Globus Medical (GMED) 10-Q 2017 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

Or

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to _______________

Commission File No. 001-35621

GLOBUS MEDICAL, INC.

(Exact name of registrant as specified in its charter)

DELAWARE	04-3744954
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
2560 General Armistead Avenue, Audubon, PA 19403	(610) 930-1800
(Address of principal executive offices) (Zip Code)	(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 that 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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files):

Yes x   No ¨

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 Filer x Accelerated Filer ¨ Non-accelerated Filer   (Do not check if a smaller reporting company) ¨ Smaller Reporting Company ¨ Emerging Growth Company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

 Yes ¨  No x

The number of shares outstanding of the issuer’s common stock (par value $0.001 per share) as of October 31, 2017 was 96,376,106 shares.

GLOBUS MEDICAL, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets (Unaudited)
	September 30, 2017 and December 31, 2016	3
	Condensed Consolidated Statements of Income (Unaudited)
	Three and nine months ended September 30, 2017 and September 30, 2016	4
	Condensed Consolidated Statements of Comprehensive Income (Unaudited)
	Three and nine months ended September 30, 2017 and September 30, 2016	5
	Condensed Consolidated Statements of Cash Flows (Unaudited)
	Nine months ended September 30, 2017 and September 30, 2016	6
	Notes to Condensed Consolidated Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 4.	Controls and Procedures	41
PART II.	OTHER INFORMATION	43
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults Upon Senior Securities	43
Item 4.	Mine Safety Disclosures	43
Item 5.	Other Information	43
Item 6.	Exhibits	44
	SIGNATURES	45
	Exhibit Index	46

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

GLOBUS MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except par value)	September 30, 2017			December 31, 2016
ASSETS
Current assets:
Cash and cash equivalents	$	154,855		$	132,639
Restricted cash	—			477
Short-term marketable securities	182,804			157,673
Accounts receivable, net of allowances of $3,725 and $2,771, respectively	94,484			91,983
Inventories	111,462			112,692
Prepaid expenses and other current assets	9,430			14,502
Income taxes receivable	10,527			3,800
Total current assets	563,562			513,766
Property and equipment, net of accumulated depreciation of $191,386 and $166,711, respectively	134,214			124,229
Long-term marketable securities	58,884			60,444
Note receivable	29,167			30,000
Intangible assets, net	87,653			61,706
Goodwill	119,273			105,926
Other assets	8,280			928
Deferred income taxes	36,127			30,638
Total assets	$	1,037,160		$	927,637
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	16,553		$	17,472
Accrued expenses	46,609			46,401
Income taxes payable	2,023			1,911
Business acquisition liabilities	9,742			14,108
Total current liabilities	74,927			79,892
Business acquisition liabilities, net of current portion	10,778			5,972
Deferred income taxes	14,405			7,876
Other liabilities	1,786			1,819
Total liabilities	101,896			95,559
Commitments and contingencies (Note 13)
Equity:
Class A common stock; $0.001 par value. Authorized 500,000 shares; issued and outstanding 72,489 and 72,052 shares at September 30, 2017 and December 31, 2016, respectively	72			72
Class B common stock; $0.001 par value. Authorized 275,000 shares; issued and outstanding 23,878 at September 30, 2017 and December 31, 2016, respectively	24			24
Additional paid-in capital	229,475			211,725
Accumulated other comprehensive loss	(6,178		)	(8,642		)
Retained earnings	711,871			628,899
Total equity	935,264			832,078
Total liabilities and equity	$	1,037,160		$	927,637

See accompanying notes to condensed consolidated financial statements.

3

GLOBUS MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended					Nine Months Ended
(In thousands, except per share amounts)	September 30, 2017			September 30, 2016		September 30, 2017		September 30, 2016
Sales	$	151,744		$	135,651	$	459,943	$	412,404
Cost of goods sold	36,798			31,453		109,597		95,703
Gross profit	114,946			104,198		350,346		316,701
Operating expenses:
Research and development	10,887			10,265		32,266		30,889
Selling, general and administrative	63,362			54,207		194,859		161,317
Provision for litigation	2,537			—		2,780		3,056
Amortization of intangibles	2,080			884		5,671		1,673
Acquisition related costs	285			1,192		1,290		1,347
Total operating expenses	79,151			66,548		236,866		198,282
Operating income	35,795			37,650		113,480		118,419
Other income, net
Interest income, net	1,738			795		4,746		1,893
Foreign currency transaction gain/(loss)	(315		)	284		681		83
Other income	139			126		421		407
Total other income, net	1,562			1,205		5,848		2,383
Income before income taxes	37,357			38,855		119,328		120,802
Income tax provision	11,766			12,628		36,356		40,759
Net income	$	25,591		$	26,227	$	82,972	$	80,043
Earnings per share:
Basic	$	0.27		$	0.27	$	0.86	$	0.84
Diluted	$	0.26		$	0.27	$	0.85	$	0.83
Weighted average shares outstanding:
Basic	96,318			95,739		96,160		95,575
Dilutive stock options	1,531			753		1,447		829
Diluted	97,849			96,492		97,607		96,404
Anti-dilutive stock options excluded from weighted average calculation	2,611			5,457		3,462		5,378

See accompanying notes to condensed consolidated financial statements.

4

GLOBUS MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended						Nine Months Ended
(In thousands)	September 30, 2017			September 30, 2016			September 30, 2017		September 30, 2016
Net income	$	25,591		$	26,227		$	82,972	$	80,043
Other comprehensive income/(loss):
Unrealized gain/(loss) on marketable securities, net of tax	7			(165		)	150		119
Foreign currency translation gain/(loss)	(313		)	141			2,314		79
Total other comprehensive income/(loss)	(306		)	(24		)	2,464		198
Comprehensive income	$	25,285		$	26,203		$	85,436	$	80,241

See accompanying notes to condensed consolidated financial statements.

5

GLOBUS MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
(In thousands)	September 30, 2017			September 30, 2016
Cash flows from operating activities:
Net income	$	82,972		$	80,043
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	33,773			21,536
Amortization of premium on marketable securities	2,258			3,067
Write-down for excess and obsolete inventories	8,158			6,919
Stock-based compensation expense	10,659			8,437
Allowance for doubtful accounts	1,135			320
Change in fair value of business acquisition liabilities	1,011			—
Change in deferred income taxes	815			(1,356		)
(Increase)/decrease in:
Restricted cash	477			25,642
Accounts receivable	(2,200		)	3,111
Inventories	(6,956		)	(6,609		)
Prepaid expenses and other assets	(974		)	7,332
Increase/(decrease) in:
Accounts payable	(344		)	(3,426		)
Accrued expenses and other liabilities	(9,377		)	(30,178		)
Income taxes payable/receivable	(6,709		)	6,643
Net cash provided by operating activities	114,698			121,481
Cash flows from investing activities:
Purchases of marketable securities	(203,609		)	(223,623		)
Maturities of marketable securities	166,453			211,138
Sales of marketable securities	11,566			47,109
Purchases of property and equipment	(37,878		)	(26,701		)
Issuance of note receivable	—			(25,000		)
Acquisition of businesses, net of cash acquired	(31,501		)	(76,068		)
Net cash used in investing activities	(94,969		)	(93,145		)
Cash flows from financing activities:
Payment of business acquisition liabilities	(5,234		)	(400		)
Proceeds from exercise of stock options	6,943			4,428
Net cash provided by financing activities	1,709			4,028
Effect of foreign exchange rate on cash	778			(2,324		)
Net increase in cash and cash equivalents	22,216			30,040
Cash and cash equivalents, beginning of period	132,639			60,152
Cash and cash equivalents, end of period	$	154,855		$	90,192
Supplemental disclosures of cash flow information:
Interest paid	34			23
Income taxes paid	$	49,008		$	37,009

See accompanying notes to condensed consolidated financial statements.

6

GLOBUS MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) The Company

Globus Medical, Inc., together with its subsidiaries, is a medical device company focused on the design, development and commercialization of musculoskeletal solutions.  We are primarily focused on implants that promote healing in patients with spine disorders but recently launched a robotic surgical navigation device and products to treat patients who have experienced orthopedic traumas. We are an engineering-driven company with a history of rapidly developing and commercializing advanced products and procedures that assist surgeons in effectively treating their patients, respond to evolving surgeon needs and address new treatment options. Since our inception in 2003, we have launched over 180 products and offer a product portfolio addressing a broad array of spinal pathologies, anatomies and surgical approaches.

We are headquartered in Audubon, Pennsylvania, and market and sell our products through our exclusive sales force in the United States, as well as within North, Central & South America, Europe, Asia, Africa and Australia. Our sales force consists of direct sales representatives and distributor sales representatives employed by exclusive independent distributors.

On August 29, 2017, Globus Medical announced that the Board of Directors named David M. Demski as the Company’s Chief Executive Officer, effective immediately. Mr. Demski will report to David C. Paul, the Company’s founder, Chairman of the Board, and Chief Executive Officer since its inception in 2003. Mr. Paul will remain in the role of Executive Chairman.

Mr. Demski has been a Globus Medical senior executive since 2003, serving initially as Chief Financial Officer from 2003 until 2008. In 2008, he became President and Chief Operating Officer of the Company, responsible for all of its domestic and international commercial operations, including sales, marketing, manufacturing, and finance. During Mr. Demski’s tenure as President and COO, Globus Medical consistently delivered above-category growth and profit margins, culminating in the Company’s successful initial public offering in 2012. In 2015, Mr. Demski became President, Emerging Technologies, and assumed responsibility for overseeing the Company’s expansion into the areas of imaging, navigation, and robotics, as well as orthopedic trauma, both of which are expected to contribute to the Company’s growth over the next decade.

Mr. Paul will continue to focus on strategic initiatives and will spend less time on day-to-day operational matters. The timing of this management change was designed to allow Mr. Paul to recover from a health condition. Mr. Paul is expected to make a full recovery over the next several months and plans to remain actively involved with the Company both during his recovery and thereafter.

The terms “the Company,” “Globus,” “we,” “us” and “our” refer to Globus Medical, Inc. and, where applicable, our consolidated subsidiaries.

7

GLOBUS MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(b) Basis of Presentation

The accompanying interim unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in complete financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). As such, the information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2016.

In the opinion of management, the statements include all adjustments necessary, which are of a normal and recurring nature, for the fair presentation of our financial position and of the results for the three- and nine- month periods presented. The results of operations for any interim period are not indicative of results for the full year. Certain reclassifications have been made to the prior period statements to include amortization of intangibles and acquisition related costs within operating expenses to conform to the current year presentation. In addition, we have recast an immaterial amount from cost of goods sold to amortization of intangibles to be consistent with our presentation for the year ended December 31, 2016.

(c) Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Globus and its wholly-owned subsidiaries. All intercompany balances and transactions are eliminated in consolidation.

(d) Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates, in part, on historical experience that management believes to be reasonable under the circumstances. Actual results could differ from those estimates. Estimates and assumptions are periodically reviewed and the effects of revisions are reflected in the condensed consolidated financial statements in the period they are determined to be necessary.

Significant areas that require management’s estimates include intangible assets, contingent payment liabilities, allowance for doubtful accounts, stock-based compensation, write-down for excess and obsolete inventory, useful lives of assets, the outcome of litigation, recoverability of intangible assets and income taxes. We are subject to risks and uncertainties due to changes in the healthcare environment, regulatory oversight, competition, and legislation that may cause actual results to differ from estimated results.

8

GLOBUS MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(e) Restricted Cash

In December 2014, we set aside cash for the payment of a portion of the DePuy Synthes and Bianco litigations. We classified this cash as restricted, as the amount was placed in escrow to be used for payment of the litigation obligations, should we not be successful with our appeals. On January 13, 2016, we settled our litigation with DePuy Synthes and made a payment of $7.9 million and recovered approximately $8.4 million related to that settlement shortly thereafter. In September 2017, we settled the Bianco matter and shortly thereafter paid $11.5 million related to the settlement. As of September 30, 2017, we have no restricted cash remaining. See “Note 13. Commitments and Contingencies” below for more details regarding these litigations.

(f) Marketable Securities

Our marketable securities include municipal bonds, corporate debt securities, commercial paper, securities of U.S. government-sponsored agencies and asset-backed securities, and are classified as available-for-sale as of September 30, 2017. Available-for-sale securities are recorded at fair value in both short-term and long-term marketable securities on our condensed consolidated balance sheets. The change in fair value for available-for-sale securities is recorded, net of taxes, as a component of accumulated other comprehensive income or loss on our condensed consolidated balance sheets. Premiums and discounts are recognized over the life of the related security as an adjustment to yield using the straight-line method. Realized gains or losses from the sale of our marketable securities are determined on a specific identification basis. Realized gains and losses, along with interest income and the amortization/accretion of premiums/discounts are included as a component of other income, net, on our condensed consolidated statements of income. Interest receivable is recorded as a component of prepaid expenses and other current assets on our condensed consolidated balance sheets.

We maintain a portfolio of various holdings, types and maturities, though most of the securities in our portfolio could be liquidated at minimal cost at any time. We invest in securities that meet or exceed standards as defined in our investment policy. Our policy also limits the amount of credit exposure to any one issue, issuer or type of security. We review our securities for other-than-temporary impairment at each reporting period. If an unrealized loss for any security is considered to be other-than-temporary, the loss will be recognized in our condensed consolidated statement of income in the period the determination is made.

(g) Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is determined on a first-in, first-out basis. The majority of our inventories are finished goods and we utilize both in-house manufacturing and third-party suppliers to source our products. We periodically evaluate the carrying value of our inventories in relation to our estimated forecast of product demand, which takes into consideration the estimated life cycle of product releases. When quantities on hand exceed estimated sales forecasts, we record a write-down for such excess inventories.

9

GLOBUS MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(h) Property and Equipment

Purchases of property and equipment included in accounts payable were $4.5 million and $3.7 million during the nine months ended September 30, 2017 and September 30, 2016, respectively.

(i) Revenue Recognition

Revenue is recognized when persuasive evidence of an arrangement exists, product delivery has occurred, pricing is fixed or determinable, and collection is reasonably assured. A significant portion of our revenue is generated from consigned inventory maintained at hospitals or with sales representatives. For these products, revenue is recognized at the time the product is used or implanted. For all other transactions, we recognize revenue when title to the goods and risk of loss transfer to customers, provided there are no remaining performance obligations that will affect the customer’s final acceptance of the sale. Our policy is to classify shipping and handling costs billed to customers as sales and the related expenses as cost of goods sold.

(j) Recently Issued Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 amends the guidance in former Topic 605, Revenue Recognition, and most other existing revenue guidances in US GAAP. Under the new standard, an entity will recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the payment to which the entity expects to be entitled in exchange for those goods or services and provide additional disclosures. As amended, the effective date for public entities is annual reporting periods beginning after December 15, 2017 and interim periods therein. Early adoption is not permitted prior to the first quarter of 2017. We will adopt ASU 2014-09 effective January 1, 2018 using the modified retrospective method (retrospective application with the cumulative effect of initially applying the guidance recognized at the date of initial application). This update will not have a material impact on our financial position or results of operations.  The updated guidance will require additional disclosure regarding our revenue transactions.

In July 2015, the FASB released ASU 2015-11, Simplifying the Measurement of Inventory (Topic 330) (“ASU 2015-11”) as part of the FASB’s Simplification Initiative. This update is intended to more closely align the measurement of inventory under GAAP with the measurement of inventory under International Financial Reporting Standards. Within the scope of the update, an entity is required to measure inventory at the lower of cost or net realizable value. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonable and predictable costs of completion, disposal and transportation. ASU 2015-11 is effective for all public entities for fiscal years beginning after December 31, 2016, including interim reporting periods within that period, and is required to be applied prospectively, with early adoption permitted. We adopted ASU 2015-11 on January 1, 2017. This update does not have a material impact on our financial position, results of operations, and disclosures.

10

GLOBUS MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

In February 2016, the FASB released ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). Under ASU 2016-02, a right-of-use asset and lease obligation will be recorded for all leases with terms greater than 12 months, whether operating or financing, while the income statement will reflect lease expense for operating leases and amortization/interest expense for financing leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted, and requires the use of the modified retrospective method, which will require adjustment to all comparative periods presented in the consolidated financial statements. We are currently evaluating the impact of this update on our financial position, results of operations, and disclosures.

In March 2016, the FASB released ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which will simplify the income tax consequences, accounting for forfeitures, and classification on the statements of cash flows. ASU 2016-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, and is required to be applied either prospectively, retrospectively or using a modified retrospective transition method, depending on the area covered in this update. We adopted ASU 2016-09 effective January 1, 2017.

ASU 2016-09 requires that all excess tax benefits and tax deficiencies are recognized as income tax expense or benefit in the income statement as discrete items in the reporting period in which they occur. The adoption of this provision is required to be applied using a prospective transition method, therefore prior period net income has not been adjusted. Under the provisions of the new guidance, we elected to account for forfeitures as they occur, and using the required modified retrospective adoption, the impact to retained earnings was immaterial. We elected to apply the presentation requirements for cash flows related to excess tax benefits retrospectively to all periods presented. As a result of this retrospective application, our cash provided by operating activities increased by $1.5 million for the nine months ended September 30, 2016, and our cash provided by financing activities decreased by $1.5 million for the nine months ended September 30, 2016.

In October 2016, the FASB released ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”). ASU 2016-16 removes the current exception in US GAAP prohibiting entities from recognizing current and deferred income tax expenses or benefits related to transfer of assets, other than inventory, within the consolidated entity. The current exception to defer the recognition of any tax impact on the transfer of inventory within the consolidated entity until it is sold to a third party remains unaffected. This update is effective for public entities for annual reporting periods beginning after December 15, 2017. Early adoption is permitted and should be in the first interim period if an entity issues interim financial statements. We are currently evaluating the impact of this new accounting standard on our financial position, results of operations, and disclosures.

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GLOBUS MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

In November 2016, the FASB released ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which requires that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. Transfers between cash and cash equivalents and restricted cash and restricted cash equivalents will no longer be presented in the statement of cash flows. The amendments in this update should be applied using a retrospective transition method to each period presented. This update is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years; early adoption is permitted, including adoption in an interim period. We will adopt ASU 2016-18 effective January 1, 2018, and this update will not have a material impact on our financial position, results of operations or cash flows.  The updated guidance will require additional disclosure regarding the total of our cash and restricted cash.

In January 2017, the FASB released ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”), which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The amendments in this ASU should be applied prospectively and are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early application permitted. No disclosures are required at transition. We will adopt ASU 2017-01 effective January 1, 2018, and this update will not have a material impact on our financial position, results of operations or cash flows.

In January 2017, the FASB released ASU 2017-04, Intangibles - Goodwill and Other (Topic 805): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which eliminates the Step 2 calculation for the implied fair value of goodwill to measure a goodwill impairment charge. Under the updated standard, an entity will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. ASU 2017-04 does not change the guidance on completing Step 1 of the goodwill impairment test and still allows an entity to perform the optional qualitative goodwill impairment assessment before determining whether to proceed to Step 1. This update is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019 with early adoption permitted for any impairment test performed on testing dates after January 1, 2017. We are currently evaluating the timing and impact of the new standard on our financial position, results of operations and disclosures.

In May 2017, the FASB released ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”), which clarifies the changes to terms or conditions of a share based payment award that requires application of modification accounting under Topic 718. A change to an award should be accounted for as a modification unless the fair value of the modified award is the same as the original award, the vesting conditions do not change, and the classification as an equity or liability instrument does not change. This update is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017. Early application is permitted and prospective application is required for awards modified on or after the adoption date. We will adopt ASU 2017-09 effective January 1, 2018, and this update will not have a material impact on our financial position, results of operations or disclosures.

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GLOBUS MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 2. ACQUISITIONS

KB Medical

On June 13, 2017, we acquired KB Medical SA (“KB Medical”), a Swiss-based robotic developer, to further bolster our development team, intellectual property, and product portfolio. We have included the financial results of KB Medical in our condensed consolidated financial statements from the acquisition date, and the results from KB Medical were not material to our condensed consolidated financial statements. The fair value of the consideration for this acquisition was approximately $31.5 million of cash paid at closing, plus a potential $4.9 million contingent consideration payment based on product development milestones. We recorded $25.0 million of identifiable net assets, based on their estimated fair values, and goodwill of $11.4 million. None of the goodwill is expected to be deductible for tax purposes.

As of September 30, 2017, the maximum aggregate undiscounted amount of contingent consideration potentially payable related to this acquisition is $5.2 million.

The preliminary fair value estimates for the assets acquired and liabilities assumed for this acquisition are based upon preliminary calculations and valuations, and our estimates and assumptions for this acquisition are subject to change as we obtain additional information during the respective measurement period. The primary areas of those preliminary estimates that are not yet finalized relate to certain tangible assets and liabilities acquired, including the valuation of the contingent consideration, identifiable intangible assets, and goodwill. We expect to complete our final purchase price allocations in late 2017.

Alphatec International

On September 1, 2016 (the “Closing Date”), Globus Medical Ireland, Ltd. (“Globus Ireland”), a private limited company existing under the laws of Ireland and an indirect wholly-owned subsidiary of Globus, acquired from Alphatec Holdings, Inc., a Delaware corporation (“Alphatec”) (i) substantially all of the assets and certain liabilities of Alphatec’s subsidiaries in the United Kingdom, Italy, the Netherlands, Germany and Hong Kong and (ii) all of the outstanding equity interests of Alphatec’s subsidiaries in Japan, Brazil, China, Singapore and Australia (“Alphatec International”) pursuant to a Purchase and Sale Agreement entered into on July 25, 2016 (the “Purchase Agreement” and the “Acquisition”). The aggregate consideration for the transaction was approximately $77.8 million in cash, subject to customary adjustment after closing for certain working capital items as provided in the Purchase Agreement.

In addition, in connection with the Acquisition, Globus Ireland entered into a supply agreement with Alphatec, pursuant to which Alphatec will supply products to Globus Ireland and its newly-acquired subsidiaries for up to five years after the Closing Date.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

We accounted for the acquisition under the purchase method of accounting, and as a result, recorded goodwill of approximately $16.5 million. The results of operations of Alphatec International have been included in our results of operations from the date of acquisition. Amounts recognized for assets acquired and liabilities assumed are based on our purchase price allocations and on certain management judgments. These allocations are based on an analysis of the estimated fair values of assets acquired and liabilities assumed, including identifiable tangible assets, and estimates of the useful lives of tangible assets. We completed our final purchase price allocations during August 2017. The final valuation adjustments were due primarily to reclassifications for inventory, instruments and cases purchased but not yet received at the closing date, reclassification of fair value adjustments to accrued expenses for inventory, reallocation of the purchase price and certain intangible assets between international jurisdictions, and tax adjustments related to inventory and intangibles. Based on our purchase price allocations, we believe that an immaterial amount of goodwill from the Acquisition is deductible for tax purposes.

As of September 30, 2017, we recorded the following purchase price allocation for the identifiable tangible and intangible assets and liabilities of Alphatec International:

(In thousands)
Consideration:
Cash paid at closing	$	80,000
Net working capital adjustment due	(2,217		)
Fair value of consideration	$	77,783
Identifiable assets acquired and liabilities assumed:
Cash acquired	$	4,010
Accounts receivable	12,352
Inventory	11,002
Customer relationships	38,800
Property and equipment	6,157
Deferred tax assets	1,446
Other assets	8,698
Accounts payable and accrued expenses	(11,847		)
Deferred tax liabilities	(9,359		)
Total identifiable net assets	61,259
Goodwill	16,524
Total allocated purchase price	$	77,783

14

GLOBUS MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following unaudited pro forma information is based on our historical data and our assumptions for consolidated results of operations, and gives effect to the Acquisition of Alphatec International as if it had occurred on January 1, 2015. These unaudited pro forma results include adjustments having a continuing impact on our condensed consolidated statements of income. These adjustments primarily consist of: adjustments to the fair value of inventory, adjustments to depreciation for the fair value and depreciable lives of property and equipment, amortization of intangibles, interest income and adjustments to tax expense based on condensed consolidated pro forma results. These results have been prepared using assumptions our management believes are reasonable, are not necessarily indicative of the actual results that would have occurred if the acquisition had occurred on January 1, 2015, and are not necessarily indicative of the results that may be achieved in the future, including but not limited to operating synergies that we may realize as a result of the Acquisition.

	Three Months Ended		Nine Months Ended
(pro forma, in thousands, except per share amounts)	September 30, 2016		September 30, 2016
Net sales	$	143,577	$	444,109
Net income	27,393		84,101
Earnings per share:
Basic	$	0.29	$	0.89
Diluted	$	0.28	$	0.88

NOTE 3. NOTE RECEIVABLE

On September 1, 2016, in connection with the Acquisition, we entered into a Credit, Security and Guaranty Agreement (the “Credit Agreement”) with Alphatec and Alphatec Spine, Inc. (“Alphatec Spine” and together with Alphatec, the “Alphatec Borrowers”), pursuant to which we made available to the Alphatec Borrowers a senior secured term loan facility in an amount not to exceed $30.0 million. On the Closing Date, we made an initial loan of $25.0 million and the Alphatec Borrowers issued a note for such amount to us. On December 20, 2016, the remaining $5.0 million was drawn by the Alphatec Borrowers and added to the note.

The Credit Agreement contains customary operational and financial covenants, including a fixed charge coverage ratio to be maintained by the Alphatec Borrowers, and provides us with a security interest in all of the assets of the Alphatec Borrowers. The Credit Agreement has a scheduled maturity date five years from the Closing Date. The term loan interest rate for the first two years following the Closing Date is priced at the London Interbank Offered Rate (“LIBOR”) plus 8.0%, subject to a 9.5% floor. The term loan interest rate thereafter will be LIBOR plus 13.0%.

On March 30, 2017, we entered into a First Amendment to the Credit Agreement which modified the time periods during which the Alphatec Borrowers are required to calculate the fixed charge coverage ratio in order to determine compliance with the Credit Agreement.

15

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Interest accrues on the note receivable based on the contractual terms of the note.  We consider a note to be impaired when, based on current information or factors (such as payment history, value of collateral and assessment of the borrower’s current creditworthiness), it is probable that the principal and interest payments will not be collected according to the note agreement. As of September 30, 2017, we do not consider this note to be impaired. We believe that the note’s carrying value approximates its fair value.

NOTE 4. INTANGIBLE ASSETS

A summary of intangible assets is presented below:

		September 30, 2017
(In thousands)	Weighted Average Amortization Period (in years)	Gross Carrying Amount		Accumulated Amortization			Intangible Assets, net
In-process research & development	—	$	25,351	$	—		$	25,351
Supplier network	10.0	4,000		(1,167		)	2,833
Customer relationships & other intangibles	6.8	41,415		(10,095		)	31,320
Developed Technology	14.8	21,088		(260		)	20,828
Patents	16.9	8,221		(900		)	7,321
Total intangible assets		$	100,075	$	(12,422	)	$	87,653

		December 31, 2016
(In thousands)	Weighted Average Amortization Period (in years)	Gross Carrying Amount		Accumulated Amortization			Intangible Assets, net
In-process research & development	—	$	20,460	$	—		$	20,460
Supplier network	10.0	4,000		(867		)	3,133
Customer relationships & other intangibles	6.8	40,308		(5,179		)	35,129
Developed Technology	7.0	628		(22		)	606
Patents	16.1	3,035		(657		)	2,378
Total intangible assets		$	68,431	$	(6,725	)	$	61,706

16

GLOBUS MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 5. MARKETABLE SECURITIES

The composition of our short-term and long-term marketable securities is as follows:

		September 30, 2017
(In thousands)	Contractual Maturity (in years)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Short-term:
Municipal bonds	Less than 1	$	64,428	$	13	$	(18	)	$	64,423
Corporate debt securities	Less than 1	51,368		10		(25		)	51,353
Commercial paper	Less than 1	61,651		4		(6		)	61,649
Securities of U.S. government-sponsored agencies	Less than 1	5,001		—		(20		)	4,981
Asset-backed securities	Less than 1	398		—		—			398
Total short-term marketable securities		$	182,846	$	27	$	(69	)	$	182,804
Long-term:
Municipal bonds	1-2	$	5,993	$	7	$	(2	)	$	5,998
Corporate debt securities	1-2	33,946		29		(13		)	33,962
Asset-backed securities	1-2	18,928		—		(4		)	18,924
Securities of U.S. government-sponsored agencies	1-2	—		—		—			—
Total long-term marketable securities		$	58,867	$	36	$	(19	)	$	58,884

		December 31, 2016
(In thousands)	Contractual Maturity (in years)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Short-term:
Municipal bonds	Less than 1	$	114,826	$	2	$	(88	)	$	114,740
Corporate debt securities	Less than 1	36,020		21		(4		)	36,037
Commercial paper	Less than 1	6,898		—		(2		)	6,896
Total short-term marketable securities		$	157,744	$	23	$	(94	)	$	157,673
Long-term:
Municipal bonds	1-2	$	30,207	$	—	$	(137	)	$	30,070
Corporate debt securities	1-2	15,278		9		(40		)	15,247
Asset-backed securities	1-2	10,146		6		(1		)	10,151
Securities of U.S. government-sponsored agencies	1-2	5,002		—		(26		)	4,976
Total long-term marketable securities		$	60,633	$	15	$	(204	)	$	60,444

17

GLOBUS MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 6. FAIR VALUE MEASUREMENTS

Under the accounting for fair value measurements and disclosures, fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or the liability in an orderly transaction between market participants on the measurement date. Additionally, a fair value hierarchy was established that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs. The level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

Our assets and liabilities measured at fair value on a recurring basis are classified and disclosed in one of the following three categories:

Level 1—quoted prices (unadjusted) in active markets for identical assets and liabilities;

Level 2—observable inputs other than quoted prices in active markets for identical assets and liabilities; and

Level 3—unobservable inputs in which there is little or no market data available, which require the reporting entity to use significant unobservable inputs or valuation techniques.

The fair value of our assets and liabilities measured at fair value on a recurring basis was as follows:

	Balance at
(In thousands)	September 30, 2017		Level 1		Level 2		Level 3
Assets
Cash equivalents	$	70,713	$	—	$	70,713	$	—
Municipal bonds	70,421		—		70,421		—
Corporate debt securities	85,315		—		85,315		—
Commercial paper	61,649		—		61,649		—
Asset-backed securities	19,322		—		19,322		—
Securities of U.S. government-sponsored agencies	4,981		—		4,981		—
Liabilities
Contingent consideration	20,521		—		—		20,521

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

	Balance at
(In thousands)	December 31, 2016		Level 1		Level 2		Level 3
Assets
Cash equivalents	$	76,157	$	957	$	75,200	$	—
Municipal bonds	144,810		—		144,810		—
Corporate debt securities	51,284		—		51,284		—
Commercial paper	6,896		—		6,896		—
Asset-backed securities	10,151		—		10,151		—
Securities of U.S. government-sponsored agencies	4,976		—		4,976		—
Liabilities
Contingent consideration	19,849		—		—		19,849

Our marketable securities are classified as Level 2 within the fair value hierarchy, as we measure their fair value using market prices for similar instruments and inputs such as actual trade data, benchmark yields, broker/dealer quotes and other similar data obtained from quoted market prices or independent pricing vendors.

Contingent consideration represents our contingent milestone, performance and revenue-sharing payment obligations related to our acquisitions and is measured at fair value, based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The valuation of contingent consideration uses assumptions we believe would be made by a market participant. We assess these estimates on an ongoing basis as additional data impacting the assumptions is obtained. The balances of the fair value of contingent consideration are recognized within business acquisition liabilities on our condensed consolidated balance sheets, and the changes in the fair value of contingent consideration are recognized within acquisition related costs in the condensed consolidated statements of income. As part of the KB Medical acquisition during the second quarter of 2017, we incurred a milestone-based contingent consideration liability.

The recurring Level 3 fair value measurements of our contingent consideration liabilities include the following significant unobservable inputs, which have not materially changed since December 31, 2016:

	Fair Value at
(In thousands)	September 30, 2017		Valuation technique	Unobservable input	Range
				Discount rate	6.7%	-	8.5%
Revenue-based payments	$	10,985	Discounted cash flow	Probability of payment	87.0%	-	100.0%
				Projected year of payment	2017	-	2029
				Discount rate	4.4%	-	13.5%
Milestone-based payments	$	9,536	Discounted cash flow	Probability of payment	100.0%
				Projected year of payment	2017	-	2018

19

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table provides a reconciliation of the beginning and ending balances of contingent consideration:

	Three Months Ended						Nine Months Ended
(In thousands)	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
Beginning balance	$	20,339		$	22,531		$	19,849		$	26,617
Purchase price contingent consideration	—			—			4,871			—
Currency translation (gain) loss	(15		)	—			27			—
Contingent payments	—			(2		)	(5,234		)	(5,003		)
Non-cash settlement of certain contingent consideration	—			(3,110		)	—			(4,632		)
Changes in fair value of contingent consideration	197			259			1,008			2,696
Ending balance	$	20,521		$	19,678		$	20,521		$	19,678

NOTE 7. INVENTORIES

(In thousands)	September 30, 2017		December 31, 2016
Raw materials	$	20,454	$	13,257
Work in process	10,494		10,747
Finished goods	80,514		88,688
Total inventories	$	111,462	$	112,692

NOTE 8. ACCRUED EXPENSES

(In thousands)	September 30, 2017		December 31, 2016
Compensation and other employee-related costs	$	22,599	$	23,214
Legal	4,150		734
Accrued non-income taxes	6,071		6,946
Royalties	2,360		4,671
Other	11,429		10,836
Total accrued expenses	$	46,609	$	46,401

20

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 9. DEBT

Line of Credit

In May 2011, we entered into a credit agreement with Wells Fargo Bank related to a revolving credit facility that provides for borrowings up to $50.0 million. At our request, and with the approval of the bank, the amount of borrowings available under the revolving credit facility can be increased to $75.0 million. The revolving credit facility includes up to a $25.0 million sub-limit for letters of credit. As amended to date, the revolving credit facility expires in May 2018. Cash advances bear interest at our option either at a fluctuating rate per annum equal to the daily LIBOR in effect for a one-month period plus 0.75%, or a fixed rate for a one- or three-month period equal to LIBOR plus 0.75%. The credit agreement governing the revolving credit facility also subjects us to various restrictive covenants, including the requirement to maintain maximum consolidated leverage. The covenants also include limitations on our ability to repurchase shares, to pay cash dividends or to enter into a sale transaction. As of September 30, 2017, we were in compliance with all financial covenants under the credit agreement, there were no outstanding borrowings under the revolving credit facility and available borrowings were $50.0 million. We may terminate the credit agreement at any time on ten days’ notice without premium or penalty.

NOTE 10. EQUITY

Our amended and restated Certificate of Incorporation provides for a total of 785,000,000 authorized shares of common stock. Of the authorized number of shares of common stock, 500,000,000 shares are designated as Class A common stock (“Class A Common”), 275,000,000 shares are designated as Class B common stock (“Class B Common”) and 10,000,000 shares are designated as Class C common stock (“Class C Common”).

Our issued and outstanding common shares by Class were as follows:

(Shares)	Class A Common	Class B Common	Class C Common	Total
September 30, 2017	72,488,894	23,877,556	—	96,366,450
December 31, 2016	72,052,360	23,877,556	—	95,929,916

The following table summarizes changes in total equity:

	Nine Months Ended
(In thousands)	September 30, 2017
Total equity, beginning of period	$	832,078
Net income	82,972
Stock-based compensation cost	10,807
Exercise of stock options	6,943
Other comprehensive income	2,464
Total equity, end of period	$	935,264

21

GLOBUS MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The tables below present the changes in each component of accumulated other comprehensive income/(loss), including current period other comprehensive income/(loss) and reclassifications out of accumulated other comprehensive income/(loss):

(In thousands)	Unrealized gain/(loss) on marketable securities, net of tax			Foreign currency translation adjustments			Accumulated other comprehensive loss
Accumulated other comprehensive loss, net of tax, at December 31, 2016	$	(167	)	$	(8,475	)	$	(8,642	)
Other comprehensive income before reclassifications	152			2,314			2,466
Amounts reclassified from accumulated other comprehensive income, net of tax	(2		)	—			(2		)
Other comprehensive income, net of tax	150			2,314			2,464
Accumulated other comprehensive loss, net of tax, at September 30, 2017	$	(17	)	$	(6,161	)	$	(6,178	)

(In thousands)	Unrealized gain/(loss) on marketable securities, net of tax			Foreign currency translation adjustments			Accumulated other comprehensive loss
Accumulated other comprehensive loss, net of tax, at December 31, 2015	$	(119	)	$	(1,839	)	$	(1,958	)
Other comprehensive income before reclassifications	95			79			174
Amounts reclassified from accumulated other comprehensive income, net of tax	24			—			24
Other comprehensive income, net of tax	119			79			198
Accumulated other comprehensive loss, net of tax, at September 30, 2016	$	—		$	(1,760	)	$	(1,760	)

NOTE 11. STOCK-BASED COMPENSATION

We have three stock plans: our Amended and Restated 2003 Stock Plan, our 2008 Stock Plan, and our 2012 Equity Incentive Plan (the “2012 Plan”).  The 2012 Plan is the only remaining active stock plan. The purpose of these stock plans was, and the 2012 Plan is, to provide incentive to employees, directors, and consultants of Globus.  The Plans are administered by the Board of Directors of Globus (the “Board”) or its delegates. The number, type of option, exercise price, and vesting terms are determined by the Board or its delegates in accordance with the terms of the Plans. The options granted expire on a date specified by the Board, but generally not more than ten years from the grant date. Option grants to employees generally vest in varying installments over a four-year period.

The 2012 Plan was approved by our Board in March 2012, and by our stockholders in June 2012. Under the 2012 Plan, the aggregate number of shares of Class A Common stock that may be issued subject to options and other awards is equal to the sum of (i) 3,076,923 shares, (ii) any shares available for issuance under the 2008 Plan as of March 13, 2012, (iii) any shares underlying awards outstanding under the 2008 Plan as of March 13, 2012 that, on or after that date, are forfeited, terminated, expired or lapse for any reason, or are settled for cash without delivery of shares and (iv) starting January 1, 2013, an annual increase in the number of shares available under the 2012 Plan equal to up to 3% of the number of shares of our common and preferred stock outstanding at the end of the previous year, as determined by our Board. The number of shares that may be issued or transferred pursuant to incentive stock options under the 2012 Plan is limited to 10,769,230 shares. The shares of Class A Common stock issuable under the 2012 Plan include authorized but unissued shares, treasury shares or shares of common stock purchased on the open market.

22

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

As of September 30, 2017, pursuant to the 2012 Plan, there were 14,889,882 shares of Class A Common stock reserved and 5,786,178 shares of Class A Common stock available for future grants.

The weighted average grant date fair value per share of the options awarded to employees were as follows:

	Three Months Ended				Nine Months Ended
	September 30, 2017		September 30, 2016		September 30, 2017		September 30, 2016
Weighted average grant date fair value per share	$	9.66	$	7.40	$	8.81	$	7.76

Stock option activity during the nine months ended September 30, 2017 is summarized as follows:  

	Option Shares (thousands)		Weighted average exercise price		Weighted average remaining contractual life (years)	Aggregate intrinsic value (thousands)
Outstanding at December 31, 2016	7,741		$	21.08
Granted	2,223		27.62
Exercised	(437	)	16.07
Forfeited	(410	)	23.79
Outstanding at September 30, 2017	9,117		$	22.79	7.5	$	63,708
Exercisable at September 30, 2017	4,269		$	19.46	6.1	$	43,821
Expected to vest at September 30, 2017	4,849		$	25.73	8.7	$	19,887

The intrinsic value of stock options exercised and the compensation cost related to stock options granted to employees and non-employees under our stock plans was as follows:

	Three Months Ended				Nine Months Ended
(In thousands)	September 30, 2017		September 30, 2016		September 30, 2017		September 30, 2016
Intrinsic value of stock options exercised	$	1,264	$	2,760	$	6,024	$	7,386
Stock-based compensation expense	$	3,596	$	2,747	$	10,659	$	8,437
Net stock-based compensation capitalized into inventory	50		65		148		205
Total stock-based compensation cost	$	3,646	$	2,812	$	10,807	$	8,642

As of September 30, 2017, there was $34.5 million of unrecognized compensation expense related to unvested employee stock options that are expected to vest over a weighted average period of three years.

NOTE 12. INCOME TAXES

In computing our income tax provision, we make certain estimates and management judgments, such as estimated annual taxable income or loss, annual effective tax rate, the nature and timing of permanent and temporary differences between taxable income for financial reporting and tax reporting, and the recoverability of deferred tax assets. Our estimates and assumptions may change as new events occur, additional information is obtained, or as the tax environment changes. Should facts and circumstances change during a quarter causing a material change to the estimated effective income tax rate, a cumulative adjustment is recorded.

23

GLOBUS MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table provides a summary of our effective tax rate:

	Three Months Ended				Nine Months Ended
	September 30, 2017		September 30, 2016		September 30, 2017		September 30, 2016
Effective income tax rate	31.5	%	32.5	%	30.5	%	33.7	%

The period over period change in the effective income tax rate for the three and nine months ended September 30, 2017 is primarily driven by a benefit derived from the recording of historical foreign tax credits and the adoption of ASU 2016-09 in the period ended September 30, 2017. Additionally for the nine months ended September 30, 2016, a one-time charge from the reorganization of our domestic legal structure impacted the overall rate.

NOTE 13. COMMITMENTS AND CONTINGENCIES

We are involved in a number of proceedings, legal actions, and claims. Such matters are subject to many uncertainties, and the outcomes of these matters are not within our control and may not be known for prolonged periods of time. In some actions, the claimants seek damages, as well as other relief, including injunctions prohibiting us from engaging in certain activities, which, if granted, could require significant expenditures and/or result in lost revenues. We record a liability in the condensed consolidated financial statements for these actions when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss is possible but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded. While it is not possible to predict the outcome for most of the matters discussed, we believe it is possible that costs associated with them could have a material adverse impact on our condensed consolidated earnings, financial position or cash flows.

N-Spine, Synthes and DePuy Synthes Litigation

In April 2010, N-Spine, Inc. and Synthes USA Sales, LLC filed suit against us in the U.S. District Court for the District of Delaware for patent infringement. N-Spine, the patent owner, and Synthes USA, a licensee of the subject patent, alleged that we infringed one or more claims of the patent by making, using, offering for sale or selling our TRANSITION^® stabilization system product. This matter was one of the four patent infringement lawsuits concerning spinal implant technologies between Globus Medical, Inc. and DePuy Synthes settled on January 13, 2016 for $7.9 million.

In a related matter, on January 8, 2014, DePuy Synthes Products, LLC (“DePuy Synthes”) filed suit against us in the U.S. District Court for the District of Delaware for patent infringement. DePuy Synthes alleged that we infringed one or more claims of the asserted patent by making, using, offering for sale or selling our TRANSITION^® stabilization system product. This matter was one of the four patent infringement lawsuits concerning spinal implant technologies between Globus Medical, Inc. and DePuy Synthes settled on January 13, 2016 for $7.9 million.

24

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Synthes USA, LLC, Synthes USA Products, LLC and Synthes USA Sales, LLC Litigation

In July 2011, Synthes USA, LLC, Synthes USA Products, LLC and Synthes USA Sales, LLC filed suit against us in the U.S. District Court for the District of Delaware for patent infringement. Synthes USA LLC, the patent owner, Synthes USA Products, LLC, a licensee to manufacture products of the subject patents, and Synthes USA Sales LLC, a licensee to sell products of the subject patents, alleged that we infringed one or more claims of three patents by making, using, offering for sale or selling our COALITION^®, INDEPENDENCE^® and INTERCONTINENTAL^® products. This matter was one of the four patent infringement lawsuits concerning spinal implant technologies between Globus Medical, Inc. and DePuy Synthes settled on January 13, 2016 for $7.9 million.

L5 Litigation

In December 2009, we filed suit in the Court of Common Pleas of Montgomery County, Pennsylvania against our former exclusive independent distributor L5 Surgical, LLC and its principals, seeking an injunction and declaratory judgment concerning certain restrictive covenants made to L5 by its sales representatives. L5 brought counterclaims against us alleging tortious interference, unfair competition and conspiracy. The injunction phase was resolved in September 2010, and this matter is now in the pre-trial phase of litigation on the underlying damages claims. We intend to defend our rights vigorously. The probable outcome of this litigation cannot be determined, nor can we estimate a range of potential loss. Therefore, in accordance with authoritative guidance on the evaluation of loss contingencies, we have not recorded an accrual related to this litigation.

Bianco Litigation

On March 21, 2012, Sabatino Bianco filed suit against us in the Federal District Court for the Eastern District of Texas claiming that we misappropriated his trade secret and confidential information and improperly utilized it in developing our CALIBER^® product. Bianco alleged that we engaged in misappropriation of trade secrets, breach of contract, unfair competition, fraud and theft. On October 1, 2013, Bianco amended his complaint to claim that his trade secrets and confidential information were also used improperly in developing our RISE^® and CALIBER-L^® products.

On January 17, 2014, the jury in this case returned a verdict in favor of Bianco on a claim of misappropriation of trade secret and awarded past damages of $4.3 million. We accrued the damages amount of $4.3 million as of December 31, 2013. On July 2, 2014, the court awarded Bianco an ongoing royalty of 5% of the net sales made by the Company between January 18, 2014 and June 30, 2022 of the CALIBER^®, CALIBER-L^®, and RISE^® products, or products that are not colorably different from those products. The court entered final judgment on the jury verdict on July 17, 2014. On October 19, 2015, the United States Federal Circuit Court of Appeals affirmed the judgment without opinion. On March 22, 2016, we filed a Petition for a Writ of Certiorari with the United States Supreme Court and on June 20, 2016 the Writ was denied. On September 13, 2017, we settled this matter with Bianco for $11.5 million in cash, which resulted in the reversal of a previously recorded accrual of $2.5 million and the recording of $9.0 million in other assets that will be amortized through June 30, 2022, as a component of cost of goods sold.

25

GLOBUS MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Bonutti Skeletal Innovations, LLC Litigation

On November 19, 2014, Bonutti Skeletal Innovations, LLC (“Bonutti Skeletal”) filed suit against us in the U.S. District Court for the Eastern District of Pennsylvania for patent infringement. Bonutti Skeletal, a non-practicing entity, alleged that Globus willfully infringed one or more claims of six patents by making, using, offering for sale or selling the CALIBER^®, CALIBER^®-L, COALITION^®, CONTINENTAL^®, FORGE^®, FORTIFY^®, INDEPENDENCE^®, INTERCONTINENTAL^®, MONUMENT^®, NIKO^®, RISE^®, SIGNATURE^®, SUSTAIN^®, and TRANSCONTINENTAL^® products. Globus Medical, Inc. and Bonutti Skeletal settled this matter on June 9, 2016.

Flexuspine, Inc. Litigation

On March 11, 2015, Flexuspine, Inc. filed suit against us in the U.S. District Court for the Eastern District of Texas for patent infringement. Flexuspine, Inc. alleged that Globus willfully infringed one or more claims of five patents by making, using, offering for sale or selling the CALIBER^®, CALIBER^®-L, and ALTERA^® products. On August 19, 2016, a jury returned a verdict in our favor finding no infringement of the asserted patents by the CALIBER^®, CALIBER^®-L, and ALTERA^® products. On November 1, 2016, plaintiff filed a notice of appeal to the United States Court of Appeals for the Federal Circuit.

Silverstein Litigation

On September 28, 2015, a putative securities class action lawsuit was filed against us and certain of our officers in the U.S. District Court for the Eastern District of Pennsylvania. Plaintiff in the lawsuit purported to represent a class of our stockholders who purchased shares between February 26, 2014 and August 5, 2014. The complaint purported to assert claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and sought damages in an unspecified amount, attorney’s fees and other relief. This matter was dismissed with prejudice on August 26, 2016. On September 9, 2016, plaintiff’s motion for reconsideration was denied, and on September 13, 2016 plaintiff filed an appeal in the United States Court of Appeals for the Third Circuit. On August 23, 2017, the Third Circuit affirmed the trial court’s dismissal of this matter with prejudice, and on September 20, 2017, plaintiff’s petition for rehearing was denied.

In addition, we are subject to legal proceedings arising in the ordinary course of business.

26

GLOBUS MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 14. SEGMENT AND GEOGRAPHIC INFORMATION

Operating segments are defined as components of an enterprise for which separate discrete financial information is available and evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. We globally manage the business within one reportable segment. Segment information is consistent with how management reviews the business, makes investing and resource allocation decisions and assesses operating performance. Products are sold principally in the United States.

The following table represents total sales by geographic area, based on the location of the customer:

	Three Months Ended				Nine Months Ended
(In thousands)	September 30, 2017		September 30, 2016		September 30, 2017		September 30, 2016
United States	$	125,933	$	120,473	$	381,870	$	372,749
International	25,811		15,178		78,073		39,655
Total sales	$	151,744	$	135,651	$	459,943	$	412,404

We classify our products into two categories: innovative fusion products and disruptive technology products. The following table represents total sales by product category:

	Three Months Ended				Nine Months Ended
(In thousands)	September 30, 2017		September 30, 2016		September 30, 2017		September 30, 2016
Innovative Fusion	$	80,202	$	68,498	$	241,940	$	207,985
Disruptive Technology	71,542		67,153		218,003		204,419
Total sales	$	151,744	$	135,651	$	459,943	$	412,404

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited interim condensed consolidated financial statements and related notes included elsewhere in this report.

Unless otherwise noted, the figures in the following discussions are unaudited.

Overview

We are a medical device company focused on the design, development and commercialization of musculoskeletal solutions. We are primarily focused on implants that promote healing in patients with spine disorders. In the third quarter of 2017, we launched our first products for the treatment of patients who have experienced orthopedic trauma. During this quarter, we also announced that the Excelsius GPS™, a revolutionary robotic guidance and navigation system, has received 510(k) clearance by the U.S. Food and Drug Administration. We expect to begin selling our robotic products in the fourth quarter of 2017.

We are an engineering-driven company with a history of rapidly developing and commercializing advanced products and procedures that assist surgeons in effectively treating their patients, respond to evolving surgeon needs and address new treatment options. Since our inception in 2003, we have launched over 180 products and offer a comprehensive product portfolio of innovative and differentiated products addressing a broad array of spinal pathologies, anatomies and surgical approaches.

All of our current products fall into one of two categories: Innovative Fusion or Disruptive Technologies. Our Innovative Fusion products comprise fusion products designed to treat a wide variety of musculoskeletal disorders or trauma and can be used in a variety of surgical approaches. We believe our Innovative Fusion products have features and characteristics that provide advantages for surgeons and potentially contribute to better outcomes for patients as compared to competing traditional fusion products.

We define Disruptive Technologies as those that represent a significant shift in the treatment of musculoskeletal disorders or trauma by allowing for novel surgical procedures, improvements to existing surgical procedures and/or the treatment of musculoskeletal disorders earlier in the continuum of care. We believe the use of Disruptive Technologies may improve patient outcomes and reduce costs given the expected lower morbidity rates, shorter patient recovery times and shorter hospital stays associated with these procedures. Additionally, Disruptive Technologies may help patients avoid progression of spinal disc disease sometimes caused by traditional surgical options such as spinal fusion. Our current portfolio of approved and pipeline Disruptive Technology products includes products that allow for minimally invasive surgical techniques, as well as new treatment alternatives, including robotic imaging and navigational technologies, motion preservation technologies, such as dynamic stabilization, total disc replacement and interspinous process spacer products; regenerative biologics technologies; and interventional pain management solutions, including treatments for vertebral compression fractures.

While we group our products into two categories, our products are not limited to a particular technology, platform or surgical approach. Instead, our goal is to offer spine surgeons a complete suite of products they can use to most effectively treat their patients, based on the patient’s specific anatomy and condition and the surgeon’s particular training and surgical preference.

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To date, the primary market for our products has been the United States, where we sell our products through a combination of direct sales representatives employed by us and distributor sales representatives employed by our exclusive independent distributors, who distribute our products on our behalf for a commission that is generally based on a percentage of sales. We believe there is significant opportunity to strengthen our position in the U.S. market by increasing the size of our U.S. sales force and we intend to add additional direct and distributor sales representatives in the future.

During the nine months ended September 30, 2017, (which includes the results since the acquisition date of the international operations and distribution channel of Alphatec Holdings, Inc. (“Alphatec International,”)), our international sales accounted for approximately 17% of our total sales. We have sold our products in 53 countries outside the United States through a combination of direct sales representatives employed by us and international distributors. We believe there are significant opportunities for us to increase our presence in both existing and new international markets through the continued expansion of our direct and distributor sales forces and the commercialization of additional products.

Recent Developments

On August 29, 2017, Globus Medical announced that the Board of Directors named David M. Demski as the Company’s Chief Executive Officer, effective immediately. Mr. Demski will report to David C. Paul, the Company’s founder, Chairman of the Board, and Chief Executive Officer since its inception in 2003. Mr. Paul will remain in the role of Executive Chairman.

Mr. Demski has been a Globus Medical senior executive since 2003, serving initially as Chief Financial Officer from 2003 until 2008. In 2008, he became President and Chief Operating Officer of the Company, responsible for all of its domestic and international commercial operations, including sales, marketing, manufacturing, and finance. During Mr. Demski’s tenure as President and COO, Globus Medical consistently delivered above-category growth and profit margins, culminating in the Company’s successful initial public offering in 2012. In 2015, Mr. Demski became President, Emerging Technologies, and assumed responsibility for overseeing the Company’s expansion into the areas of imaging, navigation, and robotics, as well as orthopedic trauma, both of which are expected to contribute to the Company’s growth over the next decade.

Mr. Paul will continue to focus on strategic initiatives and will spend less time on day-to-day operational matters. The timing of this management change was designed to allow Mr. Paul to recover from a health condition. Mr. Paul is expected to make a full recovery over the next several months and plans to remain actively involved with the Company both during his recovery and thereafter.

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Results of Operations

Three Months Ended September 30, 2017 Compared to the Three Months Ended September 30, 2016

Sales

The following tables set forth, for the periods indicated, our sales by product category and geography expressed as dollar amounts and the changes in sales between the specified periods expressed in dollar amounts and as percentages:

	Three Months Ended				Change
(In thousands, except percentages)	September 30, 2017		September 30, 2016		$		%
Innovative Fusion	$	80,202	$	68,498	$	11,704	17.1	%
Disruptive Technology	71,542		67,153		4,389		6.5	%
Total sales	$	151,744	$	135,651	$	16,093	11.9	%

The growth in Innovative Fusion of $11.7 million was due primarily to increases from Alphatec International sales, which were offset partially by pricing pressure. Disruptive Technology sales increased $4.4 million due primarily to sales of expandable interbody, minimally invasive and regenerative biologics products launched during the past three years.

	Three Months Ended				Change
(In thousands, except percentages)	September 30, 2017		September 30, 2016		$		%
United States	$	125,933	$	120,473	$	5,460	4.5	%
International	25,811		15,178		10,633		70.1	%
Total sales	$	151,744	$	135,651	$	16,093	11.9	%

In the United States, the increase in sales of $5.5 million was due primarily to increased market penetration in existing territories, which was offset partially by one less selling day in the three months ended September 30, 2017 than the comparable period in the prior year.

Internationally, the increase in sales of $10.6 million was due primarily to Alphatec International sales. On a constant currency basis, our international sales grew $10.6 million, or by 69.7%, due to expansion into new international territories and higher sales of our expandable interbody products. Our worldwide sales increased 11.8% on a constant currency basis.

Cost of Goods Sold

	Three Months Ended						Change
(In thousands, except percentages)	September 30, 2017			September 30, 2016			$		%
Cost of goods sold	$	36,798		$	31,453		$	5,345	17.0	%
Percentage of sales	24.3		%	23.2		%

The $5.3 million net increase in cost of goods sold was primarily due to higher volumes and product mix, which were partially offset by favorable in-house manufacturing impacts.

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Research and Development Expenses

	Three Months Ended						Change
(In thousands, except percentages)	September 30, 2017			September 30, 2016			$		%
Research and development	$	10,887		$	10,265		$	622	6.1	%
Percentage of sales	7.2		%	7.6		%

The increase in research and development expenses was due primarily to an increase in employee compensation costs from additional headcount, including in our Emerging Technologies group, for furthering research activities and developing new innovative products.

Selling, General and Administrative Expenses

	Three Months Ended						Change
(In thousands, except percentages)	September 30, 2017			September 30, 2016			$		%
Selling, general and administrative	$	63,362		$	54,207		$	9,155	16.9	%
Percentage of sales	41.8		%	40.0		%

The increase in selling, general and administrative expenses was primarily due to an increase of $7.5 million of costs to support the Alphatec International sales, building the Emerging Technologies sales force, and increases in the U.S. sales force expenses. In addition, there were cost increases of $1.7 million related to general and administrative compensation costs and other costs.

Provision for Litigation

	Three Months Ended						Change
(In thousands, except percentages)	September 30, 2017			September 30, 2016			$		%
Provision for litigation	$	2,537		$	—		$	2,537	—	%
Percentage of sales	1.7		%	—		%

The increase in the provision for litigation resulted from costs related to settled litigation.

Amortization of Intangibles

	Three Months Ended						Change
(In thousands, except percentages)	September 30, 2017			September 30, 2016			$		%
Amortization of intangibles	$	2,080		$	884		$	1,196	135.3	%
Percentage of sales	1.4		%	0.7		%

The increase in the amortization of intangibles is due primarily to the customer relationships acquired as part of the Alphatec International acquisition.

Acquisition Related Costs

	Three Months Ended						Change
(In thousands, except percentages)	September 30, 2017			September 30, 2016			$			%
Acquisition related costs	$	285		$	1,192		$	(907	)	(76.1	)%
Percentage of sales	0.2		%	0.9		%

31

The decrease in acquisition related costs is due primarily to the timing of the Alphatec Acquisition, which occurred during the quarter ended September 30, 2016. Current period acquisition related costs consisted primarily of accretion related to the remaining business acquisition related contingent consideration liabilities.

Other Income, Net

	Three Months Ended						Change
(In thousands, except percentages)	September 30, 2017			September 30, 2016			$		%
Other income, net	$	1,562		$	1,205		$	357	29.6	%
Percentage of sales	1.0		%	0.9		%

The increase in other income, net, was due primarily to increases in interest income from the note receivable with Alphatec Spine, Inc., which was partially offset by a foreign exchange transaction loss during the current quarter.

Income Tax Provision

	Three Months Ended						Change
(In thousands, except percentages)	September 30, 2017			September 30, 2016			$			%
Income tax provision	$	11,766		$	12,628		$	(862	)	(6.8	)%
Effective income tax rate	31.5		%	32.5		%

The change in the effective income tax rate between the current year and prior year periods is primarily driven by a benefit derived from the recording of historical foreign tax credits and the adoption of ASU 2016-09 for the period ended September 30, 2017.

Nine Months Ended September 30, 2017 Compared to the Nine Months Ended September 30, 2016

Sales

The following tables set forth, for the periods indicated, our sales by product category and geography expressed as dollar amounts and the changes in sales between the specified periods expressed in dollar amounts and as percentages:

	Nine Months Ended				Change
(In thousands, except percentages)	September 30, 2017		September 30, 2016		$		%
Innovative Fusion	$	241,940	$	207,985	$	33,955	16.3	%
Disruptive Technology	218,003		204,419		13,584		6.6	%
Total sales	$	459,943	$	412,404	$	47,539	11.5	%

The growth in Innovative Fusion of $34.0 million was due primarily to increases from Alphatec International sales, which were offset partially by pricing pressure. Disruptive Technology sales increased by $13.6 million due primarily to sales of expandable interbody products, minimally invasive products and regenerative biologics products launched during the past three years.

32

	Nine Months Ended				Change
(In thousands, except percentages)	September 30, 2017		September 30, 2016		$		%
United States	$	381,870	$	372,749	$	9,121	2.4	%
International	78,073		39,655		38,418		96.9	%
Total sales	$	459,943	$	412,404	$	47,539	11.5	%

In the United States, the increase in sales of $9.1 million was due primarily to increased market penetration in existing territories.

Internationally, the increase in sales of $38.4 million was due primarily to Alphatec International sales. On a constant currency basis, our international sales grew $39.0 million, or by 98.4%, due to expansion into new international territories and higher sales of our expandable interbody products. Our worldwide sales increased 11.7% on a constant currency basis.

Cost of Goods Sold

	Nine Months Ended						Change
(In thousands, except percentages)	September 30, 2017			September 30, 2016			$		%
Cost of goods sold	$	109,597		$	95,703		$	13,894	14.5	%
Percentage of sales	23.8		%	23.2		%

The $13.9 million net increase in cost of goods sold was due primarily to higher volumes and product mix of $16.2 million, which was partially offset by $2.3 million of net decreases in expenses, which included the continued favorable impact of in-house manufacturing, a vendor refund, net impact of depreciation and instrument scrap, and other expenses.

Research and Development Expenses

	Nine Months Ended						Change
(In thousands, except percentages)	September 30, 2017			September 30, 2016			$		%
Research and development	$	32,266		$	30,889		$	1,377	4.5	%
Percentage of sales	7.0		%	7.5		%

The increase in research and development expenses was due primarily to an increase in employee compensation costs from additional headcount, including our Emerging Technologies group, for furthering research activities and developing new innovative products.

Selling, General and Administrative Expenses

	Nine Months Ended						Change
(In thousands, except percentages)	September 30, 2017			September 30, 2016			$		%
Selling, general and administrative	$	194,859		$	161,317		$	33,542	20.8	%
Percentage of sales	42.4		%	39.1		%

The increase in selling, general and administrative expenses was primarily due to an increase of $24.4 million of costs to support the Alphatec International sales, building the Emerging Technologies sales force, and increases in the U.S. sales force expenses. In addition, there were cost increases of $9.1 million related to general and administrative compensation costs, education grants and fellowship expenses, audit fees, bad debt expense, depreciation, and other costs.

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Provision for Litigation

	Nine Months Ended						Change
(In thousands, except percentages)	September 30, 2017			September 30, 2016			$			%
Provision for litigation	$	2,780		$	3,056		$	(276	)	(9	)%
Percentage of sales	0.6		%	0.7		%

The decrease in the provision for litigation was due to the difference in timing and amounts of litigation settlement accruals between the two periods.

Amortization of Intangibles

	Nine Months Ended						Change
(In thousands, except percentages)	September 30, 2017			September 30, 2016			$		%
Amortization of intangibles	$	5,671		$	1,673		$	3,998	239.0	%
Percentage of sales	1.2		%	0.4		%

The increase in the amortization of intangibles is due primarily to the customer relationships acquired as part of the Alphatec International acquisition.

Acquisition Related Costs

	Nine Months Ended						Change
(In thousands, except percentages)	September 30, 2017			September 30, 2016			$			%
Acquisition related costs	$	1,290		$	1,347		$	(57	)	(4.2	)%
Percentage of sales	0.3		%	0.3		%

The decrease in acquisition related costs is due primarily to the avoidance of current year costs resulting from non-cash settlement of certain business acquisition liabilities in the prior period. Current period acquisition related costs consisted primarily of accretion related to the remaining business acquisition related contingent consideration liabilities.

Other Income, Net

	Nine Months Ended						Change
(In thousands, except percentages)	September 30, 2017			September 30, 2016			$		%
Other income, net	$	5,848		$	2,383		$	3,465	145.4	%
Percentage of sales	1.3		%	0.6		%

The increase in other income, net, was due primarily to increases in interest income from the note receivable with Alphatec Spine, Inc., along with increases in foreign exchange transaction gains during the current year period.

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Income Tax Provision

	Nine Months Ended						Change
(In thousands, except percentages)	September 30, 2017			September 30, 2016			$			%
Income tax provision	$	36,356		$	40,759		$	(4,403	)	(10.8	)%
Effective income tax rate	30.5		%	33.7		%

The change in the effective income tax rate between the current year and prior year periods is primarily driven by a benefit derived from the recording of historical foreign tax credits, the adoption of ASU 2016-09 for the period ended September 30, 2017, and a one-time charge from the reorganization of our domestic legal structure for the period ended September 30, 2016.

Non-GAAP Financial Measures

To supplement our financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), management uses certain non-GAAP financial measures. For example, non-GAAP Adjusted EBITDA, which represents net income before interest income, net and other non-operating expenses, provision for income taxes, depreciation and amortization, stock-based compensation expense, provision for litigation, and acquisition related costs, is useful as an additional measure of operating performance, and particularly as a measure of comparative operating performance from period to period, as it is reflective of changes in pricing decisions, cost controls and other factors that affect operating performance, and it removes the effect of our capital structure, asset base, income taxes and interest income and expense. Our management also uses non-GAAP Adjusted EBITDA for planning purposes, including the preparation of our annual operating budget and financial projections. Provision for litigation represents costs incurred for litigation settlements or unfavorable verdicts when the loss is known or considered probable and the amount can be reasonably estimated, or in the case of a favorable settlement, when income is realized. Acquisition related costs represents the change in fair value of business-acquisition-related contingent consideration; costs related to integrating recently acquired businesses including but not limited to costs to exit or convert contractual obligations, severance, and information system conversion; and specific costs related to the consummation of the acquisition process such as banker fees, legal fees, and other acquisition- related professional fees.

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The following is a reconciliation of net income to Adjusted EBITDA for the periods presented:

	Three Months Ended						Nine Months Ended
(In thousands, except percentages)	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
Net Income	$	25,591		$	26,227		$	82,972		$	80,043
Interest income, net	(1,738		)	(795		)	(4,746		)	(1,893		)
Provision for income taxes	11,766			12,628			36,356			40,759
Depreciation and amortization	10,838			7,838			33,773			21,536
EBITDA	46,457			45,898			148,355			140,445
Stock-based compensation expense	3,596			2,747			10,659			8,437
Provision for litigation	2,537			—			2,780			3,056
Acquisition related costs, COGS	499			304			1,548			304
Acquisition related costs	285			1,192			1,290			1,347
Adjusted EBITDA	$	53,374		$	50,141		$	164,632		$	153,589
Net income as a percentage of sales	16.9		%	19.3		%	18.0		%	19.4		%
Adjusted EBITDA as a percentage of sales	35.2		%	37.0		%	35.8		%	37.2		%

In addition, for the period ended September 30, 2017 and for other comparative periods, we are presenting non-GAAP net income and non-GAAP Diluted Earnings Per Share, which represents net income and diluted earnings per share excluding the provision for litigation, amortization of intangibles, acquisition related costs, and adjusted for the tax effects of such adjustments. The tax impact of these non-GAAP adjustments is calculated based on the consolidated effective tax rate on a GAAP basis, applied to the non-GAAP adjustments, unless the underlying item has a materially different tax treatment, in which case the estimated tax rate applicable to the adjustment is used.

We believe these non-GAAP measures are also useful indicators of our operating performance, and particularly as additional measures of comparative operating performance from period to period as they remove the effects of litigation, amortization of intangibles, acquisition related costs, and the tax effects of such adjustments, which we believe is not reflective of underlying business trends.

The following is a reconciliation of net income computed in accordance with U.S. GAAP to non-GAAP net income for the periods presented.

	Three Months Ended						Nine Months Ended
(In thousands)	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
Net income	$	25,591		$	26,227		$	82,972		$	80,043
Provision for litigation	2,537			—			2,780			3,056
Amortization of intangibles	2,080			884			5,671			1,673
Acquisition related costs	784			1,496			2,838			1,651
Tax effect of adjusting items	(1,677		)	(776		)	(3,443		)	(2,112		)
Non-GAAP net income	$	29,315		$	27,831		$	90,818		$	84,311

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The following is a reconciliation of Diluted Earnings Per Share as computed in accordance with U.S. GAAP to non-GAAP Diluted Earnings Per Share for the periods presented.

	Three Months Ended						Nine Months Ended
(Per share amounts)	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
Diluted earnings per share, as reported	$	0.26		$	0.27		$	0.85		$	0.83
Provision for litigation	0.03			—			0.03			0.03
Amortization of intangibles	0.02			0.01			0.06			0.02
Acquisition related costs	0.01			0.02			0.03			0.02
Tax effect of adjusting items	(0.02		)	(0.01		)	(0.04		)	(0.02		)
Non-GAAP diluted earnings per share*	$	0.30		$	0.29		$	0.93		$	0.87
* amounts might not add due to rounding

We also define the non-GAAP measure of Free Cash Flow as the net cash provided by operating activities, adjusted for the impact of restricted cash, less the cash impact of purchases of property and equipment. We believe that this financial measure provides meaningful information for evaluating our overall liquidity for comparative periods as it facilitates an assessment of funds available to satisfy current and future obligations and fund acquisitions.

Below is a reconciliation of net cash provided by operating activities as computed in accordance with U.S. GAAP to Free Cash Flow for the periods presented.

	Three Months Ended						Nine Months Ended
(In thousands)	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
Net cash provided by operating activities	$	35,273		$	42,654		$	114,698		$	121,481
Adjustment for impact of restricted cash	(478		)	(10,758		)	(477		)	(25,642		)
Purchases of property and equipment	(12,817		)	(6,559		)	(37,878		)	(26,701		)
Free cash flow	$	21,978		$	25,337		$	76,343		$	69,138

The adjustment for the impact of restricted cash is primarily related to the DePuy Synthes settlement on January 13, 2016, where we paid $7.9 million and recovered approximately $8.4 million previously set aside for the DePuy Synthes litigation obligation.

Furthermore, the non-GAAP measure of constant currency sales growth is calculated by translating current year sales at the same average exchange rates in effect during the applicable prior year period. We believe constant currency sales growth provides insight to the comparative increase or decrease in period sales, in dollar and percentage terms, excluding the effects of fluctuations in foreign currency exchange rates.

Below is a reconciliation of sales growth as reported in accordance with U.S. GAAP compared to constant currency sales growth for the periods presented.

	Three Months Ended				Reported Sales Growth		Currency Impact on Current Period Sales		Constant Currency Sales Growth
(In thousands, except percentages)	September 30, 2017		September 30, 2016
United States	$	125,933	$	120,473	4.5	%	—		4.5	%
International	25,811		15,178		70.1	%	$	47	69.7	%
Total sales	$	151,744	$	135,651	11.9	%	$	47	11.8	%

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	Nine Months Ended				Reported Sales Growth		Currency Impact on Current Period Sales			Constant Currency Sales Growth
(In thousands, except percentages)	September 30, 2017		September 30, 2016
United States	$	381,870	$	372,749	2.4	%	—			2.4	%
International	78,073		39,655		96.9	%	$	(592	)	98.4	%
Total sales	$	459,943	$	412,404	11.5	%	$	(592	)	11.7	%

Non-GAAP Adjusted EBITDA, non-GAAP net income, non-GAAP Diluted Earnings Per Share, Free Cash Flow and constant currency sales growth are not calculated in conformity with U.S. GAAP within the meaning of Item 10(e) of Regulation S-K. Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for financial measures prepared in accordance with U.S. GAAP. These measures do not include certain expenses that may be necessary to evaluate our liquidity or operating results. Our definitions of non-GAAP Adjusted EBITDA, non-GAAP net income, non-GAAP Diluted Earnings Per Share, Free Cash Flow and constant currency sales growth may differ from that of other companies and therefore may not be comparable. Additionally, we have recast prior periods for non-GAAP net income and non-GAAP Diluted Earnings Per Share to conform with current period presentation.

Cash Flows

The following table summarizes, for the periods indicated, cash flows from operating, investing and financing activities:

	Nine Months Ended						Change
(In thousands)	September 30, 2017			September 30, 2016			$
Net cash provided by operating activities	$	114,698		$	121,481		$	(6,783	)
Net cash used in investing activities	(94,969		)	(93,145		)	(1,824		)
Net cash provided by financing activities	1,709			4,028			(2,319		)
Effect of foreign exchange rate changes on cash	778			(2,324		)	3,102
Increase in cash and cash equivalents	$	22,216		$	30,040		$	(7,824	)

Cash Provided by Operating Activities

The increase in net cash provided by operating activities was due primarily to the increase in income tax receivable and accounts receivable and the decrease in prepaids and other assets, which were offset partially by the impact of the recovery of a portion of our restricted cash related to the DePuy Synthes settlement on January 13, 2016.

Cash Used in Investing Activities

The increase in net cash used in investing activities was due primarily to the increase in purchases of property and equipment and net marketable security investment, offset partially by the decrease in current year period business acquisition costs.

Cash Provided by Financing Activities

The decrease in cash provided by financing activities was the result of the current year’s presentation of a contingent consideration payment, whereas the prior year’s payment was presented as a reduction of accrued expenses in operating activities, partially offset by the increase in proceeds from option exercises.

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Liquidity and Capital Resources

The following table highlights certain information related to our liquidity and capital resources:

(In thousands)	September 30, 2017		December 31, 2016
Cash and cash equivalents	$	154,855	$	132,639
Short-term marketable securities	182,804		157,673
Long-term marketable securities	58,884		60,444
Total cash, cash equivalents and marketable securities	$	396,543	$	350,756
Available borrowing capacity under revolving credit facility	50,000		50,000
Working capital	$	488,635	$	433,874

In May 2011, we entered into a credit agreement with Wells Fargo Bank related to a revolving credit facility that provided for borrowings up to $50.0 million. At our request, and with the approval of the bank, the amount of borrowings available under the revolving credit facility can be increased to $75.0 million. The revolving credit facility includes up to a $25.0 million sub-limit for letters of credit. As amended to date, the revolving credit facility expires in May 2018. Cash advances bear interest at our option either at a fluctuating rate per annum equal to the daily LIBOR in effect for a one-month period plus 0.75%, or a fixed rate for a one- or three-month period equal to LIBOR plus 0.75%. The credit agreement governing the revolving credit facility also subjects us to various restrictive covenants, including the requirement to maintain maximum consolidated leverage. The covenants also include limitations on our ability to repurchase shares, to pay cash dividends or to enter into a sale transaction. As of September 30, 2017, we were in compliance with all financial covenants under the credit agreement, there were no outstanding borrowings under the revolving credit facility and available borrowings were $50.0 million. We may terminate the credit agreement at any time on ten days’ notice without premium or penalty.

In addition to our existing cash and marketable securities balances, our principal sources of liquidity are our cash flows from operating activities and our revolving credit facility, which was fully available as of September 30, 2017. We believe these sources will provide sufficient liquidity for us to meet our liquidity requirements for the foreseeable future. Our principal liquidity requirements are to meet our working capital, research and development, including clinical trials, capital expenditure needs, principally for our surgical sets required to maintain and expand our business, and potential future business or intellectual property acquisitions. We expect to continue to make investments in surgical sets as we launch new products, increase the size of our U.S. sales force, and expand into international markets. We may, however, require additional liquidity as we continue to execute our business strategy. Our liquidity may be negatively impacted as a result of a decline in sales of our products, including declines due to changes in our customers’ ability to obtain third-party coverage and reimbursement for procedures that use our products; increased pricing pressures resulting from intensifying competition, cost increases and slower product development cycles resulting from a changing regulatory environment; and unfavorable results from litigation which will affect our cash flow. We anticipate that to the extent that we require additional liquidity, it will be funded through the incurrence of other indebtedness, additional equity financings or a combination of these potential sources of liquidity. The sale of additional equity may result in dilution to our stockholders. There is no assurance that we will be able to secure such additional funding on terms acceptable to us, or at all.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

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Seasonality and Backlog

Our business is generally not seasonal in nature. However, our sales may be influenced by summer vacation and winter holiday periods during which we have experienced fewer spine surgeries taking place. Our sales generally consist of products that are in stock in our warehouse facilities or maintained at hospitals or with our sales representatives. Accordingly, we do not have a backlog of sales orders.

Recently Issued Accounting Pronouncements

For further details on recently issued accounting pronouncements, please refer to “Part I; Item 1. Financial Statements; Notes to Condensed Consolidated Financial Statements; Note 1. Background and Summary of Significant Accounting Policies; (j) Recently Issued Accounting Pronouncements” above.

Cautionary Note Concerning Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact are forward-looking statements. We have tried to identify forward-looking statements by using words such as “believe,” “may,” “might,” “could,” “will,” “aim,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “plan” and similar words. These forward-looking statements are based on our current assumptions, expectations and estimates of future events and trends. Forward-looking statements are only predictions and are subject to many risks, uncertainties and other factors that may affect our businesses and operations and could cause actual results to differ materially from those predicted. These risks and uncertainties include, but are not limited to, factors affecting our quarterly results, our ability to manage our growth, our ability to sustain our profitability, demand for our products, our ability to compete successfully (including without limitation our ability to convince surgeons to use our products and our ability to attract and retain sales and other personnel), our ability to rapidly develop and introduce new products, our ability to develop and execute on successful business strategies, our ability to successfully integrate the international operations acquired from Alphatec, both in general and on our anticipated timeline, our ability to transition Alphatec’s international customers to Globus Medical products, our ability to realize the expected benefits to our results from the Alphatec acquisition, our ability to comply with changes and applicable laws and regulations that are applicable to our businesses, our ability to safeguard our intellectual property, our success in defending legal proceedings brought against us, trends in the medical device industry, and general economic conditions, and other risks set forth throughout our Annual Report on Form 10-K for the year ended December 31, 2016 (the “Form 10-K”), particularly those set forth under “Item 1A, Risk Factors” of the Form 10-K, and those discussed in other documents we file with the Securities and Exchange Commission (the “SEC”). Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for us to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Given these risks and uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements. Forward-looking statements contained in this Quarterly Report speak only as of the date of this Quarterly Report. We undertake no obligation to update any forward-looking statements as a result of new information, events or circumstances or other factors arising or coming to our attention after the date hereof.

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Item 3. Quantitative and Qualitative Disclosure About Market Risk

We have evaluated the information required under this item that was disclosed under Item 7A in our Annual Report on Form 10-K and there have been no significant changes to this information.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2017. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. As disclosed on our Form 10-K, as of December 31, 2016, we self-identified a material weakness in our internal control over financial reporting related to the computation of non-cash activities in depreciation and scrap expense of instruments and cases and immediately began remediation efforts. Based on their evaluation of our disclosure controls and procedures and our continued remediation efforts related to the self-identified material weakness noted above, our CEO and CFO concluded that, as of September 30, 2017, our disclosure controls and procedures were not effective.

Changes in Internal Control over Financial Reporting

As disclosed on our Form 10-K, management has implemented remediation efforts to address the self-identified material weakness in the computation of non-cash activities in depreciation and scrap expenses of instruments and cases for the year ended December 31, 2016. These remediation efforts, summarized below, which are either implemented or in process, are intended to both address the identified material weakness and to enhance our overall control environment. Our plan includes the following steps:

• recorded an updated depreciation and scrap methodology for instruments and cases included in December 31, 2016 financial statements

• reviewed results using the updated methodology to validate the prior period adjustment

• implementation of the new methodology within the fixed asset sub-ledger

• additional account detail within the general ledger to provide added visibility to monitor amounts scrapped.

The material weakness will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed prior to December 31, 2017.

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the nine months ended September 30, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Inherent Limitations on Effectiveness of Controls

Our management, including our CEO and CFO, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. For example, these inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are involved in a number of proceedings, legal actions and claims.  Such matters are subject to many uncertainties, and the outcomes of these matters are not within our control and may not be known for prolonged periods of time.  In some actions, the claimants seek damages, as well as other relief, including injunctions prohibiting us from engaging in certain activities, which, if granted, could require significant expenditures and/or result in lost revenues.  For further details on the material legal proceedings to which we are currently a party, please refer to “Part I; Item 1. Financial Statements; Notes to Condensed Consolidated Financial Statements; Note 13. Commitments and Contingencies” above.

In addition, we are subject to legal proceedings arising in the ordinary course of business.

Item 1A. Risk Factors

We are affected by risks specific to us as well as factors that affect all businesses operating in a global market. For a discussion of the specific risks that could materially adversely affect our business, financial condition or operation results, please see our Form 10-K under the heading “Part I; Item 1A. Risk Factors.”

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

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Item 6. Exhibits

The following is a list of exhibits filed as part of this Quarterly Report on Form 10-Q.  Where so indicated, exhibits that were previously filed are incorporated by reference.  For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated in parentheses.

Exhibit No.	Item
31.1*	Certification by Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification by Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32**	Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
*	Filed herewith.
**	Furnished herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		GLOBUS MEDICAL, INC.
Dated:	November 9, 2017	/s/ DAVID M. DEMSKI
		David M. Demski
		Chief Executive Officer
		(Principal Executive Officer)
Dated:	November 9, 2017	/s/ DANIEL T. SCAVILLA
		Daniel T. Scavilla
		Senior Vice President
		Chief Financial Officer
		(Principal Financial Officer)

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EXHIBIT INDEX

Exhibit No.	Item
31.1*	Certification by Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification by Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32**	Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
*	Filed herewith.
**	Furnished herewith.

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