The preparation of financial statements in conformity with United States generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate these estimates, including those related to contractual allowances, doubtful accounts, inventories, goodwill, fair value measurements, litigation and contingent liabilities, income taxes, and share-based compensation. We base our estimates on historical experience, future expectations and other relevant assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

Information on our accounting policies and methods used in the preparation of our consolidated financial statements are included, where applicable, in their respective footnotes that follow.

Significant Accounting Policy		Footnote Reference
Recently adopted accounting standards and recently issued accounting pronouncements		2
Acquisition of Spinal Kinetics, Inc.		3
Inventories		4
Property, plant and equipment		5
Patents and other intangible assets		6
Goodwill		7
Investments		8
Long-term debt		10
Fair value measurements		11
Commitments		12
Contingencies		13
Shareholders' equity		14
Revenue recognition and accounts receivable		15
Business segment information		16
Share-based compensation		17
Defined contribution plans and deferred compensation		18
Income taxes		19
Earnings per share		20

The following is a discussion of accounting policies and methods used in our consolidated financial statements that are not presented within other footnotes.

Amounts previously reported in the consolidated statements of income and comprehensive income as SEC / FCPA matters and related costs have been reclassified to general and administrative expenses to conform with current period presentation, resulting in a decrease of general and administrative expense of $2.5 million for the year ended December 31, 2017 and an increase in general and administrative expense of $2.0 million for the year ended December 31, 2016.

In the ordinary course of business, the Company is exposed to the impact of changes in interest rates and foreign currency fluctuations. The Company’s objective is to limit the impact of such movements on earnings and cash flows. In order to achieve this objective, the Company seeks to balance its non-U.S. Dollar denominated income and expenditures.

The financial statements for operations outside the United States are generally maintained in their local currency. All foreign currency denominated balance sheet accounts, except shareholders’ equity, are translated to U.S. Dollars at year end exchange rates and revenue and expense items are translated at weighted average rates of exchange prevailing during the year. Gains and losses resulting from the translation of foreign currency are recorded in the accumulated other comprehensive income component of shareholders’ equity. Transactional foreign currency gains and losses, including those generated from intercompany operations, are included in other expense, net and were a loss of $3.3 million, gain of $1.9 million, and loss of less than $0.1 million for the years ended December 31, 2018, 2017 and 2016, respectively.

Financial instruments that could subject the Company to a concentration of credit risk consist primarily of cash, cash equivalents, restricted cash, and accounts receivable. Generally, cash is held at large financial institutions and cash equivalents consist of highly liquid money market funds. The Company performs ongoing credit evaluations of customers, generally does not require collateral, and

maintains a reserve for potential credit losses. The Company believes that a concentration of credit risk related to the accounts receivable is limited because customers are geographically dispersed and end users are diversified across several industries.

Net sales to our customers based in Europe were approximately $69 million in 2018, which results in a substantial portion of our trade accounts receivable balance as of December 31, 2018. It is at least reasonably possible that changes in global economic conditions and/or local operating and economic conditions in the regions these distributors operate, or other factors, could affect the future realization of these accounts receivable balances.

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

In 2018, restricted cash related to a court order affecting the Company’s local bank accounts for its office in São Paulo, Brazil, as part of an investigation of more than 30 companies, which resulted in the freezing of approximately $2.6 million of the Company’s cash. As such, the Company reclassified this cash balance to restricted cash. Refer to Note 13 for further discussion of this matter.

Research and development costs, including in-process research and development (“IPR&D”) costs

Expenditures related to the collaborative arrangement with MTF Biologics (“MTF”) are expensed based on the terms of the related agreement. No expenditures were incurred for the year ended December 31, 2018 under the collaborative arrangement with MTF and expenditures totaled $0.9 million and $1.3 million for the years ended December 31, 2017 and 2016, respectively. Expenditures for research and development are expensed as incurred.

As part of the Spinal Kinetics Inc. acquisition in 2018, the Company recognized $26.8 million of IPR&D costs within patents and other intangible assets, net and recorded additional costs to further develop this acquired IPR&D . See Note 3 for further details.

Acquired IPR&D represents the fair value assigned to acquired research and development assets that have not reached technological feasibility. The value assigned to acquired IPR&D is determined by estimating the costs to develop the acquired technology into commercially viable products, estimating the resulting revenues from the projects and discounting the net cash flows to present value. The revenues and costs projections used to value acquired IPR&D are, as applicable, reduced based on the probability of success of developing the asset. Additionally, the estimated revenues consider the relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by the Company and its competitors. The rates utilized to discount the net cash flows to their present value are commensurate with the stage of development of the project and uncertainties in the economic estimates used in the projections. Any future costs to further develop the IPR&D subsequent to acquisition are recorded to research and development expense as incurred. See Note 6 for additional policy discussion related to amortization and impairment testing for IPR&D.