5. Business Combinations

The Company recognizes the assets acquired, liabilities assumed, and any non-controlling interest at fair value at the date of acquisition. Certain acquisitions contained contingent consideration arrangements that required the Company to assess the acquisition date fair value of the contingent consideration liabilities, which was recorded as part of the purchase price allocation of the acquisition, with subsequent fair value adjustments to the contingent consideration recorded in the Consolidated Statements of Operations. See Note 4 to the Consolidated Financial Statements included in this Annual Report for further discussion on contingent consideration liabilities.

Acquisition of Ellipse Technologies, Inc.

On February 11, 2016, the Company acquired all of the stock interest in Ellipse Technologies, Inc., which now operates as a wholly owned subsidiary of the Company under the renamed legal entity NuVasive Specialized Orthopedics, Inc. (“NSO”), for a purchase price of $380.0 million (including holdbacks for retained employment of Ellipse Technologies leadership that is to be expensed and is not considered part of the final purchase price) and a potential milestone payment of $30.0 million payable in cash in 2017 related to the achievement of a specific revenue target. A cash payment of $382.2 million, which included additional amounts for cash on hand and traditional working capital adjustments, was transferred at the closing. Subsequent to the closing payment, the Company received $0.6 million from the escrow for traditional working capital adjustments finalized after the closing.

NSO designs and sells expandable growing rod implant systems that can be non-invasively lengthened following implantation with precise, incremental adjustments via an external remote controller using magnetic technology called MAGnetic External Control, or MAGEC. The technology platform provides the basis of NSO’s core product offerings, including MAGEC-EOS, which allows for the minimally invasive treatment of early-onset and adolescent scoliosis, as well as the PRECICE limb lengthening system, which allows for the correction of long bone limb length discrepancy, as well as enhanced bone healing in patients that have experienced traumatic injury.

The Company applied certain assumptions and findings in the valuation outcome for the assets acquired and liabilities assumed, for which the allocation of the purchase price is based on the fair values, as follows:

(in thousands)
Cash paid for purchase	$	381,579

Accounts receivable		7,148
Inventory		22,451
Other current assets		1,855
Property, plant and equipment, net		6,725
Definite-lived intangible assets:
Developed technology		133,900
Customer relationships		33,200
Trade names		16,200
Goodwill		241,905
Deferred tax assets		18,471
Other assets		1,868
Contingent consideration liability		18,800
Deferred tax liabilities		75,160
Other liabilities assumed		8,184

	$	381,579

Goodwill recognized in this transaction is not deductible for income tax purposes. Goodwill largely consists of expected revenue synergies resulting from the combination of product portfolios, cost synergies related to elimination of redundant facilities, functions and staffing; use of the Company’s existing commercial infrastructure to expand sales of NSO’s products; and the assembled workforce. The intangible assets acquired will be amortized on a straight-line basis over weighted-average useful lives of seven years, nine years and seven years for technology-based intangible assets, customer-related intangible assets, and trade name intangible assets, respectively. The estimated fair values of the intangible assets acquired were primarily determined using the income approach based on significant inputs that were not observable market data.

In connection with the acquisition, a contingent liability of $18.8 million was recorded as of the acquisition date for the potential revenue-based milestone payment. The liability was fair valued using the Monte Carlo simulation based on specific revenue achievement scenarios and discount factors. Changes in fair value of the liability over the measurement period were recorded in the results of operations in the Consolidated Statements of Operations. The revenue-based milestone was achieved as of December 31, 2016, and the Company adjusted the fair value of the contingent consideration liability to $30.0 million in current liabilities in the Consolidated Balance Sheet which represents the full amount of the milestone obligation under the merger agreement. The Company expects to pay this milestone by April 2017.

Acquisition costs of $4.0 million were recognized in business transition costs as incurred. The Company’s results of operations included the operating results of NSO, since the date of acquisition, of $57.5 million of revenue for the year ended December 31, 2016 and net income of $3.9 million for the year ended December 31, 2016 in the Consolidated Statement of Operations.

The following table presents the unaudited pro forma results for the years ended December 31, 2016 and December 31, 2015. The unaudited pro forma financial information combines the results of operations of NuVasive and Ellipse Technologies as though the companies had been combined as of January 1, 2015, and the unaudited pro forma information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at such times. The unaudited pro forma results presented include non-recurring adjustments directly attributable to the business combination, some of which are presented in the comparable period results instead of the current period by nature of such adjustments. The adjustments for amortization charges for acquired intangible assets were $26.0 million for the year ended December 31, 2015. The adjustments to cost of sales for increased fair value of acquired inventory of $(14.7) million and $14.7 million for the years ended December 31, 2016 and December 31, 2015, respectively, were amortized over the period in which underlying products were sold. The year ended December 2015 also includes an adjustment of $4.0 million for acquisition related expenses. Additionally, the years ended December 31, 2016 and 2015 include immaterial adjustments to revenue for deferred revenue adjustments, and related tax effects to the pre-tax income. The pre-acquisition accounting policies of Ellipse Technologies were materially similar to the Company, with the differences adjusted to reflect the accounting policies of the Company in the unaudited pro forma results presented.

	Years Ended December 31,
	2016		2015
(in thousands, except per share amounts)	(unaudited)		(unaudited)
Revenues	$	968,179	$	854,673
Net income attributable to NuVasive, Inc.		38,045		11,675
Net income per share attributable to NuVasive, Inc.:
Basic	$	0.76	$	0.24
Diluted	$	0.70	$	0.22

Other Acquisitions

On July 1, 2016, the Company acquired all of the stock interest in BNN Holdings Corp., for a purchase price of $98.0 million. BNN Holdings Corp., through its subsidiaries and affiliates, owns and operates Biotronic NeuroNetwork, a patient-centric healthcare organization that provides intraoperative neurophysiological monitoring services to surgeons and healthcare facilities across the U.S. A cash payment of $94.0 million was transferred at the closing, which represented the total purchase consideration, net of amounts retained for certain acquired provisional obligations, additional amounts for cash on hand and traditional working capital adjustments. Subsequent to the closing payment, the Company paid an additional $0.4 million from the escrow for traditional working capital adjustments finalized after the closing. The acquisition was not considered material to the overall Consolidated Financial Statements.

The Company combined the service offerings of Biotronic NeuroNetwork with its Impulse Monitoring, Inc. business under the newly created division NuVasive Clinical Services (“NCS”).

The Company has completed other acquisitions that were not considered material to the overall Consolidated Financial Statements during the year ended December 31, 2016. These acquisitions have been included in the Consolidated Financial Statements from the respective dates of acquisition. The Company does not believe that collectively the acquisitions made during the year, excluding NSO, are material to the overall financial statements.

For certain acquisitions completed during the year ended December 31, 2016, the Company is still in the process of finalizing the purchase price allocation given the timing of the acquisition and the size and scope of the assets and liabilities subject to valuation. While the Company does not expect material changes in the valuation outcome, certain assumptions and findings that were in place at the date of acquisition could result in changes in the purchase price allocation.

Variable Interest Entities

Progentix Orthobiology, B.V.

In 2009, the Company completed the purchase of forty percent (40%) of the capital stock of Progentix, a company organized under the laws of the Netherlands, from existing shareholders pursuant to a Preferred Stock Purchase Agreement for $10.0 million in cash (the “Initial Investment”). As of December 31, 2016, the Company has loaned Progentix cumulatively $5.3 million at an interest at a rate of 6% per year. The Company is not obligated to provide additional funding. Concurrently, with the Initial Investment, the Company and Progentix entered into a Distribution Agreement (as amended, the “Distribution Agreement”), whereby Progentix appointed the Company as its exclusive distributor for certain Progentix products. The Distribution Agreement is in effect for a term of ten years unless terminated earlier in accordance with its terms.

In accordance with authoritative guidance, the Company has determined that Progentix is a variable interest entity (“VIE”), as it does not have the ability to finance its activities without additional subordinated financial support and its equity investors will not absorb their proportionate share of expected losses and will be limited in the receipt of the potential residual returns of Progentix.

Total assets and liabilities of Progentix included in the accompanying Consolidated Balance Sheets are as follows (in thousands):

	December 31,
	2016		2015
Total current assets	$	334	$	353
Identifiable intangible assets, net		10,900		13,048
Goodwill		12,654		12,654
Accounts payable & accrued expenses		551		574
Deferred tax liabilities, net		880		1,496
Non-controlling interests		5,588		7,309

The following is a reconciliation of equity attributable to the non-controlling interests (in thousands):

	Year Ended December 31,
	2016			2015
Non-controlling interests at beginning of period	$	7,309		$	8,310
Less: Net (loss) attributable to the non-controlling interests		(1,721	)		(1,001	)
Non-controlling interests at end of period	$	5,588		$	7,309

NuVasive Clinical Services and Physician Practices

The Company maintains contractual relationships with several physician practices (“PCs”) which were inherited through the 2011 acquisition of Impulse Monitoring, Inc. and the 2016 acquisition of BNN Holdings Corp. In accordance with authoritative guidance, the Company has determined that the PCs are VIEs and the therefore, the accompanying Consolidated Financial Statements include the accounts of the PCs from the date of acquisition. During the periods presented, the results of the PCs were immaterial to the Company’s financials. The creditors of the PCs have claims only on the assets of the PCs, which are not material, and the assets of the PCs are not available to the Company.