate with the nature of the instrument at period end.

Fair Value Measurements

The Company measures certain assets and liabilities in accordance with authoritative guidance which requires fair value measurements be classified and disclosed in one of the following three categories:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available.

Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain assets or liabilities within the fair value hierarchy. The Company did not have any transfers of assets and liabilities between the levels of the fair value measurement hierarchy during the periods presented.

The fair values of the Company’s assets and liabilities, including cash equivalents, marketable securities, restricted investments, derivatives, and contingent obligations are measured at fair value on a recurring basis. As of March 31, 2019 and December 31, 2018, the Company held investments in securities classified as cash equivalents. During the periods presented, the Company did not hold any investments that were in a significant unrealized loss position and no impairment charges were recorded. 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:

 

 

 

 

 

 

Quoted Price in

 

 

Significant Other

 

 

Significant

 

 

 

 

 

 

 

Active Market

 

 

Observable Inputs

 

 

Unobservable

 

(in thousands)

 

Total

 

 

(Level 1)

 

 

(Level 2)

 

 

Inputs (Level 3)

 

March 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

37,300

 

 

$

37,300

 

 

$

 

 

$

 

Total cash equivalents

 

$

37,300

 

 

$

37,300

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

56,000

 

 

$

56,000

 

 

$

 

 

$

 

Total cash equivalents

 

$

56,000

 

 

$

56,000

 

 

$

 

 

$

 

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The carrying amounts of certain financial instruments such as cash equivalents, accounts receivable, prepaid expenses, other current assets, accounts payable, accrued expenses, and other current liabilities as of March 31, 2019 and December 31, 2018 approximate their related fair values due to the short-term maturities of these instruments.

The fair value of certain financial instruments was measured and classified within Level 1 of the fair value hierarchy based on quoted prices. Certain financial instruments classified within Level 2 of the fair value hierarchy include the types of instruments that trade in markets that are not considered to be active, but are valued based on quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.

Fair Value of Senior Convertible Notes

The fair value, based on a quoted market price (Level 1), of the Company’s outstanding Senior Convertible Notes due 2021 at March 31, 2019 and December 31, 2018, was $723.5 million and $684.8 million, respectively. See Note 6 to the Unaudited Consolidated Financial Statements for further discussion on the carrying value of the notes.

Contingent Consideration Liabilities

The fair value of contingent consideration liabilities assumed in business combinations is recorded as part of the purchase price consideration of the acquisition, and is determined using a discounted cash flow model or probability simulation model. The significant inputs of such models are not observable in the market, such as certain financial metric growth rates, volatility rates, projections associated with the applicable milestone, the interest rate, and the related probabilities and payment structure in the contingent consideration arrangement. Fair value adjustments to contingent consideration liabilities are recorded through operating expenses in the Unaudited 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 $49.3 million and $50.4 million as of March 31, 2019 and December 31, 2018, respectively, and were recorded in the Unaudited 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): 

 

 

Three Months Ended March 31,

 

(in thousands)

 

2019

 

 

2018

 

Fair value measurement at beginning of period

 

$

50,410

 

 

$

67,941

 

Contingent consideration liability recorded upon acquisition

 

 

 

 

 

6,663

 

Change in fair value measurement

 

 

356

 

 

 

149

 

Changes resulting from foreign currency fluctuations

 

 

(59

)

 

 

72

 

Contingent consideration paid or settled

 

 

(1,435

)

 

 

(9,000

)

Fair value measurement at end of period

 

$

49,272

 

 

$

65,825

 

Non-financial assets and liabilities measured on a nonrecurring basis

Certain non-financial assets and liabilities are measured at fair value, usually with Level 3 inputs including the discounted cash flow method or cost method, on a nonrecurring basis in accordance with authoritative guidance. These include items such as non-financial assets and liabilities initially measured at fair value in a business combination and non-financial long-lived assets measured at fair value for an impairment assessment. In general, non-financial assets, including goodwill, intangible assets and property and equipment, are measured at fair value when there is an indication of impairment and are recorded at fair value only when any impairment is recognized. The carrying values of the Company’s financing lease obligations approximated their estimated fair value as of March 31, 2019 and December 31, 2018.

During the three months ended March 31, 2018, the Company recorded an impairment charge of $9.0 million on a strategic investment. The impairment was recorded in other (expense) income, net in the Unaudited Consolidated Statement of Operations.

 

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