10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
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, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act):
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| |
Large Accelerated Filer x | Accelerated Filer ¨ |
Non-accelerated Filer ¨ (Do not check if a smaller reporting company) | Smaller Reporting Company ¨ |
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 April 25, 2016 was 95,510,383 shares.
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
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| March 31, 2016 and December 31, 2015 | |
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| Three months ended March 31, 2016 and March 31, 2015 | |
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| Three months ended March 31, 2016 and March 31, 2015 | |
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| Three months ended March 31, 2016 and March 31, 2015 | |
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
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Item 4. | | |
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Item 1A. | Risk Factors | |
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |
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Item 3. | Defaults Upon Senior Securities | |
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Item 4. | Mine Safety Disclosures | |
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Item 5. | Other Information | |
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Item 6. | | |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
| | | | | | | |
(In thousands, except par value) | March 31, 2016 | | December 31, 2015 |
| | | |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 81,275 |
| | $ | 60,152 |
|
Restricted cash | 10,451 |
| | 26,119 |
|
Short-term marketable securities | 236,856 |
| | 220,877 |
|
Accounts receivable, net of allowances of $2,563 and $2,513, respectively | 75,527 |
| | 77,681 |
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Inventories | 105,147 |
| | 105,260 |
|
Prepaid expenses and other current assets | 5,961 |
| | 7,351 |
|
Income taxes receivable | 281 |
| | 8,672 |
|
Deferred income taxes | — |
| | 38,687 |
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Total current assets | 515,498 |
| | 544,799 |
|
Property and equipment, net of accumulated depreciation of $145,642 and $139,114, respectively | 115,105 |
| | 114,743 |
|
Long-term marketable securities | 58,943 |
| | 48,762 |
|
Intangible assets, net | 32,849 |
| | 33,242 |
|
Goodwill | 91,964 |
| | 91,964 |
|
Other assets | 306 |
| | 590 |
|
Deferred income taxes | 25,323 |
| | — |
|
Total assets | $ | 839,988 |
| | $ | 834,100 |
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| | | |
LIABILITIES AND EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 12,124 |
| | $ | 15,971 |
|
Accrued expenses | 42,190 |
| | 53,769 |
|
Income taxes payable | 6,390 |
| | 763 |
|
Business acquisition liabilities, current | 11,633 |
| | 12,188 |
|
Total current liabilities | 72,337 |
| | 82,691 |
|
Business acquisition liabilities, net of current portion | 17,056 |
| | 21,126 |
|
Deferred income taxes | — |
| | 13,260 |
|
Other liabilities | 1,710 |
| | 1,699 |
|
Total liabilities | 91,103 |
| | 118,776 |
|
Commitments and contingencies (Note 12) |
|
| |
|
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Equity: | | | |
Class A common stock; $0.001 par value. Authorized 500,000 shares; issued and outstanding 71,620 and 71,442 shares at March 31, 2016 and December 31, 2015, respectively | 71 |
| | 71 |
|
Class B common stock; $0.001 par value. Authorized 275,000 shares; issued and outstanding 23,878 at March 31, 2016 and December 31, 2015, respectively | 24 |
| | 24 |
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Additional paid-in capital | 197,875 |
| | 192,629 |
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Accumulated other comprehensive loss | (1,653 | ) | | (1,958 | ) |
Retained earnings | 552,568 |
| | 524,558 |
|
Total equity | 748,885 |
| | 715,324 |
|
Total liabilities and equity | $ | 839,988 |
| | $ | 834,100 |
|
See accompanying notes to consolidated financial statements.
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
| | | | | | | |
| Three Months Ended |
(In thousands, except per share amounts) | March 31, 2016 | | March 31, 2015 |
Sales | $ | 139,264 |
| | $ | 131,604 |
|
Cost of goods sold | 31,644 |
| | 32,107 |
|
Gross profit | 107,620 |
| | 99,497 |
|
| | | |
Operating expenses: | | | |
Research and development | 10,199 |
| | 8,656 |
|
Selling, general and administrative | 54,570 |
| | 52,289 |
|
Provision for litigation | — |
| | 32 |
|
Total operating expenses | 64,769 |
| | 60,977 |
|
| | | |
Operating income | 42,851 |
| | 38,520 |
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| | | |
Other income/(expense), net | | | |
Interest income, net | 496 |
| | 278 |
|
Foreign currency transaction gain/(loss) | 108 |
| | (677 | ) |
Other income | 156 |
| | 52 |
|
Total other income/(expense), net | 760 |
| | (347 | ) |
| | | |
Income before income taxes | 43,611 |
| | 38,173 |
|
Income tax provision | 15,601 |
| | 13,525 |
|
| | | |
Net income | $ | 28,010 |
| | $ | 24,648 |
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| | | |
Earnings per share: | | | |
Basic | $ | 0.29 |
| | $ | 0.26 |
|
Diluted | $ | 0.29 |
| | $ | 0.26 |
|
Weighted average shares outstanding: | | | |
Basic | 95,398 |
| | 94,788 |
|
Dilutive stock options | 895 |
| | 1,117 |
|
Diluted | 96,293 |
| | 95,905 |
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| | | |
Anti-dilutive stock options excluded from weighted average calculation | 5,208 |
| | 2,721 |
|
See accompanying notes to consolidated financial statements.
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
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| | | | | | | |
| Three Months Ended |
(In thousands) | March 31, 2016 | | March 31, 2015 |
Net income | $ | 28,010 |
| | $ | 24,648 |
|
Other comprehensive income/(loss): | | | |
Unrealized gain on marketable securities, net of tax | 224 |
| | 65 |
|
Foreign currency translation gain/(loss) | 81 |
| | (243 | ) |
Total other comprehensive gain/(loss) | 305 |
| | (178 | ) |
Comprehensive income | $ | 28,315 |
| | $ | 24,470 |
|
See accompanying notes to consolidated financial statements.
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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| | | | | | | |
| Three Months Ended |
(In thousands) | March 31, 2016 | | March 31, 2015 |
Cash flows from operating activities: | | | |
Net income | $ | 28,010 |
| | $ | 24,648 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 6,676 |
| | 5,674 |
|
Amortization of premium on marketable securities | 953 |
| | 640 |
|
Write-down for excess and obsolete inventories | 2,225 |
| | 2,529 |
|
Stock-based compensation expense | 2,770 |
| | 2,131 |
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Excess tax benefit related to nonqualified stock options | (510 | ) | | (684 | ) |
Allowance for doubtful accounts | 88 |
| | 47 |
|
Change in deferred income taxes | 391 |
| | (2,217 | ) |
(Increase)/decrease in: | | | |
Restricted cash | 15,668 |
| | — |
|
Accounts receivable | 2,201 |
| | 1,888 |
|
Inventories | (2,252 | ) | | (7,361 | ) |
Prepaid expenses and other assets | 1,209 |
| | 896 |
|
Increase/(decrease) in: | | | |
Accounts payable | (1,238 | ) | | 835 |
|
Accounts payable to related-party | — |
| | (5,359 | ) |
Accrued expenses and other liabilities | (15,661 | ) | | (3,904 | ) |
Income taxes payable/receivable | 14,517 |
| | 14,907 |
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Net cash provided by operating activities | 55,047 |
| | 34,670 |
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Cash flows from investing activities: | | | |
Purchases of marketable securities | (104,208 | ) | | (72,874 | ) |
Maturities of marketable securities | 69,656 |
| | 64,574 |
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Sales of marketable securities | 7,798 |
| | 19,764 |
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Purchases of property and equipment | (9,366 | ) | | (7,228 | ) |
Acquisition of businesses, net of cash acquired | — |
| | (48,015 | ) |
Net cash used in investing activities | (36,120 | ) | | (43,779 | ) |
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Cash flows from financing activities: | | | |
Payment of business acquisition liabilities | (300 | ) | | (300 | ) |
Proceeds from exercise of stock options | 1,895 |
| | 1,425 |
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Excess tax benefit related to nonqualified stock options | 510 |
| | 684 |
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Net cash provided by financing activities | 2,105 |
| | 1,809 |
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Effect of foreign exchange rate on cash | 91 |
| | 41 |
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| | | |
Net increase/(decrease) in cash and cash equivalents | 21,123 |
| | (7,259 | ) |
Cash and cash equivalents, beginning of period | 60,152 |
| | 82,265 |
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Cash and cash equivalents, end of period | $ | 81,275 |
| | $ | 75,006 |
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| | | |
Supplemental disclosures of cash flow information: | | | |
Interest paid | 1 |
| | — |
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Income taxes paid | $ | 774 |
| | $ | 509 |
|
See accompanying notes to consolidated financial statements.
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO 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 implants. We are currently focused on implants that promote healing in patients with spine disorders. We have also recently begun to develop a robotic surgical navigation device and products to treat patients who have experienced orthopedic traumas, although those development efforts are still ongoing and we currently have no robotic or orthopedic trauma products that are cleared by the U.S. Food and Drug Administration for sale. 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 160 products and offer a product portfolio addressing a broad array of spinal pathologies.
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.
The terms “the Company,” “Globus,” “we,” “us” and “our” refer to Globus Medical, Inc. and, where applicable, our consolidated subsidiaries.
(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, 2015.
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 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 prior period statements to conform to the current year presentation.
(c) Principles of Consolidation
The accompanying 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 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
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
disclosures of contingent assets and liabilities at the date of the 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 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, 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.
(e) Restricted Cash
In December 2014, we set aside cash for the payment of a portion of the DePuy Synthes and Bianco litigation. 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. As of March 31, 2016, we have $10.5 million of restricted cash remaining related to the Bianco matter. See “Note 12. 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 March 31, 2016. Available-for-sale securities are recorded at fair value in both short-term and long-term marketable securities on our 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 loss on our 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 consolidated statements of income. Interest receivable is recorded as a component of prepaid expenses and other current assets on our 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 consolidated statement of income in the period the determination is made.
(g) Inventories
Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis. The majority of our inventories are finished goods as we mainly utilize third-party suppliers to source our products. We periodically evaluate the carrying value of our inventories in relation to our estimated forecast
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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.
(h) 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.
(i) Recently Issued Accounting Pronouncements
In May 2014, the FASB and the International Accounting Standards Board released Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 is designed to create greater comparability for financial statement users across industries and jurisdictions. 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. The standard also will require enhanced disclosures and provide more comprehensive guidance for transactions such as service revenue and contract modifications. The standard was to take effect for public companies for annual reporting periods beginning after December 15, 2016, and early adoption was prohibited. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption.
In August 2015, the FASB released ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”), which defers the effective date of ASU 2014-09 by one year while providing the option to early adopt the standard on the original effective date. We are currently evaluating the timing and impact of the new standard on our financial position, results of operations, and disclosures.
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 are currently evaluating the impact of the new standard on our financial position, results of operations, and disclosures.
In September 2015, the FASB released ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”). ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. Prior to the issuance of the standard,
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
entities were required to retrospectively apply adjustments made to provisional amounts recognized in a business combination. The amendments in ASU 2015-16 require an entity to present separately on the face of the income statement, or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, with early adoption permitted. The update is not expected to have a material impact on our financial position, results of operations, and disclosures.
In November 2015, the FASB released ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”). ASU 2015-17 simplifies the presentation of deferred income taxes by requiring that all deferred income taxes are classified as noncurrent in a classified statement of financial position. The amendments in ASU 2015-17 also aligns the presentation of deferred taxes with that of International Financial Reporting Standards. This update is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with earlier application permitted for all entities as of the beginning of an interim or annual reporting period. We adopted ASU 2015-17 prospectively effective March 31, 2016, therefore prior periods were not adjusted.
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 new accounting standard 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, with early adoption permitted, and will be applied either prospectively, retrospectively or using a modified retrospective transition method, depending on the area covered in this update. We are currently evaluating the impact of this new accounting standard on our financial position, results of operations, and disclosures.
NOTE 2. ACQUISITIONS
Branch Medical Group, Inc.
On February 25, 2015, we entered into an agreement to acquire Branch Medical Group, Inc. (“BMG”), a related-party manufacturer of high precision medical devices located in Audubon, PA. We closed this acquisition on March 11, 2015, for $57.0 million in cash, $5.3 million in deferred consideration, and $0.9 million of closing working capital adjustments. The amount payable to BMG on the date of acquisition of $5.2 million was also settled in connection with the acquisition.
As previously disclosed in our definitive proxy statement, BMG had been a related-party supplier since 2005. As of February 24, 2015, David C. Paul's wife, David D. Davidar's wife, and David M. Demski collectively owned approximately 49% of the outstanding stock of BMG. In addition, since February 2010,
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Mr. Paul's wife and Mr. Davidar's wife had served as directors of BMG. Prior to the acquisition, we purchased products and services from BMG pursuant to a standard Supplier Quality Agreement entered into in September 2010.
We accounted for the acquisition under the purchase method of accounting, and as a result, recorded goodwill of $39.0 million. The results of operations of BMG have been included in our results of operations from the date of acquisition. Amounts recognized for assets acquired and liabilities assumed are based on 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 September 2015. The goodwill from this acquisition is not deductible for tax purposes.
The table below represents the final purchase price allocation for the identifiable tangible and intangible assets and liabilities of BMG:
|
| | | |
(In thousands) | |
Consideration: | |
Cash paid at closing | $ | 57,042 |
|
Deferred consideration | 5,290 |
|
Closing adjustments payable | 944 |
|
Fair value of consideration | $ | 63,276 |
|
| |
Identifiable assets acquired and liabilities assumed: | |
Cash acquired | $ | 9,026 |
|
Accounts receivable | 88 |
|
Inventory | 4,753 |
|
Other assets | 444 |
|
Property and equipment | 14,862 |
|
Accounts payable and accrued expenses | (1,585 | ) |
Deferred tax liability, net | (3,280 | ) |
Total identifiable net assets | 24,308 |
|
| |
Goodwill | 38,968 |
|
Total allocated purchase price | $ | 63,276 |
|
The following updated unaudited pro forma information is based on historical data, and gives effect to our acquisition of BMG as if the acquisition had occurred on January 1, 2014. These unaudited pro forma results include adjustments having a continuing impact on our consolidated statements of income. These adjustments consist of: elimination of intercompany sales/purchase transactions and the related profit, adjustments to depreciation for the fair value and depreciable lives of property and equipment, adjustments in the capitalization of overhead costs and adjustments to tax expense based on consolidated pro forma results. These results have been prepared using assumptions our management believes are reasonable, but not necessarily indicative of the actual results that would have occurred if the acquisition had occurred on January 1, 2014, 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.
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
| | | |
| Three Months Ended |
(pro forma, unaudited, in thousands, except per share amounts) | March 31, 2015 |
| |
Net sales | $ | 131,584 |
|
Net income | 25,173 |
|
| |
Earnings per share: | |
Basic | $ | 0.27 |
|
Diluted | $ | 0.26 |
|
NOTE 3. INTANGIBLE ASSETS
A summary of intangible assets is presented below:
|
| | | | | | | | | | | | | |
| | | March 31, 2016 |
(In thousands) | Weighted Average Amortization Period (in years) | | Gross Carrying Amount | | Accumulated Amortization | | Intangible Assets, net |
| |
In-process research & development | — | | $ | 24,560 |
| | $ | — |
| | $ | 24,560 |
|
Supplier network | 10.0 | | 4,000 |
| | (567 | ) | | 3,433 |
|
Customer relationships & other intangibles | 7.3 | | 5,525 |
| | (2,639 | ) | | 2,886 |
|
Patents | 17.0 | | 2,495 |
| | (525 | ) | | 1,970 |
|
Total intangible assets | | | $ | 36,580 |
| | $ | (3,731 | ) | | $ | 32,849 |
|
|
| | | | | | | | | | | | | |
| | | December 31, 2015 |
(In thousands) | Weighted Average Amortization Period (in years) | | Gross Carrying Amount | | Accumulated Amortization | | Intangible Assets, net |
| |
In-process research & development | — | | $ | 24,560 |
| | $ | — |
| | $ | 24,560 |
|
Supplier network | 10.0 | | 4,000 |
| | (467 | ) | | 3,533 |
|
Customer relationships & other intangibles | 7.3 | | 5,525 |
| | (2,384 | ) | | 3,141 |
|
Patents | 17.0 | | 2,495 |
| | (487 | ) | | 2,008 |
|
Total intangible assets | | | $ | 36,580 |
| | $ | (3,338 | ) | | $ | 33,242 |
|
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 4. MARKETABLE SECURITIES
The composition of our short-term and long-term marketable securities is as follows:
|
| | | | | | | | | | | | | | | | | |
| | | March 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 | | $ | 118,977 |
| | $ | 35 |
| | $ | (19 | ) | | $ | 118,993 |
|
Corporate debt securities | Less than 1 | | 64,639 |
| | 34 |
| | (6 | ) | | 64,667 |
|
Commercial paper | Less than 1 | | 41,515 |
| | 19 |
| | — |
| | 41,534 |
|
Securities of U.S. government-sponsored agencies | Less than 1 | | 9,511 |
| | 5 |
| | — |
| | 9,516 |
|
Asset-backed securities | Less than 1 | | 2,147 |
| | — |
| | (1 | ) | | 2,146 |
|
Total short-term marketable securities | | | $ | 236,789 |
| | $ | 93 |
| | $ | (26 | ) | | $ | 236,856 |
|
| | | | | | | | | |
Long-term: | | | | | | | | | |
Municipal bonds | 1-2 | | $ | 14,594 |
| | $ | 9 |
| | $ | (4 | ) | | $ | 14,599 |
|
Corporate debt securities | 1-2 | | 20,660 |
| | 90 |
| | — |
| | 20,750 |
|
Asset-backed securities | 1-2 | | 23,590 |
| | 12 |
| | (8 | ) | | 23,594 |
|
Total long-term marketable securities | | | $ | 58,844 |
| | $ | 111 |
| | $ | (12 | ) | | $ | 58,943 |
|
|
| | | | | | | | | | | | | | | | | |
| | | December 31, 2015 |
(In thousands) | Contractual Maturity (in years) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Short-term: | | | | | | | | | |
Municipal bonds | Less than 1 | | $ | 108,402 |
| | $ | 15 |
| | $ | (81 | ) | | $ | 108,336 |
|
Corporate debt securities | Less than 1 | | 53,759 |
| | 2 |
| | (57 | ) | | 53,704 |
|
Commercial paper | Less than 1 | | 42,149 |
| | 3 |
| | (1 | ) | | 42,151 |
|
Securities of U.S. government-sponsored agencies | Less than 1 | | 14,511 |
| | 4 |
| | (4 | ) | | 14,511 |
|
Asset-backed securities | Less than 1 | | 2,175 |
| | — |
| | — |
| | 2,175 |
|
Total short-term marketable securities | | | $ | 220,996 |
| | $ | 24 |
| | $ | (143 | ) | | $ | 220,877 |
|
| | | | | | | | | |
Long-term: | | | | | | | | | |
Municipal bonds | 1-2 | | $ | 18,508 |
| | $ | — |
| | $ | (25 | ) | | $ | 18,483 |
|
Corporate debt securities | 1-2 | | 12,033 |
| | — |
| | (25 | ) | | 12,008 |
|
Asset-backed securities | 1-2 | | 18,294 |
| | — |
| | (23 | ) | | 18,271 |
|
Total long-term marketable securities | | | $ | 48,835 |
| | $ | — |
| | $ | (73 | ) | | $ | 48,762 |
|
NOTE 5. 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
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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) | March 31, 2016 | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | |
Cash equivalents | $ | 17,176 |
| | $ | 478 |
| | $ | 16,698 |
| | $ | — |
|
Municipal bonds | 133,592 |
| | — |
| | 133,592 |
| | — |
|
Corporate debt securities | 85,417 |
| | — |
| | 85,417 |
| | — |
|
Commercial paper | 41,534 |
| | — |
| | 41,534 |
| | — |
|
Asset-backed securities | 25,740 |
| | — |
| | 25,740 |
| | — |
|
Securities of U.S. government-sponsored agencies | 9,516 |
| | — |
| | 9,516 |
| | — |
|
| | | | | | | |
Liabilities | | | | | | | |
Contingent consideration | 22,260 |
| | — |
| | — |
| | 22,260 |
|
|
| | | | | | | | | | | | | | | |
| Balance at | | | | | | |
(In thousands) | December 31, 2015 | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | |
Cash equivalents | $ | 12,700 |
| | $ | 1,701 |
| | $ | 10,999 |
| | $ | — |
|
Municipal bonds | 126,819 |
| | — |
| | 126,819 |
| | — |
|
Corporate debt securities | 65,712 |
| | — |
| | 65,712 |
| | — |
|
Commercial paper | 42,151 |
| | — |
| | 42,151 |
| | — |
|
Asset-backed securities | 20,446 |
| | — |
| | 20,446 |
| | — |
|
Securities of U.S. government-sponsored agencies | 14,511 |
| | — |
| | 14,511 |
| | — |
|
| | | | | | | |
Liabilities | | | | | | | |
Contingent consideration | 26,617 |
| | — |
| | — |
| | 26,617 |
|
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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. Changes in the fair value of contingent consideration related to updated assumptions and estimates are recognized within research and development and selling, general and administrative expenses in the consolidated statements of income.
NOTE 6. INVENTORIES
|
| | | | | | | |
(In thousands) | March 31, 2016 | | December 31, 2015 |
Raw materials | $ | 12,575 |
| | $ | 12,308 |
|
Work in process | 6,672 |
| | 7,091 |
|
Finished goods | 85,900 |
| | 85,861 |
|
Total inventories | $ | 105,147 |
| | $ | 105,260 |
|
NOTE 7. ACCRUED EXPENSES
|
| | | | | | | |
(In thousands) | March 31, 2016 | | December 31, 2015 |
Compensation and other employee-related costs | $ | 16,432 |
| | $ | 21,151 |
|
Legal and other settlements and expenses | 6,393 |
| | 13,617 |
|
Accrued non-income taxes | 7,165 |
| | 6,808 |
|
Royalties | 6,874 |
| | 6,787 |
|
Other | 5,326 |
| | 5,406 |
|
Total accrued expenses | $ | 42,190 |
| | $ | 53,769 |
|
NOTE 8. 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. 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 March 31, 2016, 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.
Subsequent to March 31, 2016, we amended the above credit agreement with Wells Fargo Bank to
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
extend the term of the revolving credit facility from May 2016 to May 2017.
NOTE 9. 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 | | Total |
March 31, 2016 | 71,620,035 |
| | 23,877,556 |
| | 95,497,591 |
|
December 31, 2015 | 71,442,166 |
| | 23,877,556 |
| | 95,319,722 |
|
The following table summarizes changes in total equity:
|
| | | |
| Three Months Ended |
(In thousands) | March 31, 2016 |
Total equity, beginning of period | $ | 715,324 |
|
Net income | 28,010 |
|
Stock-based compensation cost | 2,841 |
|
Exercise of stock options | 1,895 |
|
Excess tax benefit of nonqualified stock options | 510 |
|
Other comprehensive loss | 305 |
|
Total equity, end of period | $ | 748,885 |
|
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, 2015 | | | $ | (119 | ) | | $ | (1,839 | ) | | $ | (1,958 | ) |
Other comprehensive income before reclassifications | | | 224 |
| | 81 |
| | 305 |
|
Amounts reclassified from accumulated other comprehensive income, net of tax | | — |
| | — |
| | — |
|
Other comprehensive income, net of tax | | | 224 |
| | 81 |
| | 305 |
|
Accumulated other comprehensive income/(loss), net of tax, at March 31, 2016 | | $ | 105 |
| | $ | (1,758 | ) | | $ | (1,653 | ) |
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
| | | | | | | | | | | | | |
(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, 2014 | | | $ | (64 | ) | | $ | (1,593 | ) | | $ | (1,657 | ) |
Other comprehensive income/(loss) before reclassifications | | | 64 |
| | (243 | ) | | (179 | ) |
Amounts reclassified from accumulated other comprehensive income, net of tax | | 1 |
| | — |
| | 1 |
|
Other comprehensive income/(loss), net of tax | | | 65 |
| | (243 | ) | | (178 | ) |
Accumulated other comprehensive income/(loss), net of tax, at March 31, 2015 | | | $ | 1 |
| | $ | (1,836 | ) | | $ | (1,835 | ) |
NOTE 10. 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.
As of March 31, 2016, pursuant to the 2012 Plan, there were 12,003,652 shares of Class A Common stock reserved and 5,292,834 shares of Class A Common stock available for future grants.
The weighted average grant date per share fair values of the options awarded to employees were as follows:
|
| | | | | | | |
| Three Months Ended |
| March 31, 2016 | | March 31, 2015 |
Weighted average grant date per share fair value | $ | 7.81 |
| | $ | 9.42 |
|
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Stock option activity during the three months ended March 31, 2016 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, 2015 | 6,677 |
| | $ | 19.14 |
| | | | |
Granted | 1,280 |
| | 24.93 |
| | | | |
Exercised | (178 | ) | | 10.65 |
| | | | |
Forfeited | (167 | ) | | 22.81 |
| | | | |
Outstanding at March 31, 2016 | 7,612 |
| | $ | 20.23 |
| | 7.8 | | $ | 31,834 |
|
Exercisable at March 31, 2016 | 3,042 |
| | $ | 14.63 |
| | 6.0 | | $ | 28,456 |
|
Expected to vest at March 31, 2016 | 4,570 |
| | $ | 23.96 |
| | 9.0 | | $ | 3,378 |
|
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 |
(In thousands) | March 31, 2016 | | March 31, 2015 |
Intrinsic value of stock options exercised | $ | 2,731 |
| | $ | 3,260 |
|
| | | |
Stock-based compensation expense | $ | 2,770 |
| | $ | 2,131 |
|
Net stock-based compensation capitalized into inventory | 71 |
| | — |
|
Total stock-based compensation cost | $ | 2,841 |
| | $ | 2,131 |
|
As of March 31, 2016, there was $33.5 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 11. 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.
The following table provides a summary of our effective tax rate:
|
| | | | | |
| Three Months Ended |
| March 31, 2016 | | March 31, 2015 |
Effective income tax rate | 35.8 | % | | 35.4 | % |
The change in the effective income tax rate between the current year and prior year periods is due primarily to the one-time impact to deferred tax assets as it relates to the reorganization of our domestic legal structure to better align our business operations. This is partially offset by the research and experimentation credit, which was unable to be included for the period ending March 31, 2015.
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 12. 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 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 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, allege that we infringe one or more claims of the patent by making, using, offering for sale or selling our TRANSITION® stabilization system product. N-Spine and Synthes USA sought injunctive relief and an unspecified amount in damages. 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 alleges that we infringe one or more claims of the asserted patent by making, using, offering for sale or selling our TRANSITION® stabilization system product. DePuy Synthes seeks injunctive relief and an unspecified amount in damages. 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.
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, allege 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.
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 discovery 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 alleges that we engaged in misappropriation of trade secrets, breach of contract, unfair competition, fraud and theft and seeks correction of inventorship, injunctive relief and exemplary damages. On April 20, 2012, Bianco filed a motion for a preliminary injunction, seeking to enjoin us from making, using, selling, importing or offering for sale our CALIBER® product. On November 15, 2012, the court denied Bianco’s motion for preliminary injunction. 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. We accrued the verdict amount of $4.3 million as of December 31, 2013. The jury found against Bianco on the claims of breach of contract and disgorgement of profits. The court granted our motion for judgment as a matter of law and dismissed Bianco’s claims for unfair competition, fraud, and exemplary damages, and Bianco abandoned the claim of misappropriation of confidential information. Bianco’s claims of correction of inventorship, unjust enrichment, and permanent injunctive relief were not submitted to the jury. On March 7, 2014, the court denied Bianco’s claim for correction of inventorship and ruled he is not entitled to be named as a co-inventor on any of the patents at issue, and also denied his claim for unjust enrichment. On March 17, 2014, the court denied Bianco’s claim for permanent injunctive relief. On July 2, 2014, the court awarded Bianco an ongoing royalty of 5% of the net sales of the CALIBER®, CALIBER®-L, and RISE® products, or products that are not colorably different from those products, for a fifteen year period on sales starting on January 18, 2014. 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.
We do not expect the judgment to impact our ability to conduct our business or to have any material impact on our future revenues.
Bonutti Skeletal Innovations, LLC Litigation
On November 19, 2014, Bonutti Skeletal Innovations, LLC 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, alleges that Globus willfully infringes 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. Bonutti Skeletal seeks an unspecified amount in damages and injunctive relief. This matter was stayed on June 26, 2015 pending the resolution of inter partes reviews on the asserted patents by the USPTO. The probable outcome of this litigation cannot be determined,
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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.
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. alleges that Globus willfully infringes one or more claims of five patents by making, using, offering for sale or selling the CALIBER®, CALIBER®-L, and ALTERA® products. Flexuspine seeks an unspecified amount in damages and injunctive relief. 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.
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 purports to represent a class of our stockholders who purchased shares between February 26, 2014 and August 5, 2014. The complaint purports to assert claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and seeks damages in an unspecified amount, attorney’s fees and other relief. We believe the allegations to be unfounded, and 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.
In addition, we are subject to legal proceedings arising in the ordinary course of business.
NOTE 13. RELATED-PARTY TRANSACTIONS
Prior to March 11, 2015, we had contracted with BMG, which at the time was a related-party manufacturer. On March 11, 2015, BMG was acquired by Globus, and therefore as of March 31, 2015, there were no further purchases from nor amounts payable to BMG. For the period of January 1, 2015 through March 11, 2015, we purchased $5.3 million from the related-party supplier. The amount payable to BMG on the date of acquisition of $5.2 million was settled in connection with the acquisition.
GLOBUS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO 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 |
(In thousands) | March 31, 2016 | | March 31, 2015 |
United States | $ | 127,560 |
| | $ | 119,983 |
|
International | 11,704 |
| | 11,621 |
|
Total sales | $ | 139,264 |
| | $ | 131,604 |
|
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 |
(In thousands) | March 31, 2016 | | March 31, 2015 |
Innovative Fusion | $ | 70,046 |
| | $ | 70,370 |
|
Disruptive Technology | 69,218 |
| | 61,234 |
|
Total sales | $ | 139,264 |
| | $ | 131,604 |
|
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 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 implants. We are currently focused on implants that promote healing in patients with spine disorders. 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 160 products and offer a comprehensive product portfolio of innovative and differentiated products addressing a broad array of spinal pathologies, anatomies and surgical approaches. We have also recently begun to develop a robotic surgical navigation device and products to treat patients who have experienced orthopedic traumas, although those development efforts are still ongoing and we currently have no robotic or orthopedic trauma products that are cleared by the U.S. Food and Drug Administration for sale.
We sell implants and related disposables to our customers, primarily hospitals, for use by surgeons to treat spine disorders. All of our products fall into one of two categories: Innovative Fusion or Disruptive Technologies. Spinal fusion is a surgical procedure to correct problems with the individual vertebrae, the interlocking bones making up the spine, by preventing movement of the affected bones. Our Innovative Fusion products are used in cervical, thoracolumbar, sacral, and interbody/corpectomy fusion procedures to treat degenerative, deformity, tumor, and trauma conditions.
We define Disruptive Technologies as those that represent a significant shift in the treatment of spine disorders by allowing for novel surgical procedures, improvements to existing surgical procedures, the treatment of spine disorders by new physician specialties, and surgical intervention earlier in the continuum of care. Our current portfolio of approved and pipeline products includes a variety of Disruptive Technology products, which we believe offer material improvements to fusion procedures, such as minimally invasive surgical techniques, as well as new treatment alternatives including motion preservation technologies, such as dynamic stabilization, total disc replacement and interspinous process spacer products, and regenerative biologics technologies, as well as interventional pain management solutions, including treatments for vertebral compression fractures.
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 three months ended March 31, 2016, our international sales accounted for approximately 8% of our total sales. We sell our products in 35 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 January 13, 2016, we entered into a settlement agreement providing for the settlement of four patent infringement lawsuits concerning spinal implant technologies between Globus Medical, Inc. and DePuy Synthes (the “Settlement Agreement”). Pursuant to the terms of the Settlement Agreement, we are required to make a $7.9 million payment to DePuy Synthes. The Settlement Agreement also provides for covenants not to sue relating to certain of the products sold by each of the parties and cross-licenses of all of the patents asserted in each of the Settled Lawsuits and each of the patents in those respective patent families. The Company does not expect the Settlement Agreement to impact its ability to conduct its business or have any impact on its future revenues.
The settlement resulted in one-time financial benefits reflecting the difference from previously established provisions and the final settlement amount through a one-time net income benefit of approximately $7.6 million, recognized during the fourth quarter of 2015, and a one-time transfer of approximately $8.4 million from restricted cash account into the cash account, which we recognized during the first quarter of 2016.
The Consolidated Appropriations Act of 2016, which was signed into law in December 2015, includes a two-year suspension on the medical device excise tax, effective January 1, 2016. The 2.3% tax on sales in the United States of certain medical devices by a manufacturer, producer or importer was enacted as part of the Affordable Care Act in 2010 and applied to device sales beginning on January 1, 2013. Without further legislative action, the tax will be automatically reinstated for certain medical device sales in the United States starting on January 1, 2018. We incurred $1.8 million for this medical device excise tax for the three months ended March 31, 2015. We plan to redirect approximately 40% of this benefit into increased job creation initiatives in research and development and manufacturing in 2016.
Results of Operations
Three Months Ended March 31, 2016 Compared to the Three Months Ended March 31, 2015
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) | March 31, 2016 | | March 31, 2015 | | $ | | % |
Innovative Fusion | $ | 70,046 |
| | $ | 70,370 |
| | $ | (324 | ) | | (0.5 | )% |
Disruptive Technology | 69,218 |
| | 61,234 |
| | 7,984 |
| | 13.0 | % |
Total sales | $ | 139,264 |
| | $ | 131,604 |
| | $ | 7,660 |
| | 5.8 | % |
Product launches continue to be a driving force in our sales growth, particularly from products launched during the last three years. The growth in Disruptive Technology of $8.0 million was due primarily to sales of regenerative biologics, expandable interbody products, and minimally invasive products launched during the past three years. Innovative Fusion sales decreased by $0.3 million as a result of U.S. sales force recruitment timing and onboarding.
|
| | | | | | | | | | | | | | |
| Three Months Ended | | Change |
(In thousands, except percentages) | March 31, 2016 | | March 31, 2015 | | $ | | % |
United States | $ | 127,560 |
| | $ | 119,983 |
| | $ | 7,577 |
| | 6.3 | % |
International | 11,704 |
| | 11,621 |
| | 83 |
| | 0.7 | % |
Total sales | $ | 139,264 |
| | $ | 131,604 |
| | $ | 7,660 |
| | 5.8 | % |
In the United States, the increase in sales of $7.6 million was due primarily to increased penetration in existing territories. We saw higher sales in Disruptive Technology and certain Innovative Fusion products, led by sales of expandable interbody products, regenerative biologics and pedicle screw systems.
Internationally, the increase in sales of $0.1 million was negatively impacted due to changes in foreign currency exchange rates. On a constant currency basis, our international sales grew $0.6 million, or by 5.3%, due to expansion into new international territories and higher sales in our expandable interbody products. Our worldwide sales increased 6.2% on a constant currency basis.
Cost of Goods Sold
|
| | | | | | | | | | | | | | |
| Three Months Ended | | Change |
(In thousands, except percentages) | March 31, 2016 | | March 31, 2015 | | $ | | % |
Cost of goods sold | $ | 31,644 |
| | $ | 32,107 |
| | $ | (463 | ) | | (1.4 | )% |
Percentage of sales | 22.7 | % | | 24.4 | % | | | | |
The decrease in cost of goods sold was due primarily to the two year moratorium on the medical device excise tax (“MDET”) which began on January 1, 2016. In the period ended March 31, 2015, we recognized $1.8 million of MDET. In addition to the absence of MDET in the period ended March 31, 2016, we recognized approximately $0.8 million in savings due to the impact of Branch Medical Group (“BMG”). These variances were offset partially by increased sales volume and mix of approximately $2.0 million.
Research and Development Expenses
|
| | | | | | | | | | | | | | |
| Three Months Ended | | Change |
(In thousands, except percentages) | March 31, 2016 | | March 31, 2015 | | $ | | % |
Research and development | $ | 10,199 |
| | $ | 8,656 |
| | $ | 1,543 |
| | 17.8 | % |
Percentage of sales | 7.3 | % | | 6.6 | % | | | | |
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. A portion of this increase was funded by the suspension of MDET.
Selling, General and Administrative Expenses
|
| | | | | | | | | | | | | | |
| Three Months Ended | | Change |
(In thousands, except percentages) | March 31, 2016 | | March 31, 2015 | | $ | | % |
Selling, general and administrative | $ | 54,570 |
| | $ | 52,289 |
| | $ | 2,281 |
| | 4.4 | % |
Percentage of sales | 39.2 | % | | 39.7 | % | | | | |
The increase in selling, general and administrative expenses resulted primarily from an increase of $2.3 million related to increased compensation and other costs to support increased sales volume and company growth.
Provision for Litigation
|
| | | | | | | | | | | | | | |
| Three Months Ended | | Change |
(In thousands, except percentages) | March 31, 2016 | | March 31, 2015 | | $ | | % |
Provision for litigation | $ | — |
| | $ | 32 |
| | $ | (32 | ) | | (100.0 | )% |
Percentage of sales | — | % | | — | % | | | | |
The provision for litigation, which includes settlement and verdict costs, was nominal in the current and prior quarters.
Other Income/(Expense), Net
|
| | | | | | | | | | | | | | |
| Three Months Ended | | Change |
(In thousands, except percentages) | March 31, 2016 | | March 31, 2015 | | $ | | % |
Other income/(expense), net | $ | 760 |
| | $ | (347 | ) | | $ | 1,107 |
| | (319.0 | )% |
Percentage of sales | 0.5 | % | | (0.3 | )% | | | | |
The change in other income/(expense), net is due primarily to decreases in foreign exchange transaction losses, along with increases in interest income.
Income Tax Provision
|
| | | | | | | | | | | | | | |
| Three Months Ended | | Change |
(In thousands, except percentages) | March 31, 2016 | | March 31, 2015 | | $ | | % |
Income tax provision | $ | 15,601 |
| | $ | 13,525 |
| | $ | 2,076 |
| | 15.3 | % |
Effective income tax rate | 35.8 | % | | 35.4 | % | | | | |
The change in the effective income tax rate between the current year and prior year periods is due primarily to the one-time impact to deferred tax assets as it relates to the reorganization of our domestic legal structure to better align our business operations. This is partially offset by the research and experimentation credit, which was unable to be included for the period ending March 31, 2015.
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, 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, changes in the fair value of contingent consideration in connection with business acquisitions and other acquisition related costs, and provision for litigation, 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 Adjusted EBITDA for planning purposes, including the preparation of our annual operating budget and financial projections.
The following is a reconciliation of Adjusted EBITDA to net income for the periods presented:
|
| | | | | | | |
| Three Months Ended |
(In thousands, except percentages) | March 31, 2016 | | March 31, 2015 |
Net Income | $ | 28,010 |
| | $ | 24,648 |
|
Interest income, net | (496 | ) | | (278 | ) |
Provision for income taxes | 15,601 |
| | 13,525 |
|
Depreciation and amortization | 6,676 |
| | 5,674 |
|
EBITDA | 49,791 |
| | 43,569 |
|
Stock-based compensation expense | 2,770 |
| | 2,131 |
|
Provision for litigation | — |
| | 32 |
|
Change in fair value of contingent consideration and other acquisition related costs | 674 |
| | 584 |
|
Adjusted EBITDA | $ | 53,235 |
| | $ | 46,316 |
|
Adjusted EBITDA as a percentage of sales | 38.2 | % | | 35.2 | % |
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 financial performance 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 Free Cash Flow to net cash provided by operating activities as computed in accordance with U.S. GAAP for the periods presented.
|
| | | | | | | |
| Three Months Ended |
(In thousands) | March 31, 2016 | | March 31, 2015 |
Net cash provided by operating activities | $ | 55,047 |
| | $ | 34,670 |
|
Adjustment for impact of restricted cash | (15,668 | ) | | — |
|
Purchases of property and equipment | (9,366 | ) | | (7,228 | ) |
Free cash flow | $ | 30,013 |
| | $ | 27,442 |
|
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, we define the non-GAAP measure of sales on a constant currency basis as the current and prior period sales and net income translated at the same predetermined exchange rate. We believe sales on a constant currency basis 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 table of the percentage change in sales on a constant currency basis compared to the percentage change in sales as reported in accordance with U.S. GAAP for the periods presented.
|
| | | | | | | | | | | | | |
| Three Months Ended | | Percent Change |
(In thousands, except percentages) | March 31, 2016 | | March 31, 2015 | | Reported | | Constant Currency |
United States | $ | 127,560 |
| | $ | 119,983 |
| | 6.3 | % | | 6.3 | % |
International | 11,704 |
| | 11,621 |
| | 0.7 | % | | 5.3 | % |
Total sales | $ | 139,264 |
| | $ | 131,604 |
| | 5.8 | % | | 6.2 | % |
Adjusted EBITDA, Free Cash Flow and sales on a constant currency basis are not calculated in conformity with U.S. GAAP within the meaning of Item 10 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 Adjusted EBITDA, Free Cash Flow and sales on a constant currency basis may differ from that of other companies and therefore may not be comparable.
Cash Flows
The following table summarizes, for the periods indicated, cash flows from operating, investing and financing activities:
|
| | | | | | | | | | | |
| Three Months Ended | | Change |
(In thousands) | March 31, 2016 | | March 31, 2015 | | $ |
Net cash provided by operating activities | $ | 55,047 |
| | $ | 34,670 |
| | $ | 20,377 |
|
Net cash used in investing activities | (36,120 | ) | | (43,779 | ) | | 7,659 |
|
Net cash provided by financing activities | 2,105 |
| | 1,809 |
| | 296 |
|
Effect of foreign exchange rate changes on cash | 91 |
| | 41 |
| | 50 |
|
Increase/(decrease) in cash and cash equivalents | $ | 21,123 |
| | $ | (7,259 | ) | | $ | 28,382 |
|
Cash Provided by Operating Activities
The increase in net cash provided by operating activities was due primarily to the recovery of a portion of our restricted cash related to the DePuy Synthes settlement on January 13, 2016 and lower inventory purchases. Additionally, in the prior year period, we paid the related-party payable as part of the BMG acquisition.
Cash Used in Investing Activities
The decrease in net cash used in investing activities was due primarily to the prior year period BMG acquisition, offset partially by current year period increases in net cash invested in marketable securities.
Cash Provided by Financing Activities
The increase in cash provided by financing activities was due primarily to the increase in the proceeds from the exercise of stock options.
Liquidity and Capital Resources
The following table highlights certain information related to our liquidity and capital resources:
|
| | | | | | | |
(In thousands) | March 31, 2016 | | December 31, 2015 |
Cash and cash equivalents | $ | 81,275 |
| | $ | 60,152 |
|
Short-term marketable securities | 236,856 |
| | 220,877 |
|
Long-term marketable securities | 58,943 |
| | 48,762 |
|
Total cash, cash equivalents and marketable securities | $ | 377,074 |
| | $ | 329,791 |
|
| | | |
Available borrowing capacity under revolving credit facility | 50,000 |
| | 50,000 |
|
Working capital | $ | 443,161 |
| | $ | 462,108 |
|
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. 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 March 31, 2016, we were in compliance with all 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.
Subsequent to March 31, 2016, we amended the above credit agreement with Wells Fargo Bank to extend the term of the revolving credit facility from May 2016 to May 2017.
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 March 31, 2016. 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.
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
In May 2014, the FASB and the International Accounting Standards Board released Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 is designed to create greater comparability for financial statement users across industries and jurisdictions. 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. The standard also will require enhanced disclosures and provide more comprehensive guidance for transactions such as service revenue and contract modifications. The standard was to take effect for public companies for annual reporting periods beginning after December 15, 2016, and early adoption was prohibited. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption.
In August 2015, the FASB released ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”), which defers the effective date of ASU 2014-09 by one year while providing the option to early adopt the standard on the original effective date. We are currently evaluating the timing and impact of the new standard on our financial position, results of operations, and disclosures.
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 are currently evaluating the impact of the new standard on our financial position, results of operations, and disclosures.
In September 2015, the FASB released ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”). ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. Prior to the issuance of the standard, entities were required to retrospectively apply adjustments made to provisional amounts recognized in a business combination. The amendments in ASU 2015-16 require an entity to present separately on the face of the income statement, or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for fiscal
years, and interim periods within those years, beginning after December 15, 2015, with early adoption permitted. The update is not expected to have a material impact on our financial position, results of operations, and disclosures.
In November 2015, the FASB released ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”). ASU 2015-17 simplifies the presentation of deferred income taxes by requiring that all deferred income taxes are classified as noncurrent in a classified statement of financial position. The amendments in ASU 2015-17 also aligns the presentation of deferred taxes with that of International Financial Reporting Standards. This update is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with earlier application permitted for all entities as of the beginning of an interim or annual reporting period. We adopted ASU 2015-17 prospectively effective March 31, 2016, therefore prior periods were not adjusted.
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 new accounting standard 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, with early adoption permitted, and will be applied either prospectively, retrospectively or using a modified retrospective transition method, depending on the area covered in this update. We are currently evaluating the impact of this new accounting standard on our financial position, results of operations, and disclosures.
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 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, 2015 (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.
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 March 31, 2016. 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. Based on their evaluation of our disclosure controls and procedures as of March 31, 2016, our CEO and CFO concluded that, as of such date, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There was no change 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 three months ended March 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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.
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 Consolidated Financial Statements; Note 12. 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.” There has been no material change to our risk factors disclosed in our Form 10-K.
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
On May 3, 2016, we entered into an executive employment agreement with Daniel T. Scavilla, our Senior Vice President and Chief Financial Officer. Mr. Scavilla’s employment is “at will,” meaning that his employment may be terminated by either party for any or no reason at any time. The agreement provides for a monthly car allowance. Mr. Scavilla is eligible to earn a salary and also a non-equity cash incentive award by meeting certain company and individual performance targets. For 2016, Mr. Scavilla’s base salary is $334,750, and his target non-equity cash incentive award is $250,000. Both the base salary and non-equity incentive award are subject to adjustment from time to time in the sole discretion of the Company.
Mr. Scavilla is entitled to receive his base salary for 12 months and continued coverage under the Company’s group health, dental and vision plans for a period of 12 months in the event we terminate his employment without cause or in connection with a change of control or if he resigns for good reason. All severance payments are conditioned on Mr. Scavilla signing a general release of claims against the Company. Under Mr. Scavilla’s employment agreement, “good reason” is defined as (i) a materially adverse change or material diminution in the office, title, duties, powers, authority or responsibilities of Mr. Scavilla, (ii) our failure to pay his base salary or a bonus that has become due and payable, (iii) a material reduction in his base salary, (iv) a relocation of Mr. Scavilla’s principal worksite of more than 25 miles unless such relocation
reduces his commute to such worksite, or (v) a material breach of the employment agreement by the Company; provided in each case that the Company did not correct such reason during a specified cure period.
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 |
| | |
10.1* | | Executive Employment Agreement, dated May 3, 2016 by and between Globus Medical, Inc. and Daniel T. Scavilla. |
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. |
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: | May 4, 2016 | /s/ DAVID C. PAUL |
| | |
| | David C. Paul |
| | Chairman |
| | Chief Executive Officer |
| | (Principal Executive Officer) |
| | |
Dated: | May 4, 2016 | /s/ DANIEL T. SCAVILLA |
| | |
| | Daniel T. Scavilla |
| | Senior Vice President |
| | Chief Financial Officer |
| | (Principal Financial Officer) |
EXHIBIT INDEX
|
| | |
Exhibit No. | | Item |
| | |
10.1* | | Executive Employment Agreement, dated May 3, 2016 by and between Globus Medical, Inc. and Daniel T. Scavilla. |
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. |
Exhibit
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT (the “Agreement”) is made and entered into this 3rd day of May 2016 (the “Effective Date”), by and between Globus Medical, Inc., a Delaware corporation with its principal office in Montgomery County, Pennsylvania (the “Company”), and Daniel T. Scavilla, a resident of Pennsylvania (“Executive”), hereinafter collectively referred to as “the Parties”.
WITNESSETH:
WHEREAS, Executive serves the Company as its Senior Vice President and Chief Financial Officer; and
WHEREAS, the Company and the Executive desire to enter into this Agreement to set forth the terms and conditions of the employment relationship between the Company and Executive;
NOW, THEREFORE, in consideration of the mutual promises in this Agreement, and other good and valuable consideration, including but not limited to the employment of Executive by the Company and the compensation received by Executive from the Company from time to time, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows:
1. EMPLOYMENT. The Company hereby employs Executive as the Company’s Senior Vice President and Chief Financial Officer, and Executive hereby accepts such employment, upon the terms and conditions hereinafter set forth.
2. TERM. The term (“Term”) of this Agreement shall begin on the Effective Date and shall continue until terminated in accordance with the provisions of Section 6 hereof.
3. EMPLOYMENT AT WILL. The Parties acknowledge and agree that Executive’s employment with the Company is, and shall remain at all times, “employment at-will”. Either party shall have the right to terminate the employment relationship at any time, for any reason, with or without cause or prior notice.
4. DUTIES; EXCLUSIVE SERVICES; CONFLICTS OF INTEREST. Executive shall faithfully discharge his responsibilities and perform all duties as generally performed by the Senior Vice President or Chief Financial Officer of a comparable entity, including any duties set forth in the Bylaws of the Company related to the position and those duties prescribed from time to time by the Chief Executive Officer or his designee. Executive agrees to devote his best efforts, time, skill and attention to the performance of his duties and responsibilities on behalf of the Company and in furtherance of its best interests. Executive shall not become involved in any personal investment or business that would likely adversely affect the business of the Company or its affiliates. Executive also agrees that he shall not, without the written consent of the Chief Executive Officer or his designee, take personal advantage of any business opportunities that arise during his employment with the Company and which may benefit the Company. All material facts supporting such opportunities shall be promptly reported to the Chief Executive Officer for consideration by
the Company. Executive agrees to comply with all policies, standards and regulations of the Company now existing or hereafter promulgated. Subject to the terms and conditions of this Agreement (including, without limitation, Executive’s right to resign for Good Reason pursuant to Section 6(e)), Executive may be reassigned or transferred to another management position, as designated by and in the discretion of the Chief Executive Officer or his designee which may or may not provide the same level of responsibility as the initial assignment, and Executive shall perform these duties. Upon execution of this Agreement, Executive agrees to immediately resign from the board of directors of any entity that engages in any business that competes with or represents a conflict with the business of the Company as determined in the discretion of the Board of Directors of the Company.
5. COMPENSATION. During the Term of this Agreement, Executive’s compensation shall be determined and paid as follows.
(a) BASE SALARY. Executive shall receive as compensation an initial base salary at the rate of $334,750 annually, which annual rate may be increased during Executive’s employment from time to time in the sole discretion of the Company (the “Base Salary”). The Base Salary shall be paid on the Company’s regularly scheduled paydays, less federal, state and local payroll taxes and other withholdings legally required or properly requested by Executive, in accordance with the Company’s regular payroll practices and procedures.
(b) INCENTIVE BONUS. Subject to the Company’s financial ability, it will establish an incentive bonus plan (“Bonus Plan”) that Executive shall be eligible to participate in. Under the terms of the Bonus Plan, Executive will be able to earn approximately an additional $250,000 annually by meeting certain Company and individual performance targets, which amount may be increased from time to time in the sole discretion of the Company.
(c) BENEFITS. Executive shall be eligible to participate in such other benefits as are provided from time to time to other executive-level employees of the Company. Such benefits will be provided and administered in accordance with the terms of any such benefit plans. All Company benefits are subject to termination or amendment by the Company without advance notice to or consent from Executive.
(d) VACATION. Executive shall be entitled to four (4) weeks of paid vacation per calendar year, to be accrued and used in accordance with the vacation policy of the Company.
(e) BUSINESS EXPENSES. The Company will pay all reasonable expenses incurred by Executive directly related to conduct of the business of the Company, including a monthly car allowance in the amount of $700.00, provided that Executive complies with the policies for reimbursement or advance of business expenses established by the Company. Executive will also receive the usual and customary benefits allotted to Company executives including, but not limited to, mobile PDA and laptop computer.
6. TERMINATION. Executive’s employment hereunder may be terminated as follows.
(a) VOLUNTARY RESIGNATION BY EXECUTIVE. Executive may terminate his employment by delivery of written notice to the Company.
(b) TERMINATION BY THE COMPANY WITHOUT CAUSE. The Company may terminate Executive’s employment by delivery of written notice to Executive.
(c) TERMINATION BY THE COMPANY FOR CAUSE. While Executive is employed by the Company, the Company may terminate Executive’s employment “for cause,” as hereinafter defined, immediately upon written notice to Executive. “Cause” shall be decided by a majority vote of the Board of Directors of the Company other than Executive and shall mean:
(i) Any material breach of the terms of this Agreement by Executive which breach, if curable, is not cured within fifteen (15) days after written notice of such breach has been given to Executive; or
(ii) The failure of Executive to comply with the policies and/or directives of the Company and/or Board of Directors, which failure, if curable, is not cured within fifteen (15) days after written notice of such failure has been given to Executive; or
(iii) Any act of gross negligence or willful misconduct with respect to the Company, including, without limitation fraud, embezzlement, theft or proven dishonesty in the course of his employment; or
(iv) Any failure by Executive to fully disclose any material conflict of interest he may have with the Company in a transaction involving the Company which conflict is materially detrimental to the interest of the Company; or
(v) Any adverse act or omission that would be required to be disclosed pursuant to securities laws or that would limit the ability of the Company or any entity affiliated with the Company to sell securities under any federal or state law or that would disqualify the Company or any affiliated entity from any exemption otherwise available to it, all of which are deemed for purposes of this Agreement to be materially detrimental to the interests and well-being of the Company.
(d) OTHER TERMINATION BY THE COMPANY. While the Company employs Executive, the Company may immediately terminate this Agreement upon the occurrence of any of the following events:
(i) This Agreement and Executive’s employment hereunder shall immediately terminate without notice in the event of death of the Executive.
Such termination shall not prejudice any benefits payable to Executive or Executive’s beneficiaries that are fully vested or accrued as of the date of death; however, Executive’s estate will not be entitled to any other compensation under this Agreement.
(ii) This Agreement and Executive’s employment hereunder shall immediately terminate upon written notice to Executive if Executive is unable, due to a disability, to perform the essential functions of his job, with or without a reasonable accommodation, for a period of sixty (60) continuous days. Such termination shall not prejudice any benefits payable to Executive or Executive’s beneficiaries that are fully vested or accrued as of the termination date; however, the Company shall have no further obligation or liability to Executive under this Agreement.
(iii) This Agreement shall terminate in the event of the liquidation, dissolution or discontinuance of business by the Company or the filing of any petition by or against the Company under any federal or state bankruptcy or insolvency laws, which petition shall not be dismissed within sixty (60) days after filing.
(e) TERMINATION BY EXECUTIVE FOR GOOD REASON. During the Term of this Agreement, Executive may terminate his employment under this Agreement at any time for “Good Reason.” For purposes of this Agreement, “Good Reason” means:
(i) Any materially adverse change or material diminution in the office, title, duties, powers, authority or responsibilities of Executive; or
(ii) Failure of the Company to pay Executive any Base Salary or bonus that has become due and payable; or
(iii) A material reduction in Base Salary; or
(iv) A relocation of Executive’s principal worksite of more than 25 miles unless such relocation reduces Executive’s commute to such worksite; or
(v) Any material breach of the terms of this Agreement by the Company.
However, none of the foregoing events or conditions will constitute Good Reason unless Executive provides the Company with written objection to the event or condition within 90 days following the occurrence thereof, the Company does not reverse or otherwise cure the event or condition within thirty (30) days of receiving that written objection, and Executive resigns his employment within thirty (30) days following the expiration of that cure period.
(f) TERMINATION FOLLOWING CHANGE IN CONTROL. If (i) all or substantially all of the assets of the Company are sold, liquidated or distributed or (ii) the Company is party to a merger or consolidation, or (iii) a person or entity or related persons
or entities acquire a majority of the total voting power of the Company’s then-outstanding equity securities (each, a “Change in Control”), the Company may terminate the Executive’s employment without cause or the Executive may resign his employment with the Company under circumstances establishing Good Reason. In addition, all outstanding options held by Executive shall vest 100% upon acquisition of Company by another entity.
(g) RESIGNATION AS OFFICER AND DIRECTOR. It is understood that if Executive has been, or at any time hereafter is, appointed to the Board of Directors of the Company, upon termination of this Agreement and Executive’s employment hereunder for any reason, unless otherwise agree between the Company and Executive, Executive shall also be deemed to have resigned as a member, if applicable at such time, of the Company’s Board of Directors, as well as any and all positions Executive may hold as an officer of the Company.
7. PAYMENTS ON TERMINATION. Upon termination of this Agreement and Executive’s employment hereunder for any reason, all salary and benefits accrued and unreimbursed expenses due as of the date of termination shall be paid to Executive on the Company’s next regular payday.
(a) Termination Without Severance Benefits. If this Agreement and Executive’s employment hereunder is terminated (i) by Executive for any reason other than Good Reason, including but not limited to termination pursuant to Subsection 6(d) above, or (ii) pursuant to Subsection 6(a) (voluntary resignation), or Subsection 6(c) (by the Company for “Cause”), no other payment or severance benefit will be payable to Executive by the Company.
(b) Termination with Severance Benefits. If Executive’s employment is terminated pursuant to Subsection 6(b) (by the Company without “Cause”), 6(e) (for “Good Reason”) or 6(f) (“Change in Control”), then Executive shall be entitled to receive: (i) a severance equal to the Base Salary paid in equal installments each month over a period of twelve (12) months; and (ii) reimbursement for monthly premiums paid by Executive for his (and, if applicable, his spouse’s and dependents’) continued coverage pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) under the group health, dental and/or vision plans sponsored by the Company (or any of its affiliates) for a period of twelve (12) months.
Notwithstanding the foregoing, no amount shall be payable to Executive under this Section 7 unless at the time of resignation or termination, Executive has been employed by Company for more than three (3) months from the Effective Date.
Further, notwithstanding the foregoing, the severance benefits described in the preceding paragraph are conditioned on Executive’s execution and delivery to the Company and the expiration of all applicable statutory revocation periods, by the 60th day following the effective date of his cessation of employment, of a general release of claims against the Company substantially in the form attached hereto as Exhibit A (the “Release”). Subject to the following paragraph, the severance benefits described in the preceding paragraph will be begin to be paid or provided as soon as administratively practicable after the Release becomes irrevocable, provided that if the 60-day period described
above begins in one taxable year and ends in a second taxable year such payments or benefits shall not commence until the second taxable year.
Notwithstanding anything to the contrary in this Agreement, no portion of the benefits or payments to be made under Section 7(b) hereof will be payable until Executive has a “separation from service” from the Company within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”). In addition, to the extent compliance with the requirements of Treas. Reg. § 1.409A-3(i)(2) (or any successor provision) is necessary to avoid the application of an additional tax under Section 409A of the Code to payments due to Executive upon or following his “separation from service”, then notwithstanding any other provision of this Agreement (or any otherwise applicable plan, policy, agreement or arrangement), any such payments that are otherwise due within six months following Executive’s “separation from service” (taking into account the preceding sentence of this paragraph) will be deferred without interest and paid to Executive in a lump sum immediately following that six month period. This paragraph should not be construed to prevent the application of Treas. Reg. § 1.409A-1(b)(9)(iii) (or any successor provision) to amounts payable hereunder. For purposes of the application of Section 409A of the Code, each payment in a series of payments will be deemed a separate payment.
8. WITHHOLDING FROM AND OFFSET OF SEVERANCE BENEFITS. The obligation of the Company to make any payment pursuant to Section 7 of this Agreement shall be subject to the following:
(a) Taxes. The Company shall withhold all applicable federal, state and local taxes as required by relevant law and regulation then in effect including, without limitation FICA and other taxes.
(b) Debts and Liabilities of Executive. The Company may withhold from or offset against its payment(s) to Executive any liabilities or debts of Executive to the Company.
9. Section 409A.
(a) Notwithstanding anything herein to the contrary or otherwise, except to the extent any expense, reimbursement or in-kind benefit provided to Executive does not constitute a “deferral of compensation” within the meaning of Section 409A of the Code, and its implementing regulations and guidance, (i) the amount of expenses eligible for reimbursement or in-kind benefits provided to Executive during any calendar year will not affect the amount of expenses eligible for reimbursement or in-kind benefits provided to Executive in any other calendar year, (ii) the reimbursements for expenses for which Executive is entitled to be reimbursed shall be made on or before the last day of the calendar year following the calendar year in which the applicable expense is incurred and (iii) the right to payment or reimbursement or in-kind benefits hereunder may not be liquidated or exchanged for any other benefit.
(b) Anything to the contrary herein notwithstanding, all benefits or payments provided by the Company to Executive that would be deemed to constitute “nonqualified
deferred compensation” within the meaning of Section 409A of the Code are intended to comply with Section 409A of the Code. Notwithstanding anything in this Agreement to the contrary, distributions may only be made under this Agreement upon an event and in a manner permitted by Section 409A of the Code or an applicable exemption.
(c) If the application of Section 409A impacts Company’s tax liability, then Executive agrees to reimburse Company in the amount of the liability incurred.
10. RESERVED.
11. EXECUTIVE REPRESENTATIONS. Executive warrants and represents as follows:
(a) Executive represents that his performance of all of the terms of this Agreement does not and will not breach any arrangement to keep in confidence information acquired by Executive in confidence or in trust prior to Executive’s employment by the Company. Executive represents that he has not entered into, and agrees not to enter into, any agreement either oral or written in conflict herewith.
(b) Executive understands as part of the consideration for this Agreement and for Executive’s employment or continued employment by the Company, that Executive has not brought and will not bring with Executive to the Company, or use in the performance of Executive’s duties and responsibilities for the Company or otherwise on its behalf, any materials or documents of a former employer or other owner that are generally not available to the public, unless Executive has obtained written authorization from the former employer or other owner for their possession and use and has provided the Company with a copy thereof.
(c) Executive understands that during his employment for the Company he is not to breach any obligation of confidentiality that Executive has to a former employer or any other person or entity and agrees to comply with such understanding.
12. RECORDS. All notes, data, tapes, reference materials, sketches, drawings, memoranda, models and records in any way relating to any of the proprietary information or to the Company’s business shall belong exclusively to the Company, and Executive agrees to turn over to the Company all such materials and all copies and reproduction capabilities concerning such materials or compilations of information therefrom in his possession or then under his control at the request of the Company or, in the absence of such request, upon the termination of Executive’s employment with the Company.
13. WAIVER. No waiver of any provision of this Agreement shall be valid unless the same is in writing and signed by the party against whom such waiver is sought to be enforced. Failure or delay of the Company at any time to insist upon strict compliance with any of the terms, covenants or conditions hereof, or to exercise any of its powers, rights or remedies with respect to any term or provision of this Agreement or any other aspect of Executive’s conduct or employment, shall not be deemed a waiver of such terms, covenants, conditions, powers, rights or remedies, nor
shall any waiver or relinquishment of any right or power granted hereunder at any particular time be deemed a waiver or relinquishment of such rights or power at any other time or times.
14. RESERVED.
15. SEVERABILITY. The provisions of this Agreement shall be deemed severable, and the invalidity or unenforceability of any provision (or part thereof) of this Agreement shall in no way affect the validity or enforceability of any other provision (or remaining part thereof) or the enforceability thereof under different circumstances.
16. GOVERNING LAW; VENUE. This Agreement shall be governed by and construed according to the laws of the Commonwealth of Pennsylvania, without reference to the choice of law or conflict of law provisions of such laws, provided that federal law shall govern copyright, patent and trademark issues. The Parties further agree that the Court of Common Pleas of Montgomery County, Pennsylvania or the United States District Court for the Eastern District of Pennsylvania in Philadelphia, Pennsylvania shall adjudicate any disputes related to this Agreement. The parties hereto consent to the personal jurisdiction of such courts.
17. NOTICES. Any notice required to be given hereunder shall be sufficient if in writing and sent by certified or registered United States mail, return receipt requested, first-class postage prepaid, in the case of Executive, to the last known address as shown on the Company’s records, and in the case of the Company, to its principal office in the Commonwealth of Pennsylvania.
18. BENEFIT. This Agreement shall be binding upon and shall inure to the benefit of each of the parties hereto, and to their respective heirs, representatives, successors and permitted assigns. Executive may not assign any of his rights or delegate any of his duties under this Agreement.
19. ENTIRE AGREEMENT. This Agreement and the No Competition and Non-Disclosure Agreement between the Company and Executive effective as of March 1, 2011 (the “NCND Agreement”) contain the entire agreement and understandings by and between the Company and Executive with respect to the covenants herein and therein described, and no representations, promises, agreements or understandings, written or oral, not herein or therein contained shall be of any force or effect. The NCND Agreement shall remain in full force and effect following the execution of this Agreement. No change or modification hereof shall be valid or binding unless the same is in writing and signed by the Parties hereto. Executive represents and agrees that he fully understands his right to discuss all aspects of this Agreement with counsel of his choice, that to the extent he desired, he availed himself of this right, that he has carefully read and fully understands the meaning, intent and consequences of all provisions of this entire Agreement, that he is competent to execute this Agreement, that his decision to execute this Agreement has not been obtained by any duress, and that he freely and voluntarily enters into this Agreement.
20. CAPTIONS. The captions in this Agreement are for convenience only and in no way define, bind or describe the scope or intent of this Agreement.
21. SURVIVAL. The provisions set forth in Sections 7 through 20 hereof shall survive the termination of this Agreement and any period of applicability stated therein shall be extended to the extent of any period of time during which the Executive is in violation thereof.
IN WITNESS WHEREOF, the parties have executed this Executive Employment Agreement effective as of the day and year first above written.
GLOBUS MEDICAL, INC.
By:
Name:
Title:
EXECUTIVE
Daniel T. Scavilla
EXHIBIT A
Form of Release
SEPARATION AGREEMENT AND GENERAL RELEASE
In consideration of a payment of: (1) __________ representing a severance payment of ________ salary which I will receive from Globus Medical, Inc. (“Globus”) by check (less appropriate payroll taxes which will be withheld); and (2) __________ representing the cost of extending my medical and health benefits for __________ months, both payments to be sent within __________ (__________) calendar days after Globus receives a signed copy of this Agreement, I, __________, intending to be legally bound by this Separation Agreement and General Release (“Agreement”), hereby agree to release Globus from all claims, demands, actions or liabilities I may have against Globus of whatever kind, known or unknown, including but not limited to those which arise out of or are related to my employment with Globus or the separation or termination of that employment. I agree that this also releases from liability Globus’ subsidiaries, successors, operating units, assigns, affiliates, related corporations and entities, and all of their present and future partners, principals, shareholders, employees, officers, directors, agents, attorneys, divisions, and any person or entity which can be held jointly and severably liable with any of them (hereinafter, “those associated with Globus”).
I agree that I have voluntarily executed this release on my own behalf, and also on behalf of any heirs, agents and representatives that I may have now or in the future. I knowingly and voluntarily waive any and all claims under any and all laws which provide legal restrictions on Globus’ or the rights of those associated with Globus to terminate my employment or to affect the terms and conditions of my employment, including but not limited to claims under any federal, state, or other governmental statute, regulation or ordinance, including, without limitation: (1) Title VII of the Civil Rights Act of 1964 and the Civil Rights Act of 1991; (2) the Americans With Disabilities Act;
(3) the Pennsylvania Human Relations Act; (4) the Age Discrimination in Employment Act (“ADEA”); (5) the Older Workers Benefit Protection Act; (6) The Family and Medical Leave Act (“FMLA”); (7) Sections 1981 through 1988 of Title 42 of the United States Code; (8) the Employee Retirement Income Security Act of 1974 (“ERISA”); (9) the federal Food Drug and Cosmetic Act; (10) the Occupational Safety and Health Act; (11) all other federal, state or local laws of a similar nature to any of the foregoing enumerated laws and any amendments to the foregoing statutes.
I also waive any other common law or statutory claims against Globus and those associated with Globus, including but not limited to any claim for personal injury, wrongful discharge, public policy, negligence, infliction of emotional distress, whistleblower, retaliation, negligent hiring or retention, or any form of tort, whether negligent, reckless or intentional, or any claims based on theories of contract, including any claims for legal fees or costs, or any other form of action.
I understand that I am not waiving any rights or claims under the ADEA that may arise after the date this waiver is executed, but does waive any claims pertaining to my separation from employment as provided for by this Agreement. I also understand that I am not waiving any rights or claims which cannot legally be waived by this Agreement, including without limitation, unemployment compensation claims, workers’ compensation claims or the ability to file certain administrative claims.
I understand that nothing in this Agreement shall interfere with my right to file a charge with, cooperate with, or participate in an investigation or proceeding conducted by the Equal Employment Opportunity Commission or other federal or state regulatory or law enforcement agency. However, I agree that, with the exception of unemployment and worker’s compensation claims, the
consideration provided to me in this Agreement shall be the sole relief provided for the claims that are released by me herein and I understand that I will not be entitled to recover and agree to waive any monetary benefits or economic recovery or equitable relief recovery against Globus or those associated with Globus in connection with any such claim, charge or proceeding without regard to who has brought such complaint or charge.
Subject to all of the foregoing, this Agreement shall operate as a general release of any and all claims to the fullest extent of applicable law.
I further acknowledge and agree that:
1. The payment as described above constitutes consideration for this release, in that it is a payment or other accommodation to which I would not have been entitled under any Globus policy, procedure or plan had I not signed this release.
2. As of the date set forth below, payment has been made in full for all hours worked and that I am not owed or entitled to any additional compensation in the form of salary, wages, overtime, vacation pay, fringe benefits or otherwise, related to any employment with Globus or those associated with Globus.
3. I have been given the opportunity to take a period of at least twenty-one (21) days to consider this release (“Consideration Period”), I have not been pressured or coerced to waive this Consideration Period, and I have been given the opportunity to discuss it with counsel of my choice.
4. I have carefully read this release, have had a reasonable time to review it, and have signed it voluntarily, without coercion and with knowledge of the nature and consequences thereof.
5. This release does not waive any claims I may have which arise after the date I sign this release.
6. I have not relied on any representations or promises of any kind made to me in connection with my voluntary decision to sign this release except for those set forth in this release.
7. I will keep the terms of this release, including the payment and accommodations made hereunder, in strict confidence, and will not make public or disclose the terms or payment to any person except for my spouse, my attorneys or accountants or governmental authorities as may be required by law.
8. I shall not make or publish any statement (orally or in writing) or instigate, assist or participate in the making or publication of any statement which shall tend to disparage or demean Globus, or any of its present or former employees, officers and directors.
9. If Globus receives any requests for references concerning my employment, Globus will only disclose my position and dates of employment.
10. I agree not to seek employment or be employed with Globus or those associated with Globus, and forever waive and relinquish all rights to assert any claim for recall, reemployment, or tenure with Globus or those associated with Globus. I agree that Globus and those associated with Globus need not accept or consider any application for employment from me, may deny employment to me based upon this provision, and I hereby release Globus and those associated with Globus from any liability for failure to hire or rehire me in the future. If I should apply for employment or reemployment with Globus or those associated with Globus in the future, this Agreement shall
constitute my irrevocable request that such application be withdrawn and not considered and, if already hired, shall constitute my irrevocable resignation.
11. I agree I will never institute or be a party to a claim of any kind against Globus or those associated with Globus regarding the subject matter of this release. If I violate this release by instituting a claim against Globus or those associated with Globus, I agree I will pay all costs Globus or those associated with Globus incur in defending against the claim, including reasonable attorneys’ fees.
12. I agree to timely pay any taxes due on sums paid pursuant to this Agreement and hereby indemnify and holds harmless Globus for any taxes and penalties assessed on account of sums paid pursuant to this Agreement.
13. I understand that the sums paid pursuant to this Agreement will not be included in compensation for purposes of calculating the benefits to which I am entitled under any 401(k), pension or other retirement plan.
14. I agree to execute any documents and to take any other actions necessary to implement the terms of this Agreement.
15. I understand that this Agreement sets forth the terms of the entire agreement between me and Globus concerning my employment and separation from employment and extinguish the terms of any other agreement between the parties; provided, however, that the provisions of the No Competition and Non-Disclosure Agreement that I signed as an employee of Globus shall remain in full force and effect. I am not entitled to any benefit or consideration not set forth in this Agreement nor shall I be entitled to any duplication of the consideration or benefits described in this Agreement.
16. I understand that no oral statement of any person whatsoever shall in any manner or degree modify or otherwise affect the terms and provisions of this Agreement. To the extent the terms of this Agreement and any other agreement conflict, the terms of this Agreement shall govern and supercede such inconsistent terms.
17. I understand and agree that if, after 60 days from receipt of this Agreement, I do not sign and return it to Globus, that the terms and conditions of this offer shall expire at Globus’ discretion and without any further notice to me.
I understand this Agreement is not effective or enforceable for seven (7) days after I sign it, and I may revoke it during that time (“Revocation Period”). I have not been pressured or coerced to waive this Revocation Period. To revoke, I agree to return the full amount of any check I received from Globus under this Release, together with a written notice of revocation addressed to Kelly G. Huller, Esquire, Vice President, Legal, Globus Medical, Inc., 2560 General Armistead Avenue, Audubon, PA 19403. I understand and agree that this must be done before the conclusion of the seventh day after I sign the release; that if Ms. Huller does not receive a written revocation and the sum stated above by the end of the seven day period, this release will become fully enforceable at that time; and that revocation of this release does not alter or affect the termination of my employment with Globus.
In case any part of this release shall be invalid, illegal or otherwise unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. This release shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania.
I understand and agree to this Agreement, have had the opportunity to review it with counsel, and have signed it freely and voluntarily.
Date
Witness (print name) Witness (signature)
Reviewed and agreed to on behalf of Globus Medical, Inc.:
By:
Name:
Title:
Exhibit
EXHIBIT 31.1
Certification By Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, David C. Paul, certify that:
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1. | I have reviewed this Quarterly Report on Form 10-Q of Globus Medical, Inc.; |
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2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and |
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b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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Date: | May 4, 2016 | /s/ DAVID C. PAUL |
| | David C. Paul |
| | Chairman |
| | Chief Executive Officer |
Exhibit
EXHIBIT 31.2
Certification By Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Daniel T. Scavilla, certify that:
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1. | I have reviewed this Quarterly Report on Form 10-Q of Globus Medical, Inc.; |
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2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and |
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b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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Date: | May 4, 2016 | /s/ DANIEL T. SCAVILLA |
| | Daniel T. Scavilla |
| | Senior Vice President |
| | Chief Financial Officer |
Exhibit
EXHIBIT 32
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code), David C. Paul, Chairman and Chief Executive Officer, and Daniel T. Scavilla, President and Chief Operating Officer of Globus Medical, Inc. (the “Company”), each certifies with respect to the Quarterly Report of the Company on Form 10-Q for the period ended March 31, 2016 (the “Report”) that, to the best of his knowledge:
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(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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Dated: | May 4, 2016 | /s/ DAVID C. PAUL |
| | David C. Paul |
| | Chairman |
| | Chief Executive Officer |
| | |
Dated: | May 4, 2016 | /s/ DANIEL T. SCAVILLA |
| | Daniel T. Scavilla |
| | Senior Vice President |
| | Chief Financial Officer |
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code) and is not being filed as part of the Report or as a separate disclosure document.