Attached files
| file | filename |
|---|---|
| EX-32.1 - EX-32.1 - LDR HOLDING CORP | ex321.htm |
| EX-10.1 - EX-10.1 - LDR HOLDING CORP | ex101.htm |
| EX-31.1 - EX-31.1 - LDR HOLDING CORP | ex311.htm |
| EX-31.2 - EX-31.2 - LDR HOLDING CORP | ex312.htm |
| EXCEL - IDEA: XBRL DOCUMENT - LDR HOLDING CORP | Financial_Report.xls |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
_____________________
FORM 10-Q
(Mark One) | ||
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended March 31, 2015
OR | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the Transition Period from to
Commission File Number: 001-36095
LDR HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
_____________________
Delaware (State or Other Jurisdiction of Incorporation) | 20-3933262 (I.R.S. Employer Identification No.) | |
13785 Research Boulevard, Suite 200 Austin, Texas (Address of Principal Executive Offices) | 78750 (Zip Code) | |
Telephone: (512) 344-3333 (Registrant's Telephone Number, Including Area Code) | ||
Indicate by check mark whether 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. x Yes ¨ 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). x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
o Large Accelerated Filer | x Accelerated Filer | o Non-Accelerated Filer | o Smaller Reporting Company |
(Do not check if a 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 x No
The number of shares outstanding of the Registrant's Common Stock, $0.001 par value, was 26,580,237 as of May 1, 2015.
LDR HOLDING CORPORATION AND SUBSIDIARIES
Table of Contents
Page | ||
Certifications | ||
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LDR HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
March 31, 2015 | December 31, 2014 | |||||||
Unaudited | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 65,410 | $ | 73,883 | ||||
Accounts receivable, net of allowance of $1,483 and $1,351 at March 31, 2015 and December 31, 2014, respectively | 27,132 | 26,484 | ||||||
Inventory, net | 25,969 | 24,996 | ||||||
Other current assets | 9,118 | 4,864 | ||||||
Prepaid expenses | 1,798 | 1,419 | ||||||
Deferred tax asset, current | 265 | 296 | ||||||
Total current assets | 129,692 | 131,942 | ||||||
Property and equipment, net of accumulated depreciation and amortization of $14,382 and $13,882 at March 31, 2015 and December 31, 2014, respectively | 20,122 | 19,025 | ||||||
Goodwill | 6,621 | 6,621 | ||||||
Intangible assets, net of accumulated amortization of $2,827 and $3,004 at March 31, 2015 and December 31, 2014, respectively | 3,588 | 3,858 | ||||||
Deferred tax assets | 192 | 192 | ||||||
Other assets | 167 | 171 | ||||||
Total assets | $ | 160,382 | $ | 161,809 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 9,616 | $ | 8,302 | ||||
Accrued expenses | 21,519 | 19,366 | ||||||
Short-term financing | 4,010 | 4,343 | ||||||
Current portion of long-term debt | 801 | 1,009 | ||||||
Total current liabilities | 35,946 | 33,020 | ||||||
Line of credit, net of discount | 18,166 | 18,166 | ||||||
Long-term debt, net of discount and current portion | 1,114 | 1,422 | ||||||
Deferred tax liabilities | 661 | 740 | ||||||
Other long-term liabilities | 900 | 760 | ||||||
Total liabilities | 56,787 | 54,108 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Common stock; $0.001 par value; 107,000,000 shares authorized at March 31, 2015 and December 31, 2014; 26,562,365 shares issued and 26,562,016 shares outstanding at March 31, 2015; 26,457,516 shares issued and 26,457,167 shares outstanding at December 31, 2014 | 27 | 27 | ||||||
Treasury stock at cost | (8 | ) | (8 | ) | ||||
Additional paid-in capital | 208,759 | 205,920 | ||||||
Accumulated other comprehensive loss | (7,261 | ) | (3,500 | ) | ||||
Accumulated deficit | (97,922 | ) | (94,738 | ) | ||||
Total stockholders’ equity | 103,595 | 107,701 | ||||||
Total liabilities and stockholders’ equity | $ | 160,382 | $ | 161,809 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
2
LDR HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands, except share and per share amounts)
(Unaudited)
Three Months Ended March 31, | ||||||||
2015 | 2014 | |||||||
Revenue | $ | 39,115 | $ | 31,068 | ||||
Cost of goods sold | 6,443 | 5,256 | ||||||
Gross profit | 32,672 | 25,812 | ||||||
Operating expenses: | ||||||||
Research and development | 3,013 | 3,394 | ||||||
Sales and marketing | 26,384 | 18,915 | ||||||
General and administrative | 8,536 | 6,522 | ||||||
Total operating expenses | 37,933 | 28,831 | ||||||
Operating loss | (5,261 | ) | (3,019 | ) | ||||
Other operating income (expense): | ||||||||
Other income (expense) | 2,844 | (41 | ) | |||||
Interest income | 1 | — | ||||||
Interest expense | (181 | ) | (276 | ) | ||||
Accretion related to discounts on long-term debt | (4 | ) | (6 | ) | ||||
Total other income (expense), net | 2,660 | (323 | ) | |||||
Loss before income taxes | (2,601 | ) | (3,342 | ) | ||||
Income tax expense | (583 | ) | (157 | ) | ||||
Net loss | (3,184 | ) | (3,499 | ) | ||||
Other comprehensive loss: | ||||||||
Foreign currency translation | (3,760 | ) | (48 | ) | ||||
Comprehensive loss | $ | (6,944 | ) | $ | (3,547 | ) | ||
Net loss per common share: | ||||||||
Basic and diluted | $ | (0.12 | ) | $ | (0.15 | ) | ||
Weighted average number of shares outstanding: | ||||||||
Basic and diluted | 26,770,071 | 24,083,796 | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
LDR HOLDING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) | ||||||||
Three Months Ended March 31, | ||||||||
2015 | 2014 | |||||||
Operating activities: | ||||||||
Net loss | $ | (3,184 | ) | (3,499 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Bad debt expense | 210 | 202 | ||||||
Provision for excess and obsolete inventories | 84 | 424 | ||||||
Depreciation and amortization | 1,442 | 959 | ||||||
Stock-based compensation | 2,391 | 1,040 | ||||||
Amortization of debt issuance costs on the line of credit | 4 | 6 | ||||||
Deferred income tax expense | — | 92 | ||||||
Loss on disposal of assets | 8 | 105 | ||||||
Unrealized foreign currency gain | (2,514 | ) | (53 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (1,492 | ) | (316 | ) | ||||
Prepaid expenses and other current assets | (4,920 | ) | (1,138 | ) | ||||
Inventory | (2,393 | ) | (3,523 | ) | ||||
Other assets | — | 3 | ||||||
Accounts payable | 421 | 1,027 | ||||||
Accrued expenses | 2,430 | (679 | ) | |||||
Other long-term liabilities | 200 | — | ||||||
Net cash used in operating activities | (7,313 | ) | (5,350 | ) | ||||
Investing activities: | ||||||||
Proceeds from sale of property and equipment | 30 | — | ||||||
Purchase of intangible assets | (211 | ) | (179 | ) | ||||
Purchase of property and equipment | (1,452 | ) | (695 | ) | ||||
Net cash used in investing activities | (1,633 | ) | (874 | ) | ||||
Financing activities: | ||||||||
Exercise of stock options | 688 | 211 | ||||||
Proceeds from Employee Stock Purchase Plan | 517 | 1,354 | ||||||
Payments on capital leases | (4 | ) | (13 | ) | ||||
Net proceeds (payments) on short-term financings | (131 | ) | (1,652 | ) | ||||
Payments on long-term debt | (268 | ) | (470 | ) | ||||
Net cash provided by (used in) financing activities | 802 | (570 | ) | |||||
Effect of exchange rate on cash | (329 | ) | (44 | ) | ||||
Net change in cash and cash equivalents | (8,473 | ) | (6,838 | ) | ||||
Cash and cash equivalents, beginning of period | 73,883 | 56,678 | ||||||
Cash and cash equivalents, end of period | $ | 65,410 | $ | 49,840 | ||||
4
LDR HOLDING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued) (in thousands) (Unaudited) | ||||||||
Three Months Ended March 31, | ||||||||
2015 | 2014 | |||||||
Supplemental disclosure of interest and income taxes paid | ||||||||
Cash paid for interest | $ | 191 | $ | 288 | ||||
Cash paid for taxes | 373 | 403 | ||||||
Supplemental disclosure of non-cash investing and financing activities | ||||||||
Capital lease related to purchase of fixed assets | $ | — | $ | 50 | ||||
Increase (decrease) in purchase of property and equipment in accounts payable | (1,636 | ) | 792 | |||||
See accompanying notes to unaudited condensed consolidated financial statements.
5
LDR HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Organization and Business Description
Description of Business
LDR Holding Corporation (Holding), a Delaware corporation, and its subsidiaries, LDR Spine USA, Inc. (Spine), LDR Médical, S.A.S. (Médical) and LDR Brasil Comercio, Importacao e Exportacao Ltda. (LDR Brazil and collectively, the Company), operates as a medical device company that designs and commercializes novel and proprietary surgical technologies for the treatment of patients suffering from spine disorders. The Company’s primary products are based on the VerteBRIDGE fusion platform and Mobi non-fusion platform, both of which are designed for applications in the cervical and lumbar spine for both fusion and nonfusion surgical treatments. The Company has offices in Troyes, France; Santo Andre, Brazil; Beijing and Hong Kong, China; Seoul, Korea and in Austin, Texas, which serves the U.S. market and is the corporate headquarters. The primary markets for the Company’s products are the U.S. and Western Europe.
Reclassifications
During the quarter ended June 30, 2014, the Company identified immaterial errors in its previously issued financial statements related to the presentation of purchases of property and equipment with the Condensed Consolidated Statements of Cash Flows. These previously reported amounts included property and equipment acquired but unpaid as of the end of the reporting period, which resulted in errors within investing activities with equal and offsetting errors in operating activities. These errors do not impact the Company’s previously reported amounts in its Consolidated Statements of Comprehensive Loss or Condensed Consolidated Balance Sheets for any period. The Company concluded that the errors were not material to any prior financial statements under the guidance of SEC Staff Accounting Bulletin (SAB) No. 99, Materiality.
The Company applied the guidance of SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements, to revise amounts previously presented. During the first quarter of 2015, the Company corrected the presentation within the Consolidated Statements of Cash Flows for the quarter ended March 31, 2014 to correct amounts previously reported relating to purchases of property and equipment within investing activities, the change in accounts payable within operating activities and the supplemental non-cash investing and financing activities disclosure of purchases of property and equipment included in ending accounts payable. For the three months ended March 31, 2014 there was an adjustment of $0.8 million to decrease cash flows from used in investing activities and increase cash flows used in operating activities.
2. Significant Accounting Policies
(a) Basis of Presentation
The Company prepared its interim condensed consolidated financial statements in conformity with United States of America generally accepted accounting principles, or GAAP, and the reporting regulations of the Securities and Exchange Commission, or the SEC. They do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying condensed consolidated financial statements include the Company’s accounts and the accounts of its wholly owned subsidiaries. The Company has eliminated all intercompany balances and transactions.
The Company has made estimates and judgments affecting the amounts reported in its condensed consolidated financial statements and the accompanying notes. The actual results that the Company experiences may differ materially from the Company’s estimates. The accounting estimates that require the Company’s most significant, difficult and subjective judgments include:
• | the valuation of inventory; |
• | allowance for doubtful accounts and |
• | stock-based compensation. |
(b) Unaudited Interim Results
In management’s opinion, the unaudited financial information for the interim periods presented includes all adjustments necessary for a fair statement of the results of operations, financial position, and cash flows. All adjustments are of a normal recurring nature unless otherwise disclosed. Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year. This interim information should be read in conjunction with the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
6
(c) Recent Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board, or FASB, issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 requires retrospective adoption and will be effective for the Company on January 1, 2016. Early adoption is permitted. The Company does not expect the adoption of ASU 2015-03 will have a material impact on its financial statements.
In May 2014, the FASB, issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard was originally effective for the Company on January 1, 2017, but the FASB has agreed to propose a one-year deferral for all entities. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method and it has not determined the effect of the standard on its ongoing financial reporting.
(d) Fair Value of Financial Instruments
The fair value of the Company’s financial instruments reflects the amounts that the Company estimates to receive in connection with the sale of an asset or paid in connection with the transfer of a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value hierarchy that prioritizes the use of inputs used in valuation techniques is as follows:
Level 1 – quoted prices in active markets for identical assets and liabilities;
Level 2 – observable inputs other than quoted prices in active markets, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data; and
Level 3 – unobservable inputs reflecting management’s assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.
As of March 31, 2015 and December 31, 2014, the fair value of the Company’s long-term debt, short-term financing and borrowings under its revolving credit agreement were categorized as Level 2 in the fair value hierarchy and approximated their carrying value due to the relatively recent issuances and short maturities and based on prevailing market rates for borrowings with similar ratings and maturities. The carrying amounts of the Company’s financial instruments, which primarily include cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, approximate their fair values due to their short maturities.
(e) Inventory
Inventory is carried at the lower of cost or market using the weighted average method, net of an allowance for excess and obsolete inventory. The components of inventory, net of allowance, as of March 31, 2015 and December 31, 2014 are as follows (in thousands):
March 31, 2015 | December 31, 2014 | |||||||
Finished goods | $ | 22,657 | $ | 21,337 | ||||
Work in process | 2,799 | 3,356 | ||||||
Raw materials | 513 | 303 | ||||||
Total | $ | 25,969 | $ | 24,996 | ||||
As of March 31, 2015 and December 31, 2014, inventory held by hospitals and sales agents on behalf of the Company was $8.1 million and $7.1 million, respectively.
The Company reviews the components of its inventory on a periodic basis for excess, obsolete or impaired inventory and records a reserve for items identified. The Company recorded an allowance for excess and obsolete inventory of $4.1 million and $4.3 million as of March 31, 2015 and December 31, 2014, respectively.
7
3. Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of cash and cash equivalents and accounts receivable. While the Company’s cash and cash equivalents are on deposit with high quality FDIC insured financial institutions, at times, such deposits exceed insured limits. The Company has not experienced any losses in such accounts.
The Company believes that the concentration of credit risk in its accounts receivable is substantially mitigated by the Company’s evaluation process, relatively short collection terms and the high level of creditworthiness of its customers. The Company evaluates the status of each of its customers, but generally requires no collateral. The Company has not experienced any significant losses in such accounts. The Company maintains reserves for credit losses.
The Company had no customers that represented greater than 10% of the Company’s trade receivables as of March 31, 2015 and December 31, 2014, or revenues for the three months ended March 31, 2015 and 2014.
4. Accrued Expenses
Accrued expenses consist of the following (in thousands):
March 31, 2015 | December 31, 2014 | |||||||
Compensation and other employee related costs | $ | 9,635 | $ | 10,960 | ||||
Contributions withheld for Employee Stock Purchase Plan | 611 | 94 | ||||||
Royalties | 2,219 | 1,575 | ||||||
Clinical and regulatory costs | 303 | 376 | ||||||
Government grants | 766 | 858 | ||||||
Rent | 1,770 | 1,841 | ||||||
Taxes | 4,863 | 2,479 | ||||||
Other | 1,352 | 1,183 | ||||||
$ | 21,519 | $ | 19,366 | |||||
8
5. Long-Term Debt
Long-term debt consists of the following (in thousands):
March 31, 2015 | December 31, 2014 | |||||||
Line of credit, net of discount | $ | 18,166 | $ | 18,166 | ||||
Short-term financing | 4,010 | 4,343 | ||||||
Various notes payable | 1,915 | 2,431 | ||||||
Total long-term debt | 24,091 | 24,940 | ||||||
Less current portion of long-term debt and short-term financing | (4,811 | ) | (5,352 | ) | ||||
Long-term debt and line of credit, net of discount and current portion | $ | 19,280 | $ | 19,588 | ||||
(a) Line of Credit
The Company is party to an amended loan agreement with a bank under which it may make periodic borrowings under a revolving line of credit (the Line of Credit). The Line of Credit contains various restrictive covenants, including limitations on the Company’s ability to pay dividends, enter into a merger or acquisition and the amount of capital expenditures the Company may make in any given fiscal year. In May 2014, the Company entered into an amendment, effective in April 2014, to the Line of Credit that, among other things: (1) increased the revolving line of credit from $19.0 million to $25.0 million, (2) amended the interest rate from the bank’s prime rate plus 2.0% to the bank’s prime rate plus 0.25% or, if the Company’s trailing four-quarter EBITDA exceeds $5.0 million, LIBOR plus 2.5%, (3) eliminated a requirement that the Company maintain a minimum cash balance with the bank, (4) replaced the $12.5 million minimum net worth covenant with a $50.0 million tangible net worth covenant (unless the Company maintains a minimum cash balance of $20.0 million, in which case the covenant is waived) and (5) extended the maturity date from April 25, 2014 to April 29, 2016. The bank has the right to reset the tangible net worth covenant annually, beginning February 28, 2015.
As of March 31, 2015 and December 31, 2014, the Company was in compliance with all covenants under the Line of Credit. The Company’s interest rate on borrowings under the Line of Credit was 3.5% at March 31, 2015 and December 31, 2014.
(b) Short-Term Financing
Médical borrows funds from various financial institutions in France on a short-term basis with variable interest rates based on Euribor one-month rates. The funds are typically repaid within 90 days and are collateralized by certain assets of Médical, including accounts receivable. The weighted average interest rate for the short-term balances outstanding at March 31, 2015 and December 31, 2014 was 3.2%.
(c) Various Notes Payable
Médical has loan agreements with five different entities as of March 31, 2015 and December 31, 2014. The amounts of the outstanding loans vary from approximately $33,000 to $597,000 at March 31, 2015 and $55,000 to $729,000 at December 31, 2014, and bear interest at rates varying between 2.53% and 4.65% at March 31, 2015 and December 31, 2014. Maturity dates for these loans vary from 2015 to 2019, and the loans are secured by certain assets of Médical.
9
6. Stock-Based Compensation
(a) Stock Option Activity
A summary of the stock option activity for the Company for the three months ended March 31, 2015 is as follows:
Shares | Weighted - Average Exercise Price | Weighted - Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||
(Years) | ($000's) | ||||||||||||
Outstanding - December 31, 2014 | 1,881,369 | $ | 19.30 | 8.21 | $ | 26,484 | |||||||
Options granted | 263,850 | 35.15 | |||||||||||
Options exercised | (87,214 | ) | 7.88 | ||||||||||
Options forfeited | (80,603 | ) | 18.69 | ||||||||||
Outstanding - March 31, 2015 | 1,977,402 | $ | 21.94 | 8.21 | $ | 29,166 | |||||||
Options vested and expected to vest at March 31, 2015 | 1,908,889 | $ | 21.94 | 8.21 | $ | 28,474 | |||||||
Options exercisable at March 31, 2015 | 813,494 | $ | 12.11 | 6.76 | $ | 19,958 | |||||||
The aggregate intrinsic value in the table above represents the total pre-tax value of the options shown, calculated as the difference between the Company’s closing stock price on March 31, 2015 and the exercise prices of the options shown, multiplied by the number of in-the money options. This is the aggregate amount that would have been received by the option holders if they had all exercised their options on March 31, 2015 and sold the shares thereby received at the closing price of the Company’s stock on that date. This amount changes based on the closing price of the Company’s stock.
Additional information regarding options is as follows (in thousands except for per share amounts):
Three Months Ended March 31, | ||||||||
2015 | 2014 | |||||||
Weighted-average grant date fair value per share of options granted during the period | $ | 14.40 | $ | 15.92 | ||||
Aggregate intrinsic value of options exercised during the period | $ | 2,656 | $ | 2,937 | ||||
The total intrinsic value of options exercised represents the total pre-tax intrinsic value that was received by the option holders who exercised their options during the fiscal year and is calculated as the difference between the stock price at the time of exercise and the exercise price multiplied by the number of options exercised.
The unrecognized compensation expense related to unvested options and subject to recognition in future periods was approximately $12.9 million at March 31, 2015 and is expected to be recognized over a weighted-average period of 2 years.
(b) Restricted Stock Unit Activity
A summary of the restricted stock unit activity for the Company for the three months ended March 31, 2015 is as follows:
Units | Weighted - Average Grant Date Fair Value Per Share | Weighted - Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||
(Years) | ($000's) | ||||||||||||
Unvested - December 31, 2014 | 99,500 | $ | 27.06 | 2.94 | $ | 3,000 | |||||||
Restricted stock units granted | 63,000 | 33.69 | |||||||||||
Restricted stock units vested | (24,502 | ) | 34.48 | ||||||||||
Restricted stock units forfeited | — | — | |||||||||||
Unvested - March 31, 2015 | 137,998 | $ | 30.08 | 2.93 | $ | 4,787 | |||||||
The unrecognized compensation expense related to unvested restricted stock units was $3.8 million at March 31, 2015 and is expected to be recognized over a weighted-average period of approximately 3 years.
10
(c) Performance-Based Restricted Stock Unit Activity
In January 2015, the Company granted performance-based restricted stock units to certain employees of the Company. The number of awards converted to common stock will vary from 40,200 to 126,000 shares depending on the attainment of certain revenue targets. A summary of the performance-based restricted stock unit activity for the Company for the three months ended March 31, 2015 is as follows and is based on attainment of revenue at the target thresholds:
Units | Weighted - Average Grant Date Fair Value Per Share | Weighted - Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||
(Years) | ($000's) | ||||||||||||
Unvested - December 31, 2015 | — | $ | — | 0 | $ | — | |||||||
Performance-based restricted stock units granted | 80,400 | 32.78 | |||||||||||
Performance-based restricted stock units vested | — | — | |||||||||||
Performance-based restricted stock units forfeited | — | — | |||||||||||
Unvested - March 31, 2015 | 80,400 | $ | 32.78 | 1.81 | $ | 2,789 | |||||||
The unrecognized compensation expense related to unvested restricted stock units was $2.2 million at March 31, 2015 and is expected to be recognized over a weighted-average period of approximately 2 years.
(d) Stock-Based Compensation
The Company’s stock-based compensation expense related to employee stock options, restricted stock units, performance stock units and ESPP awards for the three months ended March 31, 2015 and 2014 was as follows (in thousands):
Three Months Ended March 31, | ||||||||
2015 | 2014 | |||||||
Research and development | $ | 94 | $ | 117 | ||||
Sales and marketing | 1,022 | 585 | ||||||
General and administrative | 1,275 | 338 | ||||||
Total | $ | 2,391 | $ | 1,040 | ||||
7. Income Taxes
The following table summarizes the total income tax expense, and the related effective tax rate, for the three months ended March 31, 2015 and 2014 (in thousands):
Three Months Ended March 31, | ||||||||
2015 | 2014 | |||||||
Income tax expense | $ | 583 | $ | 157 | ||||
Effective tax rate | (22.4 | )% | (4.7 | )% | ||||
The provision for income taxes for the three months ended March 31, 2015 and 2014 includes both domestic and foreign income taxes at applicable statutory rates adjusted for non-deductible expenses and other permanent differences. The effective tax rate differs from the statutory rate due to non-deductible expenses, valuation allowance increase and foreign tax rate differentials. The Company has established a full valuation allowance relating to substantially all of its U.S. net deferred tax assets due to uncertainties regarding the realization of the deferred tax assets based on the Company’s lack of earnings history in the U.S.
As of March 31, 2015 and December 31, 2014, the Company has no accrued interest or penalties associated with uncertain tax positions. The jurisdictions in which the Company files income taxes include the U.S., France and Brazil. The Company’s returns are not currently under examination by the Internal Revenue Service or other taxing authorities. The Company is subject to income tax examinations for the Company’s U.S. federal and state and local income taxes for 2004 and subsequent years and foreign tax examinations for 2006 and subsequent years.
The Company pays income taxes in France related to intercompany sales in the year the sale occurs; however the recognition of tax expense related to intercompany sales is deferred in the consolidated financial statements until the product is sold to an
11
unrelated third party. The deferred income tax charge is included in other current assets in the consolidated balance sheets. As of March 31, 2015 and December 31, 2014, the deferred income tax charge was $5.8 million and $2.7 million, respectively.
Earnings occurring outside the U.S. are deemed to be indefinitely reinvested outside of the U.S. to support the Company’s foreign operations. As a result, the Company continues to accumulate earnings overseas for investment in the Company’s business outside the U.S. and to use cash generated from U.S. operations and short- and long-term borrowings to meet the Company’s U.S. cash needs. The Company has not estimated the deferred tax liabilities associated with the Company’s permanently reinvested earnings as it is impracticable to do so.
8. Net Loss Per Share
The Company computes basic net loss per common share by dividing net loss attributable to common stockholders by the weighted average common shares outstanding for the period. During periods of income, the Company allocates participating securities a proportional share of income determined by dividing total weighted average participating securities by the sum of the total weighted average common shares and participating securities (the two-class method). The Company’s restricted stock units, performance-based restricted stock units and preferred stock participate in any dividends declared by the Company and are therefore considered to be participating securities. During periods of loss, the Company allocates no loss to participating securities because they have no contractual obligation to share in the losses of the Company. The Company computes diluted net loss per common share after giving consideration to the dilutive effect of the Company’s stock options and warrants that are outstanding during the period, except where such would be anti-dilutive. Because the Company reported losses for the periods presented, all potentially dilutive common shares consisting of preferred stock, restricted stock units, performance-based restricted stock units, stock options and warrants are antidilutive.
Net loss per share for the three months ended March 31, 2015 and 2014 was as follows (in thousands):
Three Months Ended March 31, | ||||||||
2015 | 2014 | |||||||
Numerator | ||||||||
Net loss attributable to common stockholders | $ | (3,184 | ) | $ | (3,499 | ) | ||
Denominator | ||||||||
Weighted average shares outstanding - basic | 26,770 | 24,084 | ||||||
Dilutive effect of options and warrants | — | — | ||||||
Weighted average shares outstanding - diluted | 26,770 | 24,084 | ||||||
The following common equivalent shares were excluded from the diluted net loss per share calculation as their inclusion would have been anti-dilutive (in thousands):
Three Months Ended March 31, | ||||||
2015 | 2014 | |||||
Stock options | 1,977 | 1,914 | ||||
9. Commitments and Contingencies
On March 6, 2015, LDR Médical entered into a Commercial Lease agreement (the “Lease”) with CIRMAD Est. (the “Developer”), for an office, warehouse and logistics building being built by the Developer in Troyes, France (the “New Premises”). The Lease will commence following completion of the New Premises, which is anticipated in March 2016, at which time Médical will relocate its headquarters to the New Premises. The initial term of the Lease is ten years. Médical has the option to extend the Lease for an additional nine years, subject to Médical’s right to terminate the Lease on the third anniversary and the sixth anniversary of such extension. The New Premises are 83,250 square feet, and the annual base rent is €1,041,305, subject to increase based on the tertiary activities rent index published by the French National Institute for Statistics and Economic Studies.
From time to time, the Company may be involved in litigation relating to claims arising out of its ordinary course of business. Management believes that there are no claims or actions pending or threatened against the Company, the ultimate disposition of which would have a material impact on the Company’s financial position, results of operations or cash flows.
12
10. Segment and Geographic Information
Operating segments are defined as components of an enterprise for which separate 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. The Company globally manages 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. The Company’s products are principally sold in the United States and France.
The following table represents total sales by geographic area, based on the location of the customer (in thousands):
Three Months Ended March 31, | ||||||||
2015 | 2014 | |||||||
United States | $ | 31,320 | $ | 23,162 | ||||
France | 3,330 | 3,320 | ||||||
Other Countries (1) | 4,465 | 4,586 | ||||||
Total | $ | 39,115 | $ | 31,068 | ||||
__________
(1) | No additional locations are individually significant. |
The Company classifies its products into two categories: exclusive technology and traditional fusion products. The following table represents total sales by product category (in thousands):
Three Months Ended March 31, | ||||||||
2015 | 2014 | |||||||
Exclusive technology products | $ | 35,900 | $ | 26,672 | ||||
Traditional fusion products | 3,215 | 4,396 | ||||||
Total | $ | 39,115 | $ | 31,068 | ||||
The following table represents long-lived assets by geographic area (in thousands):
March 31, 2015 | December 31, 2014 | |||||||
United States | $ | 15,080 | $ | 13,873 | ||||
France | 3,293 | 3,472 | ||||||
Other Countries (1) | 1,749 | 1,680 | ||||||
Total | $ | 20,122 | $ | 19,025 | ||||
__________
(1) | No additional locations are individually significant. |
13
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with LDR Holding Corporation’s (together with its subsidiaries, “we,” ”us” and “our”) condensed consolidated financial statements and notes thereto included elsewhere in this document and our Annual Report on Form 10-K for the year ended December 31, 2014. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. See “Special Note Regarding Forward-Looking Statements” for further information regarding forward-looking statements.
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act. You can identify these statements by words such as “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “seeks,” “should,” “will,” or “would” or the negative of these terms or similar expressions. These statements are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. All of our forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from our expectations. Factors that may cause such differences include, but are not limited to, the risks described under “Risk Factors” in our Annual Report on Form 10-K and those discussed in other documents we file with the SEC.
Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Quarterly Report on Form 10-Q. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited interim condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and in our other SEC filings, including the audited consolidated financial statements included in our Annual Report on Form 10-K.
Overview
We are a global medical device company focused on designing and commercializing novel and proprietary surgical technologies for the treatment of patients suffering from spine disorders. Our primary products are based on our VerteBRIDGE fusion and Mobi non-fusion platforms, both of which are designed for applications in the cervical and lumbar spine. We believe our VerteBRIDGE and Mobi platforms enable products that are less invasive, provide greater intra-operative flexibility, offer simplified surgical techniques and promote improved clinical outcomes for patients as compared to existing alternatives.
Our revenue is generated from sales to two types of customers: hospitals and stocking distributors. Revenue from sales to hospitals is recognized when we are notified the product has been used or implanted and a valid purchase order has been received. Product sales to hospitals are billed to and paid by the hospital as part of their normal payment processes with payment received by us in the form of an electronic transfer, check or credit card. Revenue from our stocking distributors is generally recognized at the time the product is shipped to the distributor. Product sales to stocking distributors are billed to and paid by the distributor as part of their normal payment processes with payment received by us in the form of an electronic transfer.
Our VerteBRIDGE and Mobi platform products are used in the fastest growing segments of the global spine implant market, including the lumbar fusion segment, the cervical fusion segment and the motion preservation segment. In August 2013, we received approval from the U.S. Food and Drug Administration, or FDA, for the Mobi-C cervical replacement device, the first and only cervical disc replacement device to receive FDA approval to treat both one-level and two-level cervical disc disease. We expect sales of Mobi-C in the United States to continue to account for a significant portion of our expected increase in total revenue. We expect that sales of Mobi-C in the United States will continue to increase our sales and marketing expenses as we increase our capability to handle the expected increase in demand for Mobi-C. In addition, we anticipate that sales of our VerteBRIDGE products will continue to increase due to continued market penetration in key global markets.
14
Components of our Results of Operations
Revenue
We generate revenue from the sales of implants designed around our proprietary VerteBRIDGE fusion and Mobi non-fusion platform technologies. In addition, we market numerous traditional fusion implants so that combined we can offer to spine surgeons comprehensive spine surgical solutions. We sell our implants primarily to hospitals, for use by spine surgeons to treat spine disorders. We expect to increase revenue by establishing Mobi-C as a standard of care for cervical disc disease, leveraging our VerteBRIDGE platform and broadening our portfolio of products to further penetrate the fastest growing segments of the global spine implant market. We also expect to increase our revenue by expanding our geographic presence in the United States and other countries.
Cost of Goods Sold
We rely on third-party suppliers to manufacture our products. Our cost of goods sold primarily consist of costs of products purchased from our third-party suppliers, excess and obsolete inventory charges, royalties, shipping, inspection and related costs incurred in making our products available for sale or use. We expect our cost of goods sold to continue to increase in absolute dollars due primarily to increased sales volume. Cost of goods sold could increase as a percentage of revenue as a result of increased third-party product costs, inventory charges associated with timing of product launches and enhancements and royalties associated with the change in product mix.
Research and Development Expenses
Our research and development expenses primarily consist of engineering, product development, clinical and regulatory expenses, consulting services, outside prototyping services, outside research activities, materials, depreciation and other costs associated with development of our products. Research and development expenses also include related personnel and consultants’ compensation and stock-based compensation expense. We expense research and development costs as they are incurred. We expect research and development expense to continue to increase in absolute dollars as we develop new products to expand our product pipeline, add research and development personnel and undergo clinical activities, including clinical studies to gain additional regulatory clearances.
Sales and Marketing Expenses
Sales and marketing expenses primarily consist of salaries, benefits and other related costs, including stock-based compensation, for personnel employed in sales, marketing, reimbursement, medical education and training departments, as well as investments in surgeon training programs, industry events and other promotional activities. In addition, our sales and marketing expenses include commissions and bonuses, generally based on a percentage of sales, to our sales managers, independent sales agencies and direct sales representatives. We provide our implants in kits that consist of a range of implant sizes and include a separate instrument set necessary to complete the surgical procedure. We generally consign our instrument sets to our sales organization or our hospital customers that purchase the implants used in spine surgery. Our sales and marketing expenses include depreciation of these instrument sets. We expect our sales and marketing expenses to continue to increase in absolute dollars with the commercialization of our current and future products and continued investment in our global sales organization, including broadening our relationships with independent sales agencies, expanding exclusivity commitments among our independent sales agencies and international distributors and increasing the number of our direct sales representatives.
General and Administrative Expenses
General and administrative expenses primarily consist of salaries, benefits and other related costs, including stock-based compensation, for personnel employed in corporate management, finance, legal, compliance, administrative, information technology and human resource departments. General and administrative expenses include facility costs and a 2.3% excise tax on the sale of medical devices in the United States. General and administrative expenses also include legal expenses related to the development and protection of our intellectual property portfolio. We expect our general and administrative expenses to continue to increase in absolute dollars as we hire additional personnel to support the growth of our business and U.S. medical device excise taxes to increase as our sales volumes increase in the United States. Additionally, we expect to continue to incur increased expenses as a result of being a public company.
15
Income Tax Expense
We are taxed at the rates applicable within each jurisdiction in which we operate, primarily in the United States, France and Brazil. The composite income tax rate, tax provisions, deferred tax assets and deferred tax liabilities will vary according to the jurisdiction in which profits arise. Tax laws are complex and subject to different interpretations by management and the respective governmental taxing authorities, and require us to exercise judgment in determining our income tax provision, our deferred tax assets and liabilities and the valuation allowance recorded against our net deferred tax assets. Deferred tax assets and liabilities are determined using the enacted tax rates in effect for the years in which those tax assets are expected to be realized. A valuation allowance is established when it is more likely than not that the future realization of all or some of the deferred tax assets will not be achieved. We have recorded a full valuation allowance on our net deferred tax assets in the United States as of March 31, 2015 and December 31, 2014 due to uncertainties related to our ability to utilize our deferred tax assets in the foreseeable future.
Results of Operations
The following table sets forth, for the periods indicated, our unaudited results of operations and our unaudited results of operations as a percentage of revenue:
Three Months Ended March 31, | ||||||||||||||
2015 | 2014 | |||||||||||||
(in thousands, except percentages) | ||||||||||||||
Revenue | $ | 39,115 | 100 | % | $ | 31,068 | 100 | % | ||||||
Cost of goods sold | 6,443 | 16 | 5,256 | 17 | ||||||||||
Gross profit | 32,672 | 84 | 25,812 | 83 | ||||||||||
Operating expenses: | ||||||||||||||
Research and development | 3,013 | 8 | 3,394 | 11 | ||||||||||
Sales and marketing | 26,384 | 67 | 18,915 | 61 | ||||||||||
General and administrative | 8,536 | 22 | 6,522 | 21 | ||||||||||
Total operating expenses | 37,933 | 97 | 28,831 | 93 | ||||||||||
Operating loss | (5,261 | ) | (13 | ) | (3,019 | ) | (10 | ) | ||||||
Total other income (expense), net | 2,660 | 7 | (323 | ) | (1 | ) | ||||||||
Loss before income taxes | (2,601 | ) | (7 | ) | (3,342 | ) | (11 | ) | ||||||
Income tax expense | (583 | ) | (1 | ) | (157 | ) | (1 | ) | ||||||
Net loss | $ | (3,184 | ) | (8 | )% | $ | (3,499 | ) | (11 | )% | ||||
Three Months Ended March 31, 2015 Compared to the Three Months Ended March 31, 2014
Revenue
The following table sets forth, for the periods indicated, our revenue by product category and geography expressed as dollar amounts and the changes in revenue between the specified periods expressed in dollar amounts in thousands and as percentages:
Three Months Ended March 31, | Change 2015/2014 | ||||||||||||||
2015 | 2014 | $ | % | ||||||||||||
Exclusive technology products | $ | 35,900 | $ | 26,672 | $ | 9,228 | 35 | % | |||||||
Traditional fusion products | 3,215 | 4,396 | (1,181 | ) | (27 | ) | |||||||||
Total revenue | $ | 39,115 | $ | 31,068 | $ | 8,047 | 26 | % | |||||||
Three Months Ended March 31, | Change 2015/2014 | ||||||||||||||
2015 | 2014 | $ | % | ||||||||||||
United States | $ | 31,320 | $ | 23,162 | $ | 8,158 | 35 | % | |||||||
International | 7,795 | 7,906 | (111 | ) | (1 | ) | |||||||||
Total revenue | $ | 39,115 | $ | 31,068 | $ | 8,047 | 26 | % | |||||||
16
The increase in total revenue in the three months ended March 31, 2015 compared to the three months ended March 31, 2014 was primarily driven by an increase in revenue from our exclusive technology products in the United States and increased penetration in existing markets through the expansion of our network of independent sales agencies and direct sales representatives. Revenue growth from our exclusive technology products was driven by a 49% increase in revenue from our exclusive cervical products and by a 6% increase in revenue from our exclusive lumbar products. Sales of our exclusive cervical and lumbar products represented 74% and 26% of total exclusive technology revenue, respectively, for the three months ended March 31, 2015.
International revenue decreased as a result of unfavorable impact of changes in foreign currency rates, offset by increased market penetration and expansion of our product portfolio in existing territories.
Cost of Goods Sold
Cost of goods sold was $6.4 million in the three months ended March 31, 2015 compared to $5.3 million in the three months ended March 31, 2014, an increase of $1.2 million or 23%. The increase was primarily due to an increase in product costs, royalties and freight charges associated with the increase in sales volume and mix. Cost of goods sold decreased as a percentage of revenue due to better freight rates and lower inventory reserves associated with the value our inventory, partially offset by higher royalties due to product mix.
Research and Development Expenses
Research and development expenses were $3.0 million in the three months ended March 31, 2015 compared to $3.4 million in the three months ended March 31, 2014, a decrease of $381,000 or 11%. The decrease was primarily due to a $216,000 decrease in fees and expenses associated with product testing and clinical trials, a decrease of $141,000 associated with salaries and benefits, a $23,000 decrease in stock-based compensation expense.
Sales and Marketing Expenses
Sales and marketing expenses were $26.4 million in the three months ended March 31, 2015 compared to $18.9 million in the three months ended March 31, 2014, an increase of $7.5 million or 39%. The increase was primarily due to a $4.2 million increase in compensation costs associated with our investments in our sales organization, including hiring of additional direct sales and marketing personnel and commissions as a result of the increase in sales volume, a $437,000 increase in stock-based compensation expense, a $2.3 million increase in expenses associated with medical training workshops and product launch initiatives and a $480,000 increase in depreciation expense and other expenses associated with our instrument sets and cases.
General and Administrative Expenses
General and administrative expenses were $8.5 million in the three months ended March 31, 2015 compared to $6.5 million in the three months ended March 31, 2014, an increase of $2.0 million or 31%. The increase was primarily due to an $881,000 increase in employee salaries and benefits associated with the increase in general and administrative personnel, a $937,000 increase in stock-based compensation expense, a $118,000 increase in professional fees associated with general corporate initiatives. These increases were offset by a $171,000 decrease in property and other taxes.
Total Other Income (Expense), net
Total other income (expense), net of $2.7 million in the three months ended March 31, 2015 primarily consisted of $2.8 million gain due to the effect of changes in foreign exchange rates on payables and receivables held in currencies other than their functional (local) currency, offset by $181,000 in interest expense associated with our long-term debt.
Income Tax Expense
Income tax expense was $583,000 in the three months ended March 31, 2015 compared to $157,000 in the three months ended March 31, 2014. Our effective tax rate calculated as a percentage of income before income taxes was (22.4)% for the three months ended March 31, 2015 and (4.7)% for the three months ended March 31, 2014. The change in the effective tax rate was a result of the increase in foreign tax expense while we remain in a full valuation allowance position for net operating losses generated in the U.S.
Non-GAAP Financial Measures
We define Adjusted EBITDA as operating income (loss) plus depreciation and amortization and stock-based compensation expense. We present Adjusted EBITDA because we believe it is a useful indicator of our operating performance. Our management uses Adjusted EBITDA principally as a measure of our operating performance and believes that Adjusted EBITDA is useful to our investors because it is frequently used by securities analysts, investors and other interested parties in their evaluation of the operating performance of companies in industries similar to ours. Our management also uses Adjusted EBITDA for planning purposes, including the preparation of our annual operating budget and financial projections.
17
Adjusted EBITDA should not be considered in isolation or as a substitute for a measure of our liquidity or operating performance prepared in accordance with U.S. generally accepted accounting principles, or GAAP, and is not indicative of net income (loss) from operations as determined under GAAP. Adjusted EBITDA and other non-GAAP financial measures have limitations that should be considered before using these measures to evaluate our liquidity or financial performance. Adjusted EBITDA does not include certain expenses that may be necessary to review our operating results and liquidity requirements. Our definition and calculation of Adjusted EBITDA may differ from that or other companies.
The following table presents a reconciliation of net loss to Adjusted EBITDA for the periods presented:
Three Months Ended March 31, | ||||||||
2015 | 2014 | |||||||
Operating loss, as reported | $ | (5,261 | ) | $ | (3,019 | ) | ||
Add back: | ||||||||
Depreciation and amortization | 1,442 | 959 | ||||||
Stock-based compensation | 2,391 | 1,040 | ||||||
Adjusted EBITDA | $ | (1,428 | ) | $ | (1,020 | ) | ||
Liquidity and Capital Resources
Three Months Ended March 31, | ||||||||
2015 | 2014 | |||||||
Net cash used in operating activities | $ | (7,313 | ) | $ | (5,350 | ) | ||
Net cash used in investing activities | (1,633 | ) | (874 | ) | ||||
Net cash provided by (used in) financing activities | 802 | (570 | ) | |||||
Effect of exchange rate on cash | (329 | ) | (44 | ) | ||||
Net change in cash and cash equivalents | $ | (8,473 | ) | $ | (6,838 | ) | ||
Cash Used in Operating Activities
Net cash used in operating activities was $7.3 million in the three months ended March 31, 2015, compared to $5.4 million in the three months ended March 31, 2014, an increase of $2.0 million. The increase in net cash used in operating activities was primarily attributable to a $3.8 million increase in prepaids and other current assets, a $1.2 million net decrease in non-cash charges, which included stock-based compensation and unrealized foreign currency gains and a $1.2 million increase in accounts receivable from increased sales. These increases were partially offset by a $2.5 million increase in accounts payable and accrued expenses, a $1.1 million decrease in the change in inventory and the $0.3 million decrease in net loss.
Cash Used in Investing Activities
Net cash used in investing activities was $1.6 million in the three months ended March 31, 2015 compared to $0.9 million in the three months ended March 31, 2014, an increase of $0.8 million. The increase in net cash used in investing activities was primarily attributable to a $0.8 million increase in cash paid for the purchase of instruments and cases during the three months ended March 31, 2015.
Cash Provided by Financing Activities
Net cash provided by financing activities was $0.8 million in the three months ended March 31, 2015 compared to $0.6 million used in the three months ended March 31, 2014, an increase of $1.4 million. The increase was primarily attributable to the $1.7 million decrease in net payments on short-term financings and long-term debt and increased proceeds from the exercise of stock options of $0.5 million. These increases were partially offset by the $0.8 million decrease in contributions by employees for the Employee Stock Purchase Plan.
18
Indebtedness
We are party to an amended loan agreement with Comerica Bank, or the Comerica loan agreement, under which we may make periodic borrowings under a revolving line of credit. The Comerica loan agreement contains various restrictive covenants, including limitations on our ability to pay dividends, to enter into a merger or acquisition and the amount of capital expenditures we may make in any given fiscal year. As of March 31, 2015, we were in compliance will all covenants under our loan agreement. As of March 31, 2015, we had $18.2 million in borrowings outstanding under the revolving line of credit. Our interest rate on borrowings under the Comerica loan agreement was 3.5% on March 31, 2015.
We are also party to various loan agreements with five different financial institutions in France. As of March 31, 2015, the amounts of the outstanding loans vary from approximately $33,000 to $597,000 and bear interest at rates varying from 2.53% to 4.65%. Maturity dates for these loans vary from 2015 to 2019 and are secured by certain assets of Médical. In addition, Médical can borrow funds from various financial institutions in France on a short-term basis. The funds are typically repaid within 90 days and are collateralized by certain assets of Médical, including accounts receivable. The weighted average interest rate for the short-term balances outstanding as of March 31, 2015 was 3.2%.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Seasonality
Our business is generally not seasonal in nature. However, our sales may be influenced by summer vacation and timing of holiday periods during which we have experienced fluctuations in the number of spine surgeries taking place. In addition, product registrations in certain countries and orders associated therewith may result in seasonality not typical of our ongoing operations.
Critical Accounting Policies and Estimates
During the period covered by this Quarterly Report on Form 10-Q there have been no material updates to our significant accounting policies and critical estimates set forth in “Part II—Item 7—Management Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2014.
Recent Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board, or FASB, issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 requires retrospective adoption and will be effective for the Company on January 1, 2016. Early adoption is permitted. We do not expect the adoption of ASU 2015-03 will have a material impact on our financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for us on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method and have not determined the effect of the standard on our ongoing financial reporting.
Implications of Being an Emerging Growth Company
As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting requirements and is relieved of certain other significant requirements that are otherwise generally applicable to public companies. As an emerging growth company,
• | we may present only two years of audited financial statements and only two years of related Management’s Discussion & Analysis of Financial Condition and Results of Operations; |
• | we are exempt from the requirement to obtain an attestation and report from our auditors on the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002; |
• | we are permitted to provide less extensive disclosure about our executive compensation arrangements; |
19
• | we are not required to give our stockholders non-binding advisory votes on executive compensation or golden parachute arrangements; and |
• | we have elected to use an extended transition period for complying with new or revised accounting standards. |
We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act of 1933, as amended, or the Securities Act, which such fifth anniversary will occur in 2018. However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenues exceed $1.0 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
We are exposed to various market risks, which may result in potential losses arising from adverse changes in market rates, such as interest rates and foreign exchange rates. We do not enter into derivatives or other financial instruments for trading or speculative purposes and do not believe we are exposed to material market risk with respect to our cash and cash equivalents.
Interest Rate Risk
We are exposed to interest rate risk in connection with any future borrowings under our Comerica loan agreements, which bears interest at a floating rate based on Comerica’s prime rate plus an applicable borrowing margin. For variable rate debt, interest rate changes generally do not affect the fair value of the debt instrument, but do impact future earnings and cash flows, assuming other factors are held constant. In the ordinary course of business, we may enter into contractual arrangements to reduce our exposure to interest rate risks.
Foreign Exchange Risk
We operate in countries other than the United States, and, therefore, we are exposed to foreign currency risks. Revenue from sales outside of the United States represented approximately 20% of our total revenue in the three months ended March 31, 2015. We bill most direct sales outside of the United States in local currencies, which are comprised of the Euro and the Brazilian Real. Operating expenses related to these sales are largely denominated in the same respective currency, thereby limiting our transaction risk exposure. We therefore believe that the risk of a significant impact on our operating income from foreign currency fluctuations is not significant. Additionally, we have intercompany foreign transactions between our subsidiaries, which are denominated in currencies other than their functional currency. Fluctuations from the beginning to the end of any given reporting period result in the remeasurement of our intercompany foreign transactions generating transaction gains or losses in the respective period and are reported in total other income (expense), net in our consolidated financial statements. The monetary assets and liabilities of our foreign subsidiaries denominated in other currencies are translated into U.S. dollars at each balance sheet date resulting in a foreign currency translation adjustment reflected in accumulated other comprehensive loss. We recorded foreign currency translation losses of $3.8 million in the three months ended March 31, 2015. We do not currently hedge our exposure to foreign currency exchange rate fluctuations; however, we may choose to hedge our exposure in the future.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act refers to controls and procedures 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’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to a company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2015, the end of the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of such date.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three month period covered by this Quarterly Report on Form 10-Q, which were identified in connection with management’s evaluation required by Rules 13a-15(d) and 15d-15(d) under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are not aware of any pending or threatened legal proceeding against us that could have a material adverse effect on our business, operating results or financial condition. The medical device industry is characterized by frequent claims and litigation, including claims regarding patent and other intellectual property rights as well as improper hiring practices. As a result, we may be involved in various additional legal proceedings from time to time.
Item 1A. Risk Factors
There have been no material changes from the risk factors set forth in Part I, Item IA, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed with the SEC on February 20, 2015.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(b) Use of Proceeds
On October 15, 2013, we completed our initial public offering of 5,750,000 shares of common stock, including 750,000 shares sold to underwriters for the exercise of their over-allotment option to purchase additional shares, at a price of $15.00 per share, before underwriting discounts and commissions. The initial public offering generated net proceeds to us of approximately $77.5 million, after deducting underwriting discounts of $6.0 million and expenses of approximately $2.7 million. The offer and sale of all of the shares in the initial public offering were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-190829), which was declared effective by the SEC on October 8, 2013. The offering commenced as of October 8, 2013 and did not terminate before all of the securities registered under the registration statements were sold. Piper Jaffray & Co., Bryan, Garnier & Co., William Blair & Company, Cowen and Company, LLC, JMP Securities LLC, and Stephens Inc. acted as the underwriters.
With the proceeds of our initial public offering, we (i) spent approximately $7.6 million to launch Mobi-C in the U.S. market, (ii) spent approximately $15.7 million to expand our U.S. and international sales and marketing efforts, (iii) spent approximately $6.7 million on research and development activities, (iv) paid approximately $10.0 million under our loan facility with Escalate Capital Partners, (v) paid approximately $17.1 million to satisfy obligations to the holders of our Series C preferred stock under the Series C Voting Agreement in which such holders agreed to vote all of their shares of preferred stock in favor of the conversion of preferred stock to common stock in connection with our initial public offering, and (vi) repaid approximately $2.8 million for the portion of our convertible notes that were not converted into shares of our common stock upon the consummation of our initial public offering. Certain of our directors, or affiliates thereof, were holders of Series C preferred stock or holders of convertible notes that were not converted into shares of our common stock upon the consummation of our initial public offering and received a portion of the proceeds generated by the initial public offering. The remainder of the proceeds from our initial public offering, approximately $17.6 million, were used for working capital and general corporate purposes.
There were no material changes in the planned use of proceeds from our initial public offering from that described in the final prospectus filed with the SEC pursuant to Rule 424(b) on October 9, 2013.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
(a) Exhibits
See the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q for a list of exhibits filed or furnished with this report, which Exhibit Index is incorporated herein by reference.
21
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.
LDR HOLDING CORPORATION | ||||
Dated: | May 6, 2015 | By: | /s/ Christophe Lavigne | |
Christophe Lavigne | ||||
President and Chief Executive Officer | ||||
(Principal Executive Officer) | ||||
Dated: | May 6, 2015 | By: | /s/ Robert McNamara | |
Robert McNamara | ||||
Executive Vice President and Chief Financial Officer | ||||
(Principal Financial Officer) | ||||
22
INDEX TO EXHIBITS
Exhibit Nos. | Description | |
10.1* | Commercial Lease Agreement, dated March 6, 2015, by and between LDR Médical, S.A.S. and CIRMAD Est. | |
31.1* | Certification of Chief Executive Officer pursuant to Exchange Act Rule, 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2* | Certification of Chief Financial Officer pursuant to Exchange Act Rule, 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1* | Certifications of Chief Executive Officer and Chief Financial Officer 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 Calculation Linkbase Document. | |
101.DEF* | XBRL Taxonomy Definition Linkbase Document. | |
101.LAB* | XBRL Taxonomy Label Linkbase Document. | |
101.PRE* | XBRL Taxonomy Presentation Linkbase Document. | |
__________
* Filed herewith.
23