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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________
Form 10-Q
___________________________________________________
(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
OR
oTRANSITION 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)
Delaware33-0768598
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
12101 Airport Way
Broomfield, CO 80021
(Address of principal executive offices)
(800) 455-1476
(Registrant’s telephone number, including area code)
___________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.001 per shareNUVA
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 x No o
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 x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerxAccelerated filero
Non-accelerated fileroSmaller reporting companyo
Emerging growth companyo
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of November 7, 2022, there were 52,133,961 shares of the registrant’s common stock (par value $0.001 per share) outstanding.
1


NuVasive, Inc.
Quarterly Report on Form 10-Q
September 30, 2022
2

Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NUVASIVE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value data)
September 30, 2022December 31, 2021
ASSETS(unaudited) 
Current assets:
Cash and cash equivalents$237,500 $246,091 
Accounts receivable, net of allowances of $18,702 and $21,064, respectively
235,582 214,398 
Inventory, net340,995 315,845 
Prepaid income taxes7,163 5,425 
Prepaid expenses and other current assets21,991 20,665 
Total current assets843,231 802,424 
Property and equipment, net336,808 303,664 
Intangible assets, net187,280 242,675 
Goodwill625,141 633,467 
Operating lease right-of-use assets96,352 102,987 
Deferred tax assets60,503 48,003 
Restricted cash and investments1,494 1,494 
Other assets24,136 19,361 
Total assets$2,174,945 $2,154,075 
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued liabilities$119,297 $115,614 
Contingent consideration liabilities59,477 7,986 
Accrued payroll and related expenses60,889 66,596 
Operating lease liabilities10,025 9,867 
Income tax liabilities819 828 
Senior convertible notes446,898  
Total current liabilities697,405 200,891 
Long-term senior convertible notes443,533 884,984 
Deferred tax liabilities11,697 3,049 
Operating lease liabilities104,729 111,592 
Contingent consideration liabilities71,740 139,824 
Other long-term liabilities13,695 18,528 
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000 shares authorized, none outstanding
  
Common stock, $0.001 par value; 150,000 shares authorized at September 30, 2022 and December 31, 2021; 58,880 shares issued and 52,076 outstanding at September 30, 2022; 58,469 shares issued and 51,769 outstanding at December 31, 2021
63 63 
Additional paid-in capital1,457,828 1,434,976 
Accumulated other comprehensive loss(4,355)(7,792)
Retained earnings62,039 45,708 
Treasury stock at cost; 6,804 shares and 6,700 shares at September 30, 2022 and December 31, 2021, respectively
(683,429)(677,748)
Total equity832,146 795,207 
Total liabilities and equity$2,174,945 $2,154,075 
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 September 30,Nine Months Ended
September 30,
(unaudited)2022202120222021
Net sales:
Products$267,208 $247,061 $813,600 $759,275 
Services28,072 23,775 82,893 77,638 
Total net sales295,280 270,836 896,493 836,913 
Cost of sales (excluding below amortization of intangible assets):
Products59,220 69,609 181,670 181,495 
Services21,652 19,043 64,057 57,248 
Total cost of sales80,872 88,652 245,727 238,743 
Gross profit214,408 182,184 650,766 598,170 
Operating expenses:
Selling, general and administrative154,005 146,056 474,982 449,407 
Research and development23,666 23,405 72,937 67,393 
Amortization of intangible assets12,157 14,805 37,826 43,230 
Business transition costs2,811 4,551 (1,753)21,688 
Total operating expenses192,639 188,817 583,992 581,718 
Interest and other expense, net:
Interest income820 23 1,125 119 
Interest expense(4,352)(4,320)(13,083)(16,738)
Other expense, net(21,053)(13,082)(34,490)(24,339)
Total interest and other expense, net(24,585)(17,379)(46,448)(40,958)
(Loss) income before income taxes(2,816)(24,012)20,326 (24,506)
Income tax benefit (expense)839 2,373 (3,995)(2,844)
Consolidated net (loss) income$(1,977)$(21,639)$16,331 $(27,350)
Net (loss) income per share:
Basic$(0.04)$(0.42)$0.31 $(0.53)
Diluted$(0.04)$(0.42)$0.31 $(0.53)
Weighted average shares outstanding:
Basic52,067 51,669 51,974 51,539 
Diluted52,067 51,669 52,512 51,539 
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 September 30,Nine Months Ended September 30,
(unaudited)2022202120222021
Consolidated net (loss) income$(1,977)$(21,639)$16,331 $(27,350)
Other comprehensive income:
Unrealized loss on marketable securities, net of tax   (13)
Translation adjustments, net of tax2,855 313 3,437 289 
Other comprehensive income2,855 313 3,437 276 
Total consolidated comprehensive income (loss)$878 $(21,326)$19,768 $(27,074)
See accompanying Notes to unaudited Consolidated Financial Statements.
5

Table of Contents
NUVASIVE, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands)
Common StockAdditional Paid-in Capital Accumulated Other Comprehensive Loss Retained Earnings Treasury Stock Total
Stockholders'
Equity
(unaudited)Shares AmountShares Amount
Balance at December 31, 202158,469 $63 $1,434,976 $(7,792)$45,708 (6,700)$(677,748)$795,207 
Issuance of common stock under employee and director equity option and purchase plans278 — — — — (98)(5,345)(5,345)
Stock-based compensation expense— — 6,807 — — — — 6,807 
Consolidated net income— — — — 19,201 — — 19,201 
Other comprehensive loss— — — (3,949)— — — (3,949)
Balance at March 31, 202258,747 $63 $1,441,783 $(11,741)$64,909 (6,798)$(683,093)$811,921 
Issuance of common stock under employee and director equity option and purchase plans116 — 3,716 — — (4)(220)3,496 
Stock-based compensation expense— — 7,514 — — — — 7,514 
Consolidated net loss— — — — (893)— — (893)
Other comprehensive income— — — 4,531 — — — 4,531 
Balance at June 30, 202258,863 $63 $1,453,013 $(7,210)$64,016 (6,802)$(683,313)$826,569 
Issuance of common stock under employee and director equity option and purchase plans17 — — — — (2)(116)(116)
Stock-based compensation expense— — 4,815 — — — — 4,815 
Consolidated net loss— — — — (1,977)— — (1,977)
Other comprehensive income— — — 2,855 — — — 2,855 
Balance at September 30, 202258,880 $63 $1,457,828 $(4,355)$62,039 (6,804)$(683,429)$832,146 
See accompanying Notes to unaudited Consolidated Financial Statements.
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NUVASIVE, INC.
CONSOLIDATED STATEMENTS OF EQUITY – (Continued)
(in thousands)
Common Stock
Additional Paid-in Capital
Accumulated Other Comprehensive Loss
Retained Earnings Treasury Stock
Total Stockholders' Equity
(unaudited)SharesAmountShares Amount
Balance at December 31, 202057,945 $62 $1,550,001 $(7,585)$45,322 (6,569)$(668,882)$918,918 
Adjustment for modified retrospective adoption of accounting standard— — (147,161)— 64,472 — — (82,689)
Issuance of common stock under employee and director equity option and purchase plans4 — (6)— — (1)(55)(61)
Stock-based compensation expense— — 7,709 — — — — 7,709 
Settlement of convertible note hedge(1)— 53 — — — (53) 
Equity component of convertible note settlement1 — 574 — — — — 574 
Consolidated net loss— — — — (7,510)— — (7,510)
Other comprehensive loss— — — (1,554)— — — (1,554)
Balance at March 31, 202157,949 $62 $1,411,170 $(9,139)$102,284 (6,570)$(668,990)$835,387 
Issuance of common stock under employee and director equity option and purchase plans383 — 3,809 — — (97)(6,909)(3,100)
Stock-based compensation expense— — 5,298 — — — — 5,298 
Consolidated net income— — — — 1,799 — — 1,799 
Other comprehensive income— — — 1,517 — — — 1,517 
Balance at June 30, 202158,332 $62 $1,420,277 $(7,622)$104,083 (6,667)$(675,899)$840,901 
Issuance of common stock under employee and director equity option and purchase plans17 1 — — — (5)(345)(344)
Stock-based compensation expense— — 4,965 — — — — 4,965 
Consolidated net loss— — — — (21,639)— — (21,639)
Other comprehensive income— — — 313 — — — 313 
Balance at September 30, 202158,349 $63 $1,425,242 $(7,309)$82,444 (6,672)$(676,244)$824,196 
See accompanying Notes to unaudited Consolidated Financial Statements.
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NUVASIVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended September 30,
(unaudited)20222021
Operating activities:
Consolidated net income (loss)$16,331 $(27,350)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization110,200 111,818 
Deferred income taxes(5,004)(5,211)
Amortization of non-cash interest5,906 6,672 
Stock-based compensation19,136 17,972 
Changes in fair value of contingent consideration(8,560)6,646 
Net loss (gain) on strategic investments1,248 (2,101)
Net loss from foreign currency adjustments33,619 26,572 
Reserves on current assets(342)25,418 
Other non-cash adjustments13,654 8,750 
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable(27,934)4,142 
Inventory(26,469)(29,266)
Prepaid expenses and other current assets4,538 (367)
Accounts payable and accrued liabilities(8,329)(779)
Accrued payroll and related expenses(3,878)3,021 
Income taxes(1,769)(1,167)
Net cash provided by operating activities122,347 144,770 
Investing activities:
Acquisition of Simplify Medical, net of cash acquired(750)(149,463)
Payment of contingent consideration for Simplify Medical (45,850)
Acquisitions and investments(5,650)(500)
Purchases of intangible assets (1,200)
Purchases of property and equipment(107,120)(85,630)
Proceeds from sales of marketable securities 127,023 
Proceeds from maturities of marketable securities 46,000 
Other investing activities(697)(819)
Net cash used in investing activities(114,217)(110,439)
Financing activities:
Payment of contingent consideration(6,839)(3)
Proceeds from the issuance of common stock3,716 3,803 
Purchases of treasury stock(5,681)(7,309)
Payments upon settlement of senior convertible notes (649,426)
Other financing activities(1,362)(1,038)
Net cash used in financing activities(10,166)(653,973)
Effect of exchange rate changes on cash(6,555)(2,649)
Decrease in cash, cash equivalents and restricted cash(8,591)(622,291)
Cash, cash equivalents and restricted cash at beginning of period247,585 858,363 
Cash, cash equivalents and restricted cash at end of period$238,994 $236,072 
See accompanying Notes to unaudited Consolidated Financial Statements.
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The following table provides a reconciliation of cash, cash equivalents and restricted cash reported on the Company's unaudited Consolidated Statements of Cash Flows for the periods presented:
Nine Months Ended September 30,
20222021
Cash and cash equivalents$237,500 $234,578 
Restricted cash1,494 1,494 
Total cash, cash equivalents and restricted cash shown in the unaudited Consolidated Statements of Cash Flows$238,994 $236,072 
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., or the Company, or NuVasive, was incorporated in Delaware on July 21, 1997, and began commercializing its products in 2001. Since its incorporation in 1997, the Company has grown from a small developer of specialty spinal implants into a global medical technology company delivering procedurally integrated solutions for spine surgery. Underlying the Company’s procedurally integrated solutions for spine surgery are technologies designed to enable better clinical, financial, and operational outcomes, including:
its surgical access instruments, including its integrated split-blade retractor system, designed to enable less-invasive surgical techniques by minimizing soft tissue disruption during spine surgery;
its Advanced Materials Science portfolio of specialized spinal implants, designed to advance spinal fusion by enhancing the osseointegration and biomechanical properties of implant materials, including porous titanium and porous polyetheretherketone;
its fixation systems, designed to facilitate the preservation and restoration of patient alignment, while addressing a vast array of spinal pathologies from an open or less-invasive approach across all spinal procedures;
its cervical total disc replacement technology, which complements the Company’s portfolio of products and services for cervical spinal fusion surgery and is designed to offer surgeons capabilities across key performance functions—anatomic, physiologic motion, and radiologic design;
its neuromonitoring systems, which use proprietary software-driven nerve detection and avoidance technology, and the Company’s intraoperative neuromonitoring, or IONM, services and support; and
its Pulse platform, a software ecosystem that integrates multiple hardware technologies into a single, condensed footprint in the operating room, including: radiation reduction, imaging enhancement, rod bending, navigation, IONM, and spinal alignment tools.
In addition, the Company also designs and sells expandable growing rod implant systems for the treatment of early-onset scoliosis 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. This technology is also the basis for the Company’s Precice line of products which is designed to support complex orthopedic reconstruction, such as trauma and limb length discrepancy. Precice is an intramedullary device that, once implanted, utilizes the MAGEC technology to non-invasively lengthen the femur and tibia.
The COVID-19 pandemic significantly impacted the Company’s business and results of operations during the years ended December 31, 2020 and 2021, and continued to negatively impact the Company's business during the three and nine months ended September 30, 2022. Many government agencies, in conjunction with hospitals and healthcare systems have, to varying degrees, deferred, reduced, or suspended elective surgical procedures due to the COVID-19 pandemic. While certain spine surgeries are deemed essential and certain surgeries, like in cases of trauma, cannot be delayed, the Company has seen and may continue to see a significant reduction in procedural volumes as hospital systems and/or patients elect to defer spine surgery procedures.
During the three and nine months ended September 30, 2022, procedural volume rates for elective surgeries steadily recovered in the U.S. and certain international regions as government restrictions eased and hospital systems resumed more elective surgical procedures. The COVID-19 pandemic continues to evolve and its impact on the Company’s business will depend on several factors that are highly uncertain and unpredictable, including, the efficacy and adoption of vaccines, future resurgences of the virus and its variants, the imposition of governmental lockdowns, quarantine and physical distancing requirements, patient capacity at hospitals and healthcare systems, the duration and severity of healthcare worker shortages, and the willingness and ability of patients to seek care and treatment due to safety concerns or financial hardship.
Additionally, the COVID-19 pandemic and general macroeconomic conditions have led to disruptions in the global supply chain. While the Company has largely been able to mitigate the impact, it has experienced challenges associated with material and component availability for certain product lines, longer shipping and delivery times for raw materials and components, constrained logistics capacity related to the movement of products, availability of skilled labor and increased costs of raw materials, components, labor, and freight and courier services. Net sales and profitability have also been negatively affected by the unfavorable foreign currency exchange impact of the strengthened U.S. dollar against a number of currencies.
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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 the 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.
The accompanying unaudited Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or 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, or U.S. GAAP. Operating results for the three and nine months ended September 30, 2022 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, 2021 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 U.S. GAAP, management must make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates and assumptions involve judgments with respect to numerous factors that are difficult to predict. As a result, actual amounts could be materially different from these estimates.
Recent Accounting Pronouncements Not Yet Adopted
In October 2021, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires an entity (acquirer) to recognize and measure contract assets and liabilities acquired in a business combination in accordance with Topic 606, Revenue from Contracts with Customers. This update is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, with early adoption permitted. The amendments should be applied prospectively to business combinations occurring on or after the effective date of the amendments. The Company is currently evaluating the impact the standard will have on its Consolidated Financial Statements.
In June 2022, the FASB issued ASU No. 2022-03, Fair Value Measurement (Topic 820), Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, which clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The ASU introduces new disclosure requirements to provide investors with information about contractual restrictions, including the nature and remaining duration of such restrictions. This update is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years, with early adoption permitted. The amendments should be applied prospectively with any adjustments from the adoption of the amendments recognized in earnings and disclosed on the date of adoption. The Company is currently evaluating the impact the standard will have on its Consolidated Financial Statements.
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Revenue Recognition
In accordance with Accounting Standards Codification 606 Revenue from Contracts with Customers, or 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, fixation products 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 IONM services is recognized in the period the service is performed for the amount of consideration expected to be received. Revenue from the sale of surgical 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 surgical instrumentation primarily on a non-sales type basis. Revenue from the sale or lease of capital equipment is recognized when the Company transfers control to the customer, which is generally at the point when acceptance occurs that indicates customer acknowledgment of delivery or installation, depending on the terms of the arrangement. Selling and leasing of surgical instrument sets and capital equipment represents an immaterial amount of the Company’s total net sales 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.
Accounts Receivable and Related Valuation Accounts
Accounts receivable in the accompanying unaudited Consolidated Balance Sheets are presented net of allowances for credit losses. The Company maintains an allowance for credit losses resulting from the inability of its customers, including hospitals, ambulatory surgery centers, and distributors, to make required payments. The allowance for credit losses is calculated quarterly, and is estimated on a region-by-region basis considering a number of factors including age of account balances, collection history, historical account write-offs, third party credit reports, identified trends, current economic conditions, and supportable forecasted economic expectations. The allowance is adjusted on a specific identification basis for certain accounts as well as pooling of accounts with similar characteristics. An increase in the provision for credit losses may be required when the financial condition of the Company’s customers or its collection experience deteriorates. An increase to the allowance for credit losses results in a corresponding charge to selling, general and administrative expenses. The Company has a diverse customer base and no single customer represented greater than ten percent of net sales or accounts receivable. Historically, the Company’s reserves have been adequate to cover credit losses.
The Company's exposure to credit losses may increase if its customers are adversely affected by changes in healthcare laws, coverage and reimbursement, economic pressures or uncertainty associated with local or global economic recessions, disruption associated with the current COVID-19 pandemic, or other customer-specific factors. It is possible that there could be a significant adverse impact from potential adjustments to the carrying amount of trade receivables as customers’ cash flows are impacted by their response to the COVID-19 pandemic and the deferral of elective surgical procedures and other macroeconomic challenges.
The following table summarizes the changes in the allowance for credit losses:
(in thousands)September 30, 2022December 31, 2021
Allowance for credit losses at January 1$10,928 $9,646 
Current-period provision for expected losses360 2,165 
Write-offs charged against the allowance(184)(743)
Recoveries of amounts previously written off31 42 
Changes resulting from foreign currency fluctuations(243)(182)
Allowance for credit losses at end of period$10,892 $10,928 
Inventory, Net
Net inventory as of September 30, 2022 consisted of $329.8 million of finished goods, $6.2 million of work in progress and $5.0 million of raw materials. Net inventory as of December 31, 2021 consisted of $301.3 million of finished goods, $8.1 million of work in progress and $6.4 million of raw materials.
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Finished goods primarily consists of specialized implants, fixation products and disposables and are stated at the lower of cost or net realizable value 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 recorded at the lower of cost or net realizable value. 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.
The Company records an inventory reserve for estimated excess and obsolete inventory based upon historical turnover and assumptions about future demand for its products and market conditions, such as product life cycles and timing of the introduction and development of new or enhanced products. The Company’s allograft products have shelf lives ranging from two years to five years and are subject to demand fluctuations based on the availability and demand for alternative products. The Company’s inventory, which consists primarily of disposables, specialized implants and fixation products, is at risk of obsolescence following the introduction and development of new or enhanced products. One of the Company’s strategic objectives is to continue to rapidly develop and commercialize new products and product enhancements which increases the risk that products will become obsolete prior to the end of their anticipated useful life. The Company’s estimates and assumptions for excess and obsolete inventory are reviewed and updated on a quarterly basis. The estimates the Company uses for demand are also used for near-term capacity planning and inventory purchasing and are consistent with its net sales forecasts. Increases in the reserve for excess and obsolete inventory result in a corresponding charge to cost of sales.
For the three and nine months ended September 30, 2022, the Company recorded a reserve for excess and obsolete inventory of $1.5 million and $1.8 million, respectively, and $15.3 million and $23.3 million, for the three and nine months ended September 30, 2021, respectively. The decrease is primarily attributable to updates to the Company’s estimates and assumptions about future product demand and product life cycles which have been affected by multiple factors, including the COVID-19 pandemic and general market conditions. During the three months ended September 30, 2021, the Company made a determination to withdraw certain products manufactured by its NuVasive Specialized Orthopedics (NSO) subsidiary from the market and discontinue sales of the products. As a result, for the three and nine months ended September 30, 2021, the Company recorded a charge of $14.2 million.
Derivative Financial Instruments
The Company recognizes all derivative instruments as assets or liabilities in its unaudited Consolidated Balance Sheets and measures these instruments at fair value by revaluing these assets and liabilities at the end of each reporting period. Gains and losses are recorded as a component of other expense, net in the unaudited Consolidated Statements of Operations.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income (loss) includes net of tax, unrealized gains or losses on the Company’s marketable debt securities and foreign currency translation adjustments. The accumulated other comprehensive loss was $4.4 million and $7.8 million as of September 30, 2022 and December 31, 2021, respectively.
Product Shipment Costs
Product shipment costs, included in selling, general and administrative expense in the accompanying unaudited Consolidated Statements of Operations, were $9.7 million and $27.8 million for the three and nine months ended September 30, 2022, respectively, and $7.1 million and $22.1 million for the three and nine months ended September 30, 2021, respectively. The majority of the Company’s shipping costs are associated with providing instrument sets to hospitals for use in individual surgical procedures. Amounts billed to customers for shipping and handling of products are reflected in net sales 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. Contingent consideration is accrued based on the fair value of the expected payment, and such accruals are subject to increase or decrease based on the assessment of the likelihood that the contingent milestones will be achieved resulting in payment. If an accrual for contingent consideration decreases during a particular period, it results in a reduction of costs during such period.
During the three months ended September 30, 2022, the Company recorded $2.8 million of costs related to acquisition, integration and business transition activities, which included $0.3 million of fair value adjustments on contingent consideration liabilities associated with the Company’s 2021 and 2016 acquisitions.
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During the nine months ended September 30, 2022, the Company recorded a benefit of $(1.8) million related to acquisition, integration and business transition activities, which included $(8.6) million of fair value adjustments on contingent consideration liabilities associated with the Company’s 2021, 2017 and 2016 acquisitions.
During the three months ended September 30, 2021, the Company recorded $4.6 million of costs related to acquisition, integration and business transition activities, which included $0.7 million of fair value adjustments on contingent consideration liabilities associated with the Company’s 2021, 2017 and 2016 acquisitions.
During the nine months ended September 30, 2021, the Company recorded $21.7 million of costs related to acquisition, integration and business transition activities, which included $6.6 million of fair value adjustments on contingent consideration liabilities associated with the Company’s 2021, 2017 and 2016 acquisitions and $4.0 million of costs associated with the 2021 acquisition of Simplify Medical Pty Limited, or Simplify Medical.
2.    Net (Loss) Income Per Share
The following table sets forth the computation of basic and diluted consolidated net (loss) income per share:
Three Months Ended September 30,Nine Months Ended September 30,
(in thousands, except per share data)2022202120222021
Numerator:
Net (loss) income for basic $(1,977)$(21,639)$16,331 $(27,350)
Dilutive potential net (loss) income:
Interest and debt issuance costs on the 1.00% Senior Convertible Notes due 2023, net of tax
$ $ $ $ 
Interest and debt issuance costs on the 0.375% Senior Convertible Notes due 2025, net of tax
    
Net (loss) income for diluted $(1,977)$(21,639)$16,331 $(27,350)
Denominator for basic and diluted net (loss) income per share:
Weighted average common shares outstanding for basic52,067 51,669 51,974 51,539 
Dilutive potential common stock outstanding:
Employee stock purchase plan (ESPP)  4  
Restricted stock units (RSUs) and performance restricted stock units (PRSUs)  534  
1.00% Senior Convertible Notes due 2023
    
0.375% Senior Convertible Notes due 2025
    
Weighted average common shares outstanding for diluted52,067 51,669 52,512 51,539 
Basic net (loss) income per share$(0.04)$(0.42)$0.31 $(0.53)
Diluted net (loss) income per share$(0.04)$(0.42)$0.31 $(0.53)
In accordance with ASU No. 2020-06, Debt with Conversion and Other Options (Subtopic 470-20), or ASU 2020-06, the Company applies the if-converted method in computing the effect of the Company's senior convertible notes on diluted net (loss) income per share. For periods in which the Company reports net income, the numerator of the diluted per share computation is adjusted for interest expense and amortization of debt issuance costs, net of tax, and the denominator is adjusted for the weighted average number of shares into which each of the Company’s senior convertible notes could be converted. The effect is only included in the calculation of diluted net income per share for those senior convertible notes which reduce net income per share.
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The following weighted average outstanding common stock equivalents were not included in the calculation of net (loss) income per diluted share because their effects were anti-dilutive:
Three Months Ended September 30,Nine Months Ended September 30,
(in thousands)
2022202120222021
ESPP, RSUs and PRSUs1,488 1,336 114 1,367 
Warrants10,169 17,127 10,169 19,716 
Senior convertible notes10,169 10,169 10,169 10,169 
   Total21,826 28,632 20,452 31,252 
3.    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 contain contingent consideration arrangements that require the Company to assess the acquisition date fair value of the contingent consideration liabilities. Such liabilities are recorded as part of the purchase price allocation of the acquisition, with subsequent fair value adjustments to the contingent consideration recorded in the unaudited Consolidated Statements of Operations. See Note 4, Financial Instruments and Fair Value Measurements, in the Notes to unaudited Consolidated Financial Statements included in this Quarterly Report for further discussion on contingent consideration liabilities.
Acquisition of Simplify Medical Pty Limited
On February 24, 2021, the Company, through its indirect wholly-owned subsidiary, NuVasive (AUST/NZ) Pty Limited, acquired all of the stock interest in Simplify Medical, a developer of cervical disc technology for cervical total disc replacement procedures. Simplify Medical now operates as a wholly-owned subsidiary of the Company. The Company agreed to make an upfront payment of $150.0 million, subject to customary purchase price adjustments, plus additional future payments contingent upon milestones related to regulatory approval and net sales from products incorporating the Simplify Medical cervical disc technology. In April 2021, the Simplify Cervical Disc received approval from the U.S. Food and Drug Administration, or FDA, for two-level cervical total disc replacement, resulting in the Company’s payment of $45.8 million for the achievement of the regulatory milestone. Additional milestone payments, which are uncapped and contingent upon net sales from products incorporating the Simplify Medical cervical disc technology, will become payable in calendar years 2023, 2024 and 2025. In connection with the closing, the Company paid $151.0 million, which included additional amounts for customary purchase price adjustments, using available cash on hand. During the three months ended September 30, 2022, the Company made an additional payment of $0.8 million relating to a holdback associated with the acquisition.
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The allocation of the purchase price to the assets acquired and liabilities assumed based on their fair values is as follows:
(in thousands)
Cash paid for purchase$151,026 
Cash1,563 
Accounts receivable203 
Inventory6,710 
Other current assets568 
Property, plant and equipment, net381 
Definite-lived intangible assets:
Developed technology141,700 
Patents19,000 
Trade names3,500 
Goodwill81,125 
Other assets7 
Contingent consideration liabilities(103,400)
Accounts payable, accrued expenses and other(331)
$151,026 
Goodwill recognized in this transaction is not deductible for tax purposes. Goodwill largely consists of expected net sales synergies resulting from the combination of product portfolios, use of the Company’s existing commercial infrastructure to expand sales of Simplify Medical’s products, and the assembled workforce. The intangible assets acquired are being amortized on a straight-line basis over useful lives of seventeen years, ten years, and fifteen years for developed technology-based intangible assets, patent-related intangible assets, and trade name related intangible assets, respectively. The estimated fair values of the intangible assets acquired were primarily determined using the income approach based on significant inputs that were not observable.
In connection with the acquisition, contingent consideration liabilities of $103.4 million were recorded for the potential regulatory and net sales-based milestone payments. The fair value of the contingent liability related to the regulatory milestone payment was determined using the probability approach based on the probability of the approval being achieved as of various periods. The fair value of the contingent liability relating to the net sales-based milestone payments was determined using a Monte Carlo simulation model based on forecasted net sales, volatility factors associated with those forecasted net sales and discount rates.
The Company’s results of operations for the three and nine months ended September 30, 2021 include the operating results of Simplify Medical since the date of acquisition. Acquisition costs of $4.0 million were included in the unaudited Consolidated Statements of Operations as business transition costs for the nine months ended September 30, 2021.
Variable Interest Entities
The Company provides IONM services through various subsidiaries, which conduct business as NuVasive Clinical Services. In providing IONM services to surgeons and healthcare facilities across the United States, the Company maintains contractual relationships with several physician practices, or PCs. In accordance with authoritative guidance, the Company has determined that the PCs are variable interest entities and therefore, the accompanying unaudited 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 financial statements. The creditors of the PCs have claims only to the assets of the PCs, which are not material, and the assets of the PCs are not available to the Company.
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4.    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 or loss. Net currency exchange (losses) gains, which include gains and losses from derivative instruments, were $(20.0) million and $(33.6) million for the three and nine months ended September 30, 2022, respectively, and $(13.2) million and $(26.6) million for the three and nine months ended September 30, 2021, respectively, and are included in other expense, 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 September 30, 2022 and December 31, 2021, a notional principal amount of $18.5 million and $12.2 million, respectively, was outstanding to hedge currency risk relative to the Company’s foreign currency-denominated receivables and payables. Derivative instrument net gains on the Company’s forward exchange contracts were $1.3 million and $3.7 million for the three and nine months ended September 30, 2022, respectively, and $0.1 million and $1.5 million for the three and nine months ended September 30, 2021, respectively, and are included in other expense, net in the unaudited Consolidated Statements of Operations. The fair value of the forward contract exchange derivative instrument asset (liability) was $(