nuva-10q_20200331.htm
NUVASIVE INC 0001142596 false 2020 Q1 --12-31 Large Accelerated Filer true P15Y P3Y P6M P8Y P13Y P9Y P9Y P9Y P8Y P13Y P9Y P9Y P9Y P6M P6M P13Y4M24D P12Y4M24D P2Y2M12D P2Y3M18D us-gaap:ValuationTechniqueDiscountedCashFlowMember 0001142596 2020-01-01 2020-03-31 xbrli:shares 0001142596 2020-05-04 iso4217:USD 0001142596 2020-03-31 0001142596 2019-12-31 iso4217:USD xbrli:shares 0001142596 us-gaap:ProductMember 2020-01-01 2020-03-31 0001142596 us-gaap:ProductMember 2019-01-01 2019-03-31 0001142596 us-gaap:ServiceMember 2020-01-01 2020-03-31 0001142596 us-gaap:ServiceMember 2019-01-01 2019-03-31 0001142596 2019-01-01 2019-03-31 0001142596 us-gaap:CommonStockMember 2019-12-31 0001142596 us-gaap:AdditionalPaidInCapitalMember 2019-12-31 0001142596 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-12-31 0001142596 us-gaap:RetainedEarningsMember 2019-12-31 0001142596 us-gaap:TreasuryStockMember 2019-12-31 0001142596 us-gaap:CommonStockMember 2020-01-01 2020-03-31 0001142596 us-gaap:AdditionalPaidInCapitalMember 2020-01-01 2020-03-31 0001142596 us-gaap:TreasuryStockMember 2020-01-01 2020-03-31 0001142596 us-gaap:RetainedEarningsMember 2020-01-01 2020-03-31 0001142596 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2020-01-01 2020-03-31 0001142596 us-gaap:CommonStockMember 2020-03-31 0001142596 us-gaap:AdditionalPaidInCapitalMember 2020-03-31 0001142596 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2020-03-31 0001142596 us-gaap:RetainedEarningsMember 2020-03-31 0001142596 us-gaap:TreasuryStockMember 2020-03-31 0001142596 us-gaap:CommonStockMember 2018-12-31 0001142596 us-gaap:AdditionalPaidInCapitalMember 2018-12-31 0001142596 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-12-31 0001142596 us-gaap:RetainedEarningsMember 2018-12-31 0001142596 us-gaap:TreasuryStockMember 2018-12-31 0001142596 2018-12-31 0001142596 us-gaap:CommonStockMember 2019-01-01 2019-03-31 0001142596 us-gaap:AdditionalPaidInCapitalMember 2019-01-01 2019-03-31 0001142596 us-gaap:TreasuryStockMember 2019-01-01 2019-03-31 0001142596 us-gaap:RetainedEarningsMember 2019-01-01 2019-03-31 0001142596 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-01-01 2019-03-31 0001142596 us-gaap:CommonStockMember 2019-03-31 0001142596 us-gaap:AdditionalPaidInCapitalMember 2019-03-31 0001142596 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-03-31 0001142596 us-gaap:RetainedEarningsMember 2019-03-31 0001142596 us-gaap:TreasuryStockMember 2019-03-31 0001142596 2019-03-31 0001142596 us-gaap:AccountingStandardsUpdate201613Member 2020-01-01 2020-03-31 0001142596 us-gaap:ShippingAndHandlingMember 2020-01-01 2020-03-31 0001142596 us-gaap:ShippingAndHandlingMember 2019-01-01 2019-03-31 0001142596 us-gaap:SeriesOfIndividuallyImmaterialBusinessAcquisitionsMember 2020-01-01 2020-03-31 0001142596 us-gaap:SeriesOfIndividuallyImmaterialBusinessAcquisitionsMember 2019-01-01 2019-03-31 0001142596 nuva:StockOptionsAndESPPMember 2020-01-01 2020-03-31 0001142596 nuva:StockOptionsAndESPPMember 2019-01-01 2019-03-31 0001142596 us-gaap:RestrictedStockUnitsRSUMember 2020-01-01 2020-03-31 0001142596 us-gaap:RestrictedStockUnitsRSUMember 2019-01-01 2019-03-31 0001142596 us-gaap:ConvertibleDebtSecuritiesMember 2020-01-01 2020-03-31 0001142596 nuva:StockOptionsESPPAndRestrictedStockUnitsMember 2020-01-01 2020-03-31 0001142596 nuva:StockOptionsESPPAndRestrictedStockUnitsMember 2019-01-01 2019-03-31 0001142596 us-gaap:WarrantMember 2020-01-01 2020-03-31 0001142596 us-gaap:WarrantMember 2019-01-01 2019-03-31 0001142596 us-gaap:ConvertibleDebtSecuritiesMember 2020-01-01 2020-03-31 0001142596 us-gaap:ConvertibleDebtSecuritiesMember 2019-01-01 2019-03-31 0001142596 us-gaap:ForeignExchangeForwardMember 2020-03-31 0001142596 us-gaap:ForeignExchangeForwardMember 2019-12-31 0001142596 us-gaap:ForeignExchangeForwardMember us-gaap:OtherOperatingIncomeExpenseMember 2020-01-01 2020-03-31 0001142596 us-gaap:ForeignExchangeForwardMember us-gaap:OtherOperatingIncomeExpenseMember 2019-01-01 2019-03-31 0001142596 us-gaap:ForeignExchangeForwardMember nuva:OtherCurrentAssetsOrOtherCurrentLiabilitiesMember 2019-12-31 nuva:investment 0001142596 2019-01-01 2019-12-31 0001142596 us-gaap:MoneyMarketFundsMember us-gaap:FairValueMeasurementsRecurringMember 2020-03-31 0001142596 us-gaap:MoneyMarketFundsMember us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember 2020-03-31 0001142596 us-gaap:FairValueMeasurementsRecurringMember 2020-03-31 0001142596 us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember 2020-03-31 0001142596 us-gaap:MoneyMarketFundsMember us-gaap:FairValueMeasurementsRecurringMember 2019-12-31 0001142596 us-gaap:MoneyMarketFundsMember us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember 2019-12-31 0001142596 us-gaap:FairValueMeasurementsRecurringMember 2019-12-31 0001142596 us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember 2019-12-31 0001142596 us-gaap:FairValueInputsLevel1Member us-gaap:DebtInstrumentRedemptionPeriodTwoMember 2020-03-31 0001142596 us-gaap:FairValueInputsLevel1Member us-gaap:DebtInstrumentRedemptionPeriodTwoMember 2019-12-31 0001142596 us-gaap:FairValueInputsLevel1Member us-gaap:DebtInstrumentRedemptionPeriodThreeMember 2020-03-31 0001142596 nuva:CommercialSaleMilestoneMember us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember 2020-03-31 xbrli:pure 0001142596 us-gaap:FairValueInputsLevel3Member nuva:CommercialSaleMilestoneMember us-gaap:FairValueMeasurementsRecurringMember us-gaap:MeasurementInputDiscountRateMember srt:MinimumMember 2020-03-31 0001142596 us-gaap:FairValueInputsLevel3Member nuva:CommercialSaleMilestoneMember us-gaap:FairValueMeasurementsRecurringMember us-gaap:MeasurementInputDiscountRateMember srt:MaximumMember 2020-03-31 0001142596 us-gaap:FairValueInputsLevel3Member nuva:CommercialSaleMilestoneMember us-gaap:FairValueMeasurementsRecurringMember us-gaap:MeasurementInputDiscountRateMember srt:WeightedAverageMember 2020-03-31 0001142596 us-gaap:FairValueInputsLevel3Member nuva:CommercialSaleMilestoneMember us-gaap:FairValueMeasurementsRecurringMember us-gaap:MeasurementInputExpectedTermMember srt:MinimumMember 2020-01-01 2020-03-31 0001142596 us-gaap:FairValueInputsLevel3Member nuva:CommercialSaleMilestoneMember us-gaap:FairValueMeasurementsRecurringMember us-gaap:MeasurementInputExpectedTermMember srt:MaximumMember 2020-01-01 2020-03-31 0001142596 nuva:ContingentConsiderationLiabilitiesMember 2020-03-31 0001142596 nuva:ContingentConsiderationLiabilitiesMember 2019-12-31 0001142596 nuva:ContingentConsiderationLiabilitiesMember 2018-12-31 0001142596 nuva:ContingentConsiderationLiabilitiesMember 2020-01-01 2020-03-31 0001142596 nuva:ContingentConsiderationLiabilitiesMember 2019-01-01 2019-03-31 0001142596 nuva:ContingentConsiderationLiabilitiesMember 2019-03-31 0001142596 us-gaap:DevelopedTechnologyRightsMember 2020-01-01 2020-03-31 0001142596 nuva:ManufacturingKnowHowAndTradeSecretsMember 2020-01-01 2020-03-31 0001142596 nuva:TradeNameAndTrademarksMember 2020-01-01 2020-03-31 0001142596 us-gaap:CustomerRelationshipsMember 2020-01-01 2020-03-31 0001142596 us-gaap:DevelopedTechnologyRightsMember 2020-03-31 0001142596 nuva:ManufacturingKnowHowAndTradeSecretsMember 2020-03-31 0001142596 nuva:TradeNameAndTrademarksMember 2020-03-31 0001142596 us-gaap:CustomerRelationshipsMember 2020-03-31 0001142596 us-gaap:DevelopedTechnologyRightsMember 2019-01-01 2019-12-31 0001142596 nuva:ManufacturingKnowHowAndTradeSecretsMember 2019-01-01 2019-12-31 0001142596 nuva:TradeNameAndTrademarksMember 2019-01-01 2019-12-31 0001142596 us-gaap:CustomerRelationshipsMember 2019-01-01 2019-12-31 0001142596 us-gaap:DevelopedTechnologyRightsMember 2019-12-31 0001142596 nuva:ManufacturingKnowHowAndTradeSecretsMember 2019-12-31 0001142596 nuva:TradeNameAndTrademarksMember 2019-12-31 0001142596 us-gaap:CustomerRelationshipsMember 2019-12-31 0001142596 nuva:TwoPointTwoFivePercentSeniorConvertibleNotesMember us-gaap:DebtInstrumentRedemptionPeriodTwoMember 2020-03-31 0001142596 nuva:TwoPointTwoFivePercentSeniorConvertibleNotesMember us-gaap:DebtInstrumentRedemptionPeriodTwoMember 2019-12-31 0001142596 nuva:ZeroPointThreeSevenFivePercentSeniorConvertibleNotesMember us-gaap:DebtInstrumentRedemptionPeriodThreeMember 2020-03-31 0001142596 nuva:ZeroPointThreeSevenFivePercentSeniorConvertibleNotesMember us-gaap:DebtInstrumentRedemptionPeriodThreeMember 2020-03-01 2020-03-31 0001142596 nuva:ZeroPointThreeSevenFivePercentSeniorConvertibleNotesMember us-gaap:DebtInstrumentRedemptionPeriodThreeMember us-gaap:AdditionalPaidInCapitalMember 2020-01-01 2020-03-31 0001142596 nuva:ZeroPointThreeSevenFivePercentSeniorConvertibleNotesMember us-gaap:DebtInstrumentRedemptionPeriodThreeMember 2020-01-01 2020-03-31 utr:D 0001142596 nuva:ZeroPointThreeSevenFivePercentSeniorConvertibleNotesMember us-gaap:DebtInstrumentRedemptionPeriodThreeMember srt:MinimumMember nuva:ScenarioOneMember 2020-03-01 2020-03-31 0001142596 nuva:ZeroPointThreeSevenFivePercentSeniorConvertibleNotesMember us-gaap:DebtInstrumentRedemptionPeriodThreeMember srt:MaximumMember nuva:ScenarioOneMember 2020-03-01 2020-03-31 0001142596 nuva:ZeroPointThreeSevenFivePercentSeniorConvertibleNotesMember us-gaap:DebtInstrumentRedemptionPeriodThreeMember srt:MinimumMember 2020-03-01 2020-03-31 0001142596 nuva:ZeroPointThreeSevenFivePercentSeniorConvertibleNotesMember us-gaap:DebtInstrumentRedemptionPeriodThreeMember nuva:ScenarioTwoMember 2020-03-01 2020-03-31 0001142596 nuva:ZeroPointThreeSevenFivePercentSeniorConvertibleNotesMember us-gaap:DebtInstrumentRedemptionPeriodThreeMember srt:MaximumMember 2020-03-01 2020-03-31 0001142596 nuva:FairValueHedgingTwoThousandTwentyFiveMember 2020-03-01 2020-03-31 0001142596 nuva:FairValueHedgingTwoThousandTwentyFiveMember 2020-03-31 0001142596 us-gaap:AdditionalPaidInCapitalMember nuva:FairValueHedgingTwoThousandTwentyFiveMember 2020-03-31 0001142596 srt:MaximumMember us-gaap:CommonStockMember nuva:WarrantsTwoThousandTwentyFiveMember 2020-03-31 0001142596 srt:MinimumMember nuva:WarrantsTwoThousandTwentyFiveMember 2020-03-01 2020-03-31 0001142596 srt:MaximumMember nuva:WarrantsTwoThousandTwentyFiveMember 2020-03-01 2020-03-31 0001142596 nuva:WarrantsTwoThousandTwentyFiveMember 2020-03-01 2020-03-31 0001142596 nuva:WarrantsTwoThousandTwentyFiveMember 2020-03-31 0001142596 nuva:TwoPointTwoFivePercentSeniorConvertibleNotesMember us-gaap:DebtInstrumentRedemptionPeriodTwoMember 2016-03-31 0001142596 nuva:TwoPointTwoFivePercentSeniorConvertibleNotesMember us-gaap:DebtInstrumentRedemptionPeriodTwoMember 2016-03-01 2016-03-31 0001142596 nuva:TwoPointTwoFivePercentSeniorConvertibleNotesMember us-gaap:DebtInstrumentRedemptionPeriodTwoMember us-gaap:AdditionalPaidInCapitalMember 2016-01-01 2016-12-31 0001142596 nuva:TwoPointTwoFivePercentSeniorConvertibleNotesMember us-gaap:DebtInstrumentRedemptionPeriodTwoMember 2020-01-01 2020-03-31 0001142596 nuva:TwoPointTwoFivePercentSeniorConvertibleNotesMember us-gaap:DebtInstrumentRedemptionPeriodTwoMember 2019-01-01 2019-03-31 0001142596 us-gaap:DebtInstrumentRedemptionPeriodTwoMember nuva:TwoPointTwoFivePercentSeniorConvertibleNotesMember nuva:ScenarioOneMember srt:MinimumMember 2016-03-01 2016-03-31 0001142596 us-gaap:DebtInstrumentRedemptionPeriodTwoMember nuva:TwoPointTwoFivePercentSeniorConvertibleNotesMember nuva:ScenarioOneMember srt:MaximumMember 2016-03-01 2016-03-31 0001142596 us-gaap:DebtInstrumentRedemptionPeriodTwoMember nuva:TwoPointTwoFivePercentSeniorConvertibleNotesMember srt:MinimumMember 2016-03-01 2016-03-31 0001142596 us-gaap:DebtInstrumentRedemptionPeriodTwoMember nuva:TwoPointTwoFivePercentSeniorConvertibleNotesMember nuva:ScenarioTwoMember 2016-03-01 2016-03-31 0001142596 us-gaap:DebtInstrumentRedemptionPeriodTwoMember nuva:TwoPointTwoFivePercentSeniorConvertibleNotesMember srt:MaximumMember 2016-03-01 2016-03-31 0001142596 nuva:FairValueHedgingTwoThousandTwentyOneMember 2016-03-01 2016-03-31 0001142596 nuva:FairValueHedgingTwoThousandTwentyOneMember 2016-03-31 0001142596 nuva:FairValueHedgingTwoThousandTwentyOneMember us-gaap:AdditionalPaidInCapitalMember 2016-12-31 0001142596 us-gaap:CommonStockMember srt:MaximumMember nuva:WarrantsTwoThousandTwentyOneMember 2016-03-31 0001142596 srt:MinimumMember nuva:WarrantsTwoThousandTwentyOneMember 2016-03-01 2016-03-31 0001142596 srt:MaximumMember nuva:WarrantsTwoThousandTwentyOneMember 2016-03-01 2016-03-31 0001142596 nuva:WarrantsTwoThousandTwentyOneMember 2016-03-01 2016-03-31 0001142596 nuva:WarrantsTwoThousandTwentyOneMember 2016-03-31 0001142596 us-gaap:RevolvingCreditFacilityMember 2020-02-29 0001142596 nuva:MulticurrencyBorrowingsMember 2020-02-29 0001142596 us-gaap:StandbyLettersOfCreditMember 2020-02-29 0001142596 nuva:SwingLineLoansMember 2020-02-29 0001142596 us-gaap:RevolvingCreditFacilityMember 2020-02-01 2020-02-29 0001142596 us-gaap:RevolvingCreditFacilityMember 2020-03-31 0001142596 us-gaap:RevolvingCreditFacilityMember 2019-12-31 0001142596 us-gaap:RevolvingCreditFacilityMember us-gaap:FederalFundsEffectiveSwapRateMember 2020-02-01 2020-02-29 0001142596 us-gaap:RevolvingCreditFacilityMember us-gaap:EurodollarMember 2020-02-01 2020-02-29 0001142596 us-gaap:RevolvingCreditFacilityMember us-gaap:BaseRateMember srt:MinimumMember 2020-02-01 2020-02-29 0001142596 us-gaap:RevolvingCreditFacilityMember us-gaap:BaseRateMember srt:MaximumMember 2020-02-01 2020-02-29 0001142596 us-gaap:RevolvingCreditFacilityMember us-gaap:EurodollarMember srt:MinimumMember 2020-02-01 2020-02-29 0001142596 us-gaap:RevolvingCreditFacilityMember us-gaap:EurodollarMember srt:MaximumMember 2020-02-01 2020-02-29 0001142596 us-gaap:RevolvingCreditFacilityMember srt:MinimumMember 2020-02-01 2020-02-29 0001142596 us-gaap:RevolvingCreditFacilityMember srt:MaximumMember 2020-02-01 2020-02-29 0001142596 srt:MaximumMember us-gaap:CommonStockMember 2017-10-31 0001142596 us-gaap:CommonStockMember 2017-10-01 2017-10-31 0001142596 us-gaap:CommonStockMember 2020-02-29 0001142596 us-gaap:CommonStockMember 2020-02-01 2020-02-29 0001142596 us-gaap:DebtInstrumentRedemptionPeriodThreeMember nuva:ZeroPointThreeSevenFivePercentSeniorConvertibleNotesMember us-gaap:CommonStockMember 2020-03-01 2020-03-31 0001142596 us-gaap:SellingGeneralAndAdministrativeExpensesMember 2020-01-01 2020-03-31 0001142596 us-gaap:SellingGeneralAndAdministrativeExpensesMember 2019-01-01 2019-03-31 0001142596 us-gaap:ResearchAndDevelopmentExpenseMember 2020-01-01 2020-03-31 0001142596 us-gaap:ResearchAndDevelopmentExpenseMember 2019-01-01 2019-03-31 0001142596 nuva:CostOfRevenueMember 2020-01-01 2020-03-31 0001142596 nuva:CostOfRevenueMember 2019-01-01 2019-03-31 0001142596 us-gaap:RestrictedStockUnitsRSUMember 2020-03-31 0001142596 nuva:PerformanceBasedRestrictedStockUnitsMember 2020-03-31 0001142596 nuva:PerformanceBasedRestrictedStockUnitsMember 2020-01-01 2020-03-31 0001142596 nuva:RestrictedStockUnitsAndPerformanceBasedRestrictedStockUnitsMember 2020-01-01 2020-03-31 0001142596 nuva:RestrictedStockUnitsAndPerformanceBasedRestrictedStockUnitsMember 2019-01-01 2019-12-31 0001142596 us-gaap:EmployeeStockMember 2020-01-01 2020-03-31 0001142596 us-gaap:EmployeeStockMember 2019-01-01 2019-03-31 0001142596 us-gaap:EmployeeStockMember 2020-03-31 nuva:segment 0001142596 nuva:SpinalHardwareMember 2020-01-01 2020-03-31 0001142596 nuva:SpinalHardwareMember 2019-01-01 2019-03-31 0001142596 nuva:SurgicalSupportMember 2020-01-01 2020-03-31 0001142596 nuva:SurgicalSupportMember 2019-01-01 2019-03-31 0001142596 country:US 2020-01-01 2020-03-31 0001142596 us-gaap:NonUsMember 2020-01-01 2020-03-31 0001142596 country:US 2019-01-01 2019-03-31 0001142596 us-gaap:NonUsMember 2019-01-01 2019-03-31 0001142596 country:US 2020-03-31 0001142596 us-gaap:NonUsMember 2020-03-31 0001142596 country:US 2019-12-31 0001142596 us-gaap:NonUsMember 2019-12-31 0001142596 srt:MinimumMember 2020-03-31 0001142596 srt:MaximumMember 2020-03-31 0001142596 nuva:CorporateOfficeFacilitiesMember 2020-03-31 0001142596 nuva:CorporateOfficeFacilitiesMember 2020-01-01 2020-03-31 0001142596 nuva:ExecutiveSeverancePlansMember 2020-03-31

 

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, 2020

OR

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

 

For the transition period from                 to                

Commission File 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)

 

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

NUVA

The NASDAQ Stock Market LLC

(NASDAQ Global Select Market)

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

 

  

  

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  

As of May 4, 2020 there were 51,248,457 shares of the registrant’s common stock (par value $0.001 per share) outstanding.

 

 

2


NuVasive, Inc.

Quarterly Report on Form 10-Q

March 31, 2020

 

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

4

 

Consolidated Balance Sheets

4

 

Consolidated Statements of Operations

5

 

Consolidated Statements of Comprehensive Income

6

 

Consolidated Statements of Equity

7

 

Consolidated Statements of Cash Flows

9

 

Notes to Unaudited Consolidated Financial Statements

10

Item 2.

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

27

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

38

Item 4.

Controls and Procedures

38

 

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

38

Item 1A.

Risk Factors

38

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

42

Item 3.

Defaults Upon Senior Securities

42

Item 4.

Mine Safety Disclosures

42

Item 5.

Other Information

42

Item 6.

Exhibits

43

 

SIGNATURES

45

 

 

 

3


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, 2020

 

 

December 31, 2019

 

ASSETS

 

(Unaudited)

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

511,976

 

 

$

213,034

 

Accounts receivable, net of allowances of $17,386 and $17,019, respectively

 

 

186,826

 

 

 

211,532

 

Inventory, net

 

 

324,675

 

 

 

312,419

 

Prepaid income taxes

 

 

17,628

 

 

 

10,434

 

Prepaid expenses and other current assets

 

 

17,294

 

 

 

16,917

 

Total current assets

 

 

1,058,399

 

 

 

764,336

 

Property and equipment, net

 

 

280,058

 

 

 

266,318

 

Intangible assets, net

 

 

191,136

 

 

 

201,092

 

Goodwill

 

 

559,299

 

 

 

561,064

 

Operating lease right-of-use assets

 

 

107,304

 

 

 

66,932

 

Deferred tax assets

 

 

9,354

 

 

 

9,162

 

Restricted cash and investments

 

 

1,494

 

 

 

1,494

 

Other assets

 

 

13,477

 

 

 

14,892

 

Total assets

 

$

2,220,521

 

 

$

1,885,290

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

91,241

 

 

$

97,160

 

Contingent consideration liabilities

 

 

14,859

 

 

 

15,727

 

Accrued payroll and related expenses

 

 

40,173

 

 

 

86,458

 

Operating lease liabilities

 

 

7,031

 

 

 

5,567

 

Income tax liabilities

 

 

151

 

 

 

2,005

 

Senior convertible notes

 

 

628,681

 

 

 

 

Total current liabilities

 

 

782,136

 

 

 

206,917

 

Long-term senior convertible notes

 

 

361,633

 

 

 

623,298

 

Deferred and income tax liabilities

 

 

23,905

 

 

 

14,655

 

Operating lease liabilities

 

 

116,496

 

 

 

73,153

 

Other long-term liabilities

 

 

50,152

 

 

 

52,060

 

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, 2020 and December 31, 2019, 57,691,871 and 57,524,658 issued and outstanding at March 31, 2020 and December 31, 2019, respectively

 

 

62

 

 

 

62

 

Additional paid-in capital

 

 

1,478,294

 

 

 

1,429,854

 

Accumulated other comprehensive loss

 

 

(13,227

)

 

 

(9,418

)

Retained earnings

 

 

87,773

 

 

 

82,475

 

Treasury stock at cost; 6,524,218 shares and 5,379,536 shares at March 31, 2020 and December 31, 2019, respectively

 

 

(666,703

)

 

 

(587,766

)

Total equity

 

 

886,199

 

 

 

915,207

 

Total liabilities and equity

 

$

2,220,521

 

 

$

1,885,290

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

 

4


Table of Contents

 

NUVASIVE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 

 

 

Three Months Ended March 31,

 

(unaudited)

 

2020

 

 

2019

 

Revenue

 

 

 

 

 

 

 

 

Product revenue

 

$

234,687

 

 

$

243,823

 

Service revenue

 

 

25,194

 

 

 

30,953

 

Total revenue

 

 

259,881

 

 

 

274,776

 

Cost of revenue (excluding below amortization of intangible assets)

 

 

 

 

 

 

 

 

Cost of products sold

 

 

51,645

 

 

 

54,486

 

Cost of services

 

 

20,220

 

 

 

20,008

 

Total cost of revenue

 

 

71,865

 

 

 

74,494

 

Gross profit

 

 

188,016

 

 

 

200,282

 

Operating expenses:

 

 

 

 

 

 

 

 

Sales, marketing and administrative

 

 

130,231

 

 

 

145,076

 

Research and development

 

 

18,257

 

 

 

17,575

 

Amortization of intangible assets

 

 

12,649

 

 

 

13,625

 

Business transition costs

 

 

(1,440

)

 

 

3,833

 

Total operating expenses

 

 

159,697

 

 

 

180,109

 

Interest and other expense, net:

 

 

 

 

 

 

 

 

Interest income

 

 

731

 

 

 

409

 

Interest expense

 

 

(11,517

)

 

 

(9,513

)

Other (expense) income, net

 

 

(7,408

)

 

 

(366

)

Total interest and other expense, net

 

 

(18,194

)

 

 

(9,470

)

Income before income taxes

 

 

10,125

 

 

 

10,703

 

Income tax expense

 

 

(4,827

)

 

 

(1,317

)

Consolidated net income

 

$

5,298

 

 

$

9,386

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.10

 

 

$

0.18

 

Diluted

 

$

0.10

 

 

$

0.18

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

51,837

 

 

 

51,675

 

Diluted

 

 

53,727

 

 

 

52,480

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

 

 

5


Table of Contents

 

NUVASIVE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

 

 

Three Months Ended March 31,

 

(unaudited)

 

2020

 

 

2019

 

Consolidated net income

 

$

5,298

 

 

$

9,386

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

Translation adjustments, net of tax

 

 

(3,809

)

 

 

(494

)

Other comprehensive loss

 

 

(3,809

)

 

 

(494

)

Total consolidated comprehensive income

 

$

1,489

 

 

$

8,892

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

6


Table of Contents

 

 

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, 2019

 

 

57,525

 

 

$

62

 

 

$

1,429,854

 

 

$

(9,418

)

 

$

82,475

 

 

 

(5,380

)

 

$

(587,766

)

 

$

915,207

 

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

 

 

167

 

 

 

 

 

 

119

 

 

 

 

 

 

 

 

 

(59

)

 

 

(3,937

)

 

 

(3,818

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

2,786

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,786

 

Tax benefits related to convertible note issuance

 

 

 

 

 

 

 

 

484

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

484

 

Shares repurchased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,085

)

 

 

(75,000

)

 

 

(75,000

)

Sale of warrants

 

 

 

 

 

 

 

 

47,070

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

47,070

 

Convertible note hedge

 

 

 

 

 

 

 

 

(78,300

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(78,300

)

Equity component of convertible note issuance

 

 

 

 

 

 

 

 

78,268

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

78,268

 

Debt issuance costs attributable to convertible feature

 

 

 

 

 

 

 

 

(1,987

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,987

)

Consolidated net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,298

 

 

 

 

 

 

 

 

 

5,298

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(3,809

)

 

 

 

 

 

 

 

 

 

 

 

(3,809

)

Balance at March 31, 2020

 

 

57,692

 

 

$

62

 

 

$

1,478,294

 

 

$

(13,227

)

 

$

87,773

 

 

 

(6,524

)

 

$

(666,703

)

 

$

886,199

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

7


Table of Contents

 

 

NUVASIVE, INC.

CONSOLIDATED STATEMENTS OF EQUITY – (Continued)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-in

 

 

Comprehensive

 

 

Retained Earnings

 

 

Treasury Stock

 

 

Stockholders'

 

(unaudited)

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

(Accumulated Deficit)

 

 

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.

 

 

8


Table of Contents

 

NUVASIVE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands) 

 

 

 

Three Months Ended March 31,

 

(unaudited)

 

2020

 

 

2019

 

Operating activities:

 

 

 

 

 

 

 

 

Consolidated net income

 

$

5,298

 

 

$

9,386

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

34,972

 

 

 

34,054

 

Amortization of non-cash interest

 

 

7,143

 

 

 

5,210

 

Stock-based compensation

 

 

(2,858

)

 

 

5,717

 

Reserves on current assets

 

 

5,232

 

 

 

3,785

 

Net loss on strategic investments

 

 

1,411

 

 

 

 

Other non-cash adjustments

 

 

5,403

 

 

 

3,172

 

Deferred income taxes

 

 

9,105

 

 

 

1,547

 

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

 

 

 

 

 

 

 

 

Accounts receivable

 

 

22,409

 

 

 

1,620

 

Inventory

 

 

(21,135

)

 

 

(19,292

)

Prepaid expenses and other current assets

 

 

(2,042

)

 

 

(1,399

)

Accounts payable and accrued liabilities

 

 

(5,271

)

 

 

(2,249

)

Accrued payroll and related expenses

 

 

(45,927

)

 

 

(14,815

)

Income taxes

 

 

(8,515

)

 

 

(2,261

)

Net cash provided by operating activities

 

 

5,225

 

 

 

24,475

 

Investing activities:

 

 

 

 

 

 

 

 

Purchases of intangible assets

 

 

(2,490

)

 

 

(6,827

)

Purchases of property and equipment

 

 

(28,116

)

 

 

(33,929

)

Net cash used in investing activities

 

 

(30,606

)

 

 

(40,756

)

Financing activities:

 

 

 

 

 

 

 

 

Purchases of treasury stock

 

 

(78,818

)

 

 

(8,177

)

Payment of contingent consideration

 

 

(346

)

 

 

(1,435

)

Proceeds from issuance of convertible debt, net of issuance costs

 

 

437,686

 

 

 

 

Proceeds from sale of warrants

 

 

47,070

 

 

 

 

Purchase of convertible note hedge

 

 

(78,300

)

 

 

 

Other financing activities

 

 

(1,233

)

 

 

1,556

 

Net cash provided by (used in) financing activities

 

 

326,059

 

 

 

(8,056

)

Effect of exchange rate changes on cash

 

 

(1,736

)

 

 

(112

)

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

 

 

298,942

 

 

 

(24,449

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

214,528

 

 

 

120,235

 

Cash, cash equivalents and restricted cash at end of period

 

$

513,470

 

 

$

95,786

 

 

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,

 

 

 

2020

 

 

2019

 

Cash and cash equivalents

 

$

511,976

 

 

$

93,391

 

Restricted cash

 

 

1,494

 

 

 

2,395

 

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

 

$

513,470

 

 

$

95,786

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

 

9


Table of Contents

 

 

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 products 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 products. 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 has developed a procedural solution for spine surgery that includes IOM services, iGA and hardware and software technology offerings. The Company has also invested in the development of capital equipment designed to further improve clinical and economic outcomes through proceduralization, including LessRay and Pulse. LessRay is an image enhancement platform designed to reduce radiation exposure in the operating room by allowing surgeons to take low-quality, low-dose images and improve them to look like conventional full-dose images. Pulse integrates multiple enabling technologies within a single, expandable platform and is engineered to improve workflow, reduce variability, and increase the reproducibility of surgical outcomes. Revenue from the sale or lease of capital equipment does not make up a material portion of the Company’s total revenue.

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.

10


Table of Contents

 

 

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, 2020 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, 2019 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 December 2019, the FASB issued Accounting Standards Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which modifies Accounting Standard Codification 740 – Income Taxes, to simplify the accounting for income taxes. ASU 2019-12 removes certain exceptions for intraperiod tax allocation, recognizing deferred taxes for investments and simplifies guidance to reduce complexity in certain areas. This update is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, 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 January 2020, the FASB issued Accounting Standards Update No. 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the Emerging Issues Task Force), which clarifies the interaction of the accounting for equity securities, investments accounted for under the equity method, and certain forward contracts and purchased options. This update is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, 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 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. The amendments in this update were adopted using a modified retrospective transition method as of January 1, 2020, which had no cumulative impact to retained earnings. The adoption of this guidance did not have a material impact on the Company’s Unaudited Consolidated Financial Statements.

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. The Company adopted the amendments in this update on January 1, 2020, which will be applied using a prospective transition method. The adoption did not have a material impact on the Company’s Unaudited Consolidated Financial Statements.

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 (“ASU 2018-13”), 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. The Company adopted ASU 2018-13 as of January 1, 2020. The adoption did not have a material impact on the Company’s Unaudited Consolidated Financial Statements. See Note 3 to the Unaudited Consolidated Financial Statements for further discussion on fair value measurements.

11


Table of Contents

 

 

In September 2018, the FASB issued Accounting Standards Update No. 2018-15, Intangible – Goodwill and Other – Internal-Use Software (“ASU 2018-15”), which requires a customer in a cloud computing arrangement to determine whether implementation costs should be capitalized as assets or expensed 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.