

19.		BUSINESS SEGMENT, GEOGRAPHIC AND CONCENTRATION RISK INFORMATION

On October 27, 2015, the Company acquired all of the outstanding common stock of Lake Region Medical. As a result, the Company now has three reportable segments: Greatbatch Medical, QiG and Lake Region Medical. In February 2016, Greatbatch announced that its Board of Directors approved the spin-off of a portion of its QiG segment through a tax-free distribution of its QiG Group LLC subsidiary to the stockholders of Greatbatch on a pro rata basis. The portion of the QiG segment being spun-off will consist of QiG Group LLC and its subsidiaries: (i) Algostim, (ii) PelviStim, and (iii) Greatbatch’s NeuroNexus subsidiary. It is expected that Greatbatch stockholders will receive one share of Nuvectra common stock for every three shares of Greatbatch common stock held as of the record date. Upon completion of the pending Spin-off, Nuvectra will be an independent, publicly-traded company and Greatbatch will not own any shares of Nuvectra common stock. The operations of CCC and certain other existing QiG research and development capabilities will be retained by Greatbatch and not included as part of the Spin-off. The Spin-off is expected to be completed in March 2016. As a result of the Lake Region Medical acquisition and pending Spin-off, the Company is reevaluating its operating and reporting segments, which is expected to be finalized in 2016 once the corporate and management reporting structure realignment is completed.

Greatbatch Medical designs and manufactures medical devices and components where Greatbatch either owns the intellectual property or has unique manufacturing and assembly expertise. Greatbatch Medical provides medical devices and components to the cardiac, neuromodulation, orthopaedics, portable medical, vascular and energy markets among others. Greatbatch Medical also offers value-added assembly and design engineering services for medical devices that utilize its component products.

The QiG segment focuses on the design and development of medical device systems and components. QiG is in the process of developing applications for its neurostimulation technology platform for emerging indications such as SCS, SNS, and DBS, among others. The QiG segment is comprised of the QiG Group, LLC, NeuroNexus, and CCC. QiG facilitates the development of medical device systems through the establishment of limited liability companies (“LLCs”). These LLCs do not own, but have the exclusive right to use the technology of Greatbatch in specific fields of use and have an exclusive manufacturing agreement with Greatbatch Medical. As of January 2, 2015, QiG Group LLC owned 89% of two LLCs, Algostim and PelviStim, but was responsible for 100% of the expenses incurred by these LLCs. However, no distributions were to be made to the minority holders of the LLCs until QiG was reimbursed for all expenses paid. Minority interests in these LLCs were held by key opinion leaders and clinicians. During 2015, the Company purchased the non-controlling interest in these LLCs for $16.7 million. Of this amount, $6.8 million remained payable as of January 1, 2016 and was recorded in Accrued Expenses in the Consolidated Balance Sheet. For purposes of the Consolidated Statement of Cash Flows for the year ended January 1, 2016, this liability was treated as a non-cash financing transaction. As of January 1, 2016, QiG Group LLC now owns 100% of Algostim and PelviStim.

The purchase of outstanding non-controlling interests included $6.9 million paid to Drees Holding LLC, of which Scott F. Drees, Chief Executive Officer (“CEO”) of Nuvectra, is the principal owner and the sole managing director. Mr. Drees received his interests in Algostim and PelviStim in connection with entering into a long-term consulting agreement with Nuvectra and prior to being appointed as its CEO in July 2015. Mr. Drees’ consulting agreement was terminated in connection with his agreeing to serve in the role of Nuvectra CEO.

Algostim is focused on the development and commercialization of its Algovita SCS system, the first application of QiG’s neurostimulation technology platform. Algovita is indicated for the treatment of chronic pain of the trunk and limbs. Algovita received CE Mark approval during 2014. During the fourth quarter of 2015, QiG received final approval of its PMA application for Algovita, which it anticipates launching commercially in the United States during the first half of 2016.

QiG revenue includes sales of neural interface technology, components and systems to the neuroscience and clinical markets from NeuroNexus, a limited release of Algovita in Europe, and CCC sales of various medical device products such as implantable pulse generators, programmer systems, battery chargers, patient wands and leads to medical device companies. Once the medical devices developed by CCC reach significant production levels, the responsibility for manufacturing these products may be transferred to Greatbatch Medical. After the pending Spin-off is completed, the Company’s design and development of complete medical device systems will be completed by the combined teams in Greatbatch Medical, Lake Region Medical, and CCC.

Lake Region Medical has operated as a segment for Greatbatch since it was acquired during the fourth quarter of 2015. This segment specializes in the design, development, and manufacturing of products across the medical component and device spectrum, primarily serving the cardio, vascular and advanced surgical markets. Lake Region Medical offers fully integrated outsourced manufacturing, regulatory and engineering services, contract manufacturing, finished device assembly services, original device development, and supply chain management to its customers, who are located worldwide.

As a result of the Lake Region Medical acquisition and pending Spin-off, the Company has recast its product line sales to reflect the reclassification of Greatbatch, Inc. and Lake Region net sales from the historical product lines to the product lines associated with those revenues that will be utilized for future revenue reporting.

As of January 1, 2016, the Company’s product lines consist of the following:

•

Advanced Surgical, Orthopaedics, and Portable Medical: Includes legacy Greatbatch Orthopaedics and Portable Medical product line sales plus the legacy Lake Region Medical Advanced Surgical product line sales. Products include components, sub-assemblies, finished devices, implants, instruments and delivery systems for a range of surgical technologies to the advanced surgical market, including laparoscopy, orthopaedics and general surgery, biopsy and drug delivery, joint preservation and reconstruction, arthroscopy, and engineered tubing solutions. Products also include life-saving and life-enhancing applications comprising of automated external defibrillators, portable oxygen concentrators, ventilators, and powered surgical tools for the portable medical markets.

•

Cardio and Vascular: Includes the legacy Greatbatch Vascular product line sales plus the legacy Lake Region Medical Cardio and Vascular product line sales less the legacy Lake Region Medical Cardiac/Neuromodulation sales. Products include introducers, steerable sheaths, guidewires, catheters, and stimulation therapy components, subassemblies and finished devices that deliver therapies for various markets such as coronary and neurovascular disease, peripheral vascular disease, interventional radiology, vascular access, atrial fibrillation, and interventional cardiology, plus products for medical imaging and pharmaceutical delivery.

•

Cardiac/Neuromodulation: Includes the legacy Greatbatch Cardiac/Neuromodulation and QiG sales plus the legacy Lake Region Medical Cardiac/Neuromodulation sales previously included in their Cardio and Vascular product line sales. Products include batteries, capacitors, filtered and unfiltered feed-throughs, engineered components, implantable stimulation leads, and enclosures used in implantable medical devices.


•	Electrochem: Includes the legacy Greatbatch Energy, Military and Environmental product line sales. Products include primary and rechargeable batteries and battery packs for demanding applications such as down hole drilling tools.

An analysis and reconciliation of the Company’s business segments, product lines and geographic information to the respective information in the Consolidated Financial Statements follows. Intersegment sales between Greatbatch Medical and QiG were not material for 2014 or 2013. Approximately $1.8 million of intersegment sales are included in Greatbatch Medical and $1.2 million intersegment sales are included in Lake Region Medical. Sales by geographic area are presented by allocating sales from external customers based on where the products are shipped (in thousands):



	Year Ended
	January 1, 2016			January 2, 2015		January 3, 2014
Product line sales:
Advanced Surgical, Orthopaedics, and Portable Medical	$	243,385		$	216,339	$	208,990
Cardio and Vascular	143,260			58,770		48,357
Cardiac/Neuromodulation	356,064			330,921		328,455
Electrochem	59,449			81,757		78,143
Elimination of interproduct line sales	(1,744		)	—		—
Total sales	$	800,414		$	687,787	$	663,945



	Year Ended
	January 1, 2016			January 2, 2015		January 3, 2014
Business segment sales:
Greatbatch Medical	$	649,977		$	678,285	$	660,902
QiG	13,571			9,502		3,043
Lake Region Medical	139,819			—		—
Elimination of intersegment sales	(2,953		)	—		—
Total sales	$	800,414		$	687,787	$	663,945



	Year Ended
	January 1, 2016			January 2, 2015			January 3, 2014
Segment income (loss) from operations:
Greatbatch Medical	$	109,737		$	126,312		$	111,805
QiG	(25,855		)	(23,256		)	(30,484		)
Lake Region Medical	(16,416		)	—			—
Total segment income from operations	67,466			103,056			81,321
Unallocated operating expenses	(54,320		)	(27,402		)	(19,982		)
Operating income	13,146			75,654			61,339
Unallocated other income (expense), net	(28,846		)	925			(12,501		)
Income (loss) before provision for income taxes	$	(15,700	)	$	76,579		$	48,838



	Year Ended
	January 1, 2016		January 2, 2015		January 3, 2014
Depreciation and amortization:
Greatbatch Medical	$	30,160	$	31,906	$	31,112
QiG	1,862		2,101		1,539
Lake Region Medical	32,249		—		—
Total depreciation and amortization included in segment income from operations	64,271		34,007		32,651
Unallocated depreciation and amortization	3,347		3,450		3,315
Total depreciation and amortization	$	67,618	$	37,457	$	35,966



	Year Ended
	January 1, 2016		January 2, 2015		January 3, 2014
Expenditures for tangible long-lived assets, excluding acquisitions:
Greatbatch Medical	$	32,921	$	19,006	$	13,242
QiG	1,160		1,453		2,134
Lake Region Medical	7,525		—		—
Total reportable segments	41,606		20,459		15,376
Unallocated long-lived tangible assets	6,448		5,187		2,798
Total expenditures	$	48,054	$	25,646	$	18,174



	At
	January 1, 2016		January 2, 2015		January 3, 2014
Identifiable assets:
Greatbatch Medical	$	798,609	$	761,225	$	758,369
QiG	68,637		76,529		56,245
Lake Region Medical	1,971,071		—		—
Total reportable segments	2,838,317		837,754		814,614
Unallocated assets	143,819		117,368		75,015
Total assets	$	2,982,136	$	955,122	$	889,629



	Year Ended
	January 1, 2016		January 2, 2015		January 3, 2014
Sales by geographic area:
United States	$	401,380	$	312,539	$	325,090
Non-Domestic locations:
Puerto Rico	136,898		127,702		117,961
Belgium	62,546		65,308		67,155
Rest of world	199,590		182,238		153,739
Total sales	$	800,414	$	687,787	$	663,945



	At
	January 1, 2016		January 2, 2015		January 3, 2014
Long-lived tangible assets:
United States	$	264,556	$	113,851	$	116,484
Rest of world	114,936		31,074		29,289
Total	$	379,492	$	144,925	$	145,773

A significant portion of the Company’s sales and accounts receivable were to four customers as follows:



	Sales						Accounts Receivable
	Year Ended						At
	January 1, 2016		January 2, 2015		January 3, 2014		January 1, 2016		January 2, 2015
Customer A	18	%	18	%	16	%	23	%	23	%
Customer B	17	%	18	%	20	%	8	%	4	%
Customer C	12	%	12	%	13	%	6	%	8	%
Customer D	5	%	6	%	7	%	7	%	12	%
	52	%	54	%	56	%	44	%	47	%