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EX-31.2 - EX-31.2 - LDR HOLDING CORPex312.htm
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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 September 30, 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 29,045,256 as of October 30, 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)
 
 
September 30, 2015
 
December 31, 2014
 
 
Unaudited
 

ASSETS
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
123,511

 
$
73,883

Accounts receivable, net of allowance of $1,829 and $1,351 at September 30, 2015 and December 31, 2014, respectively
 
26,367

 
26,484

Inventory, net
 
27,788

 
24,996

Other current assets
 
6,525

 
4,864

Prepaid expenses
 
1,481

 
1,419

Deferred tax assets, current
 
278

 
296

Total current assets
 
185,950

 
131,942

Property and equipment, net of accumulated depreciation and amortization of $17,091 and $13,882 at September 30, 2015 and December 31, 2014, respectively
 
20,798

 
19,025

Goodwill
 
6,621

 
6,621

Intangible assets, net of accumulated amortization of $3,247 and $3,004 at September 30, 2015 and December 31, 2014, respectively
 
3,683

 
3,858

Deferred tax assets
 
5,470

 
192

Other assets
 
544

 
171

Total assets
 
$
223,066

 
$
161,809

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
 
Accounts payable
 
$
8,912

 
$
8,302

Accrued expenses
 
19,514

 
19,366

Short-term financing
 
479

 
4,343

Current portion of long-term debt
 
689

 
1,009

Total current liabilities
 
29,594

 
33,020

Line of credit
 

 
18,166

Long-term debt, net of discount and current portion
 
832

 
1,422

Deferred tax liabilities
 
685

 
740

Other long-term liabilities
 
780

 
760

Total liabilities
 
31,891

 
54,108

Commitments and contingencies
 


 


Stockholders’ equity:
 
 
 
 
Common stock; $0.001 par value; 107,000,000 shares authorized at September 30, 2015 and December 31, 2014; 29,024,852 shares issued and 29,024,503 shares outstanding at September 30, 2015; 26,457,516 shares issued and 26,457,167 shares outstanding at December 31, 2014
 
29

 
27

Treasury stock at cost
 
(8
)
 
(8
)
Additional paid-in capital
 
302,971

 
205,920

Accumulated other comprehensive loss
 
(5,982
)
 
(3,500
)
Accumulated deficit
 
(105,835
)
 
(94,738
)
Total stockholders’ equity
 
191,175

 
107,701

Total liabilities and stockholders’ equity
 
$
223,066

 
$
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 September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Revenue
 
$
39,294

 
$
35,901

 
119,918

 
101,721

Cost of goods sold
 
6,086

 
6,462

 
19,354

 
17,575

Gross profit
 
33,208

 
29,439

 
100,564

 
84,146

Operating expenses:
 
 
 
 
 
 
 
 
Research and development
 
2,704

 
2,831

 
8,523

 
9,309

Sales and marketing
 
25,895

 
21,610

 
79,691

 
61,238

General and administrative
 
9,873

 
7,238

 
27,953

 
20,653

Total operating expenses
 
38,472

 
31,679

 
116,167

 
91,200

Operating loss
 
(5,264
)
 
(2,240
)
 
(15,603
)
 
(7,054
)
Other operating income (expense):
 
 
 
 
 
 
 
 
Other income (expense)
 
(1,100
)
 
1,366

 
855

 
1,403

Interest income
 
9

 
2

 
12

 
21

Interest expense
 
(123
)
 
(211
)
 
(492
)
 
(719
)
Total other income (expense), net
 
(1,214
)
 
1,157

 
375

 
705

Loss before income taxes
 
(6,478
)
 
(1,083
)
 
(15,228
)
 
(6,349
)
Income tax benefit (expense)
 
4,390

 
(936
)
 
4,131

 
(1,497
)
Net loss
 
(2,088
)
 
(2,019
)
 
(11,097
)
 
(7,846
)
Other comprehensive loss:
 
 
 
 
 
 
 
 
Foreign currency translation
 
478

 
(2,160
)
 
(2,482
)
 
(2,404
)
Comprehensive loss
 
$
(1,610
)
 
$
(4,179
)
 
$
(13,579
)
 
$
(10,250
)
Net loss per common share:
 
 
 
 
 
 
 
 
Basic and diluted
 
$
(0.07
)
 
$
(0.08
)
 
$
(0.41
)
 
$
(0.31
)
Weighted average number of shares outstanding:
 
 
 
 
 
 
 
 
Basic and diluted
 
28,064,850

 
26,011,393

 
27,244,496

 
25,005,434

See accompanying notes to unaudited condensed consolidated financial statements.


3


LDR HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
(Unaudited)
 
 
Common Stock
 
Treasury Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Accumulated Deficit
 
Total Stockholders' Equity
 
 
Number of Shares
 
Par Value
 
Number of Shares
 
Amount
 
 
 
 
Balance at December 31, 2014
 
26,457,516

 
$
27

 
349

 
$
(8
)
 
$
205,920

 
$
(3,500
)
 
$
(94,738
)
 
$
107,701

Issuance of common stock in a public offering
 
2,300,000

 
2

 

 

 
91,998

 

 

 
92,000

Underwriting discount and common stock issuance costs
 

 

 

 

 
(5,131
)
 

 

 
(5,131
)
Exercise of common stock options
 
218,468

 

 

 

 
2,374

 

 

 
2,374

Issuance of common stock under employee stock purchase plan
 
28,731

 

 

 

 
775

 

 

 
775

Issuance of restricted stock units, net of shares withheld for taxes
 
20,137

 

 

 

 
(238
)
 

 

 
(238
)
Stock-based compensation
 

 

 

 

 
7,273

 

 

 
7,273

Currency translation adjustment
 

 

 

 

 

 
(2,482
)
 

 
(2,482
)
Net loss
 

 

 

 

 

 

 
(11,097
)
 
(11,097
)
Balance at September 30, 2015
 
29,024,852

 
$
29

 
349

 
$
(8
)
 
$
302,971

 
$
(5,982
)
 
$
(105,835
)
 
$
191,175

See accompanying notes to unaudited condensed consolidated financial statements.


4


LDR HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
 
Nine Months Ended September 30,
 
 
2015
 
2014
Operating activities:
 
 
 
 
 Net loss
 
$
(11,097
)
 
(7,846
)
 Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
 Bad debt expense
 
1,124

 
470

 Provision for excess and obsolete inventories
 
1,203

 
957

 Depreciation and amortization
 
4,635

 
3,349

 Stock-based compensation
 
7,273

 
3,640

 Amortization of debt issuance costs
 
12

 
14

 Deferred income tax expense (benefit)
 
(5,277
)
 
174

 Loss on disposal of assets
 
125

 
199

 Unrealized foreign currency gain
 
(301
)
 
(1,207
)
 Changes in operating assets and liabilities:
 
 
 
 
 Cash restricted for line of credit agreement
 

 
2,000

 Accounts receivable
 
(1,744
)
 
(2,258
)
 Prepaid expenses and other current assets
 
(1,901
)
 
(1,792
)
 Inventory
 
(5,316
)
 
(7,814
)
 Other assets
 
(370
)
 
(24
)
 Accounts payable
 
624

 
410

 Accrued expenses
 
(574
)
 
4,549

 Other long-term liabilities
 
200

 

 Net cash used in operating activities
 
(11,384
)
 
(5,179
)
 Investing activities:
 
 
 
 
 Proceeds from sale of property and equipment
 
60

 
15

 Purchase of intangible assets
 
(629
)
 
(565
)
 Purchase of property and equipment
 
(6,226
)
 
(4,892
)
 Net cash used in investing activities
 
(6,795
)
 
(5,442
)
 Financing activities:
 
 
 
 
 Proceeds from issuance of common stock in public offering
 
92,000

 
36,628

 Stock issuance costs and underwriting discount
 
(5,131
)
 
(2,640
)
 Exercise of stock options
 
2,374

 
968

 Proceeds from Employee Stock Purchase Plan
 
697

 
281

 Proceeds from issuance of stock under Employee Stock Purchase Plan
 
775

 
1,761

 Purchase of treasury stock
 

 
(8
)
 Payments on capital leases
 
(12
)
 
(33
)
 Payments on line of credit
 
(18,166
)
 

 Net proceeds (payments) on short-term financings
 
(3,678
)
 
1,589

 Proceeds from long-term debt
 
96

 

 Payments on long-term debt
 
(801
)
 
(1,405
)
 Net cash provided by financing activities
 
68,154

 
37,141


5


LDR HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(in thousands)
(Unaudited)
 
 
Nine Months Ended September 30,
 
 
2015
 
2014
 Effect of exchange rate on cash
 
(347
)
 
(162
)
 Net change in cash and cash equivalents
 
49,628

 
26,358

 Cash and cash equivalents, beginning of period
 
73,883

 
56,678

 Cash and cash equivalents, end of period
 
$
123,511

 
$
83,036

 Supplemental disclosure of interest and income taxes paid:
 
 
 
 
 Cash paid for interest
 
$
559

 
$
751

 Cash paid for taxes
 
2,261

 
740

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
 
(541
)
 
874

See accompanying notes to unaudited condensed consolidated financial statements.



6


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, Shanghai, Guangzhou 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 United States and Western Europe as well as key markets in Asia Pacific and Latin America.
Public Offering
In August 2015, the Company completed a public offering in which the Company sold 2,300,000 shares of common stock, including 300,000 shares sold to underwriters pursuant to the exercise of their over-allotment option to purchase additional shares, at a price of $40.00 per share, before underwriting discounts and expenses. The follow-on public offering generated net proceeds of approximately $86.9 million, after deducting underwriting discounts and expenses of approximately $5.1 million.
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;
valuation of deferred taxes 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.
(c) Recent Accounting Pronouncements
In July 2015, the Financial Accounting Standards Board, or FASB, issued ASU No. 2015-11, Simplifying the Measurement of Inventory (ASU 2015-11), which simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 will be effective for the Company on January 1, 2017. The Company is evaluating the effect that ASU 2015-11 will have on its consolidated financial statements.
In April 2015, the 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

7


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 GAAP when it becomes effective. The new standard will be effective for the Company on January 1, 2018. 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 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 September 30, 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 September 30, 2015 and December 31, 2014 are as follows (in thousands):
 
 
September 30, 2015
 
December 31, 2014
Finished goods
 
$
24,123

 
$
21,337

Work in process
 
3,403

 
3,356

Raw materials
 
262

 
303

Total
 
$
27,788

 
$
24,996

As of September 30, 2015 and December 31, 2014, inventory held by hospitals and sales agents on behalf of the Company was $9.3 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 $5.2 million and $4.3 million as of September 30, 2015 and December 31, 2014, respectively.
(f) Revenue Recognition
Revenue is recognized when evidence of an arrangement exists, fees are fixed or determinable, collection of the fees is reasonably assured, and delivery or customer acceptance of the product has occurred and no other significant obligations remain. Further, for direct markets (United States, France, Germany, Belgium and Brazil), the Company recognizes revenue on its products when the spinal implant is used in surgery and a valid purchase order has been received. The Company generally recognizes revenue from sales to distributors at the time the product is shipped to the distributor. Distributors, who sell the products to their customers, take title to the products and assume all risks of ownership at the time of shipment.

8


Amounts billed to customers related to shipping and handling are included in revenues. Shipping and handling costs are included in cost of goods sold when related to revenue producing activities.
(g) Accounts Receivable
The Company generally extends credit to customers without requiring collateral; however in certain situations, customers may be required to provide prepayment or a letter of credit. Accounts receivable are carried at cost less an allowance for doubtful accounts. On a regular basis, the Company evaluates accounts receivable and estimates an allowance for doubtful accounts, as needed, based on various factors, such as customers’ current credit conditions and history of payment, length of time past due, and the general economy as a whole. Receivables are written off against the allowance when they are deemed uncollectible.
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 September 30, 2015 and December 31, 2014, or revenues for the three and nine months ended September 30, 2015 and 2014.
4. Accrued Expenses
Accrued expenses consist of the following (in thousands):
 
 
 
September 30, 2015
 
December 31, 2014
Compensation and other employee related costs
 
$
10,767

 
$
10,960

Contributions withheld for Employee Stock Purchase Plan
 
697

 
94

Royalties
 
2,429

 
1,575

Clinical, regulatory and professional fees
 
860

 
770

Government grants
 
579

 
858

Rent
 
1,631

 
1,841

Taxes
 
1,026

 
2,479

Other
 
1,525

 
789

 
 
$
19,514

 
$
19,366


9


5. Debt
Debt consists of the following (in thousands):
 
 
September 30, 2015
 
December 31, 2014
Line of credit
 
$

 
$
18,166

Short-term financing
 
479

 
4,343

Various notes payable
 
1,521

 
2,431

Total debt
 
2,000

 
24,940

Less current portion of long-term debt and short-term financing
 
(1,168
)
 
(5,352
)
Long-term debt and line of credit, net of discount and current portion
 
$
832

 
$
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.
In August 2015, in connection with the Company’s public offering, the Line of Credit was repaid in full, resulting in a zero outstanding balance as of September 30, 2015. As of September 30, 2015, the Company had $25.0 million available under the Line of Credit.
(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 September 30, 2015 and December 31, 2014 was 2.6% and 2.3%, respectively.
(c) Various Notes Payable
Médical has loan agreements with four different entities as of September 30, 2015 and five different entities at December 31, 2014. The amounts of the outstanding loans vary from approximately $8,000 to $506,000 with interest rates varying between 2.53% and 3.95% at September 30, 2015 and $55,000 to $729,000 with interest rates varying between 2.53% and 4.65% at December 31, 2014. Maturity dates for these loans vary from 2015 to 2019, and the loans are secured by certain assets of Médical.
In June 2015, Brazil entered into a loan agreement with a bank with a maturity date in December 2015. As of September 30, 2015, the outstanding amount of the loan was approximately $38,000.

10


6. Stock-Based Compensation
(a) Stock Option Activity
A summary of the stock option activity for the Company for the nine months ended September 30, 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
 
455,200

 
37.24

 
 
 
 
Options exercised
 
(218,468
)
 
10.87

 
 
 
 
Options forfeited
 
(131,705
)
 
23.09

 
 
 
 
Outstanding - September 30, 2015
 
1,986,396

 
$
24.04

 
7.99
 
$
22,741

Options vested and expected to vest at September 30, 2015
 
1,917,329

 
$
24.04

 
7.99
 
$
22,276

Options exercisable at September 30, 2015
 
859,321

 
$
15.27

 
6.78
 
$
16,818

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 September 30, 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 September 30, 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):
 
 
Nine Months Ended September 30,
 
 
2015
 
2014
Weighted-average grant date fair value per share of options granted during the period
 
$
15.95

 
$
14.55

Aggregate intrinsic value of options exercised during the period
 
$
6,268

 
$
6,582

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 $13.1 million at September 30, 2015 and is expected to be recognized over a weighted-average period of two years.
(b) Restricted Stock Unit Activity
A summary of the restricted stock unit activity for the Company for the nine months ended September 30, 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
 
78,000

 
34.53

 
 
 
 
Restricted stock units vested
 
(27,004
)
 
26.80

 
 
 
 
Restricted stock units forfeited
 

 

 
 
 
 
Unvested - September 30, 2015
 
150,496

 
$
30.98

 
2.42
 
$
4,898


11


The unrecognized compensation expense related to unvested restricted stock units was $3.6 million at September 30, 2015 and is expected to be recognized over a weighted-average period of approximately 2 years.
(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 120,600 shares depending on the attainment of certain revenue targets. A summary of the performance-based restricted stock unit activity for the Company for the nine months ended September 30, 2015 is as follows and is based on attainment of revenue at the target thresholds which the Company believes are probable of occurance:
 
 
Units
 
Weighted - Average Grant Date Fair Value Per Share
 
Weighted - Average Remaining Contractual Term
 
Aggregate Intrinsic Value
 
 
 
 
 
 
(Years)
 
($000's)
Unvested - December 31, 2014
 

 
$

 

 
$

Performance-based restricted stock units granted
 
80,400

 
32.78

 
 
 
 
Performance-based restricted stock units vested
 

 

 
 
 
 
Performance-based restricted stock units forfeited
 

 

 
 
 
 
Unvested - September 30, 2015
 
80,400

 
$
32.78

 
1.26

 
$
2,617

The unrecognized compensation expense related to unvested restricted stock units was $1.4 million at September 30, 2015 and is expected to be recognized over a weighted-average period of approximately 1 year.
(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 and nine months ended September 30, 2015 and 2014 was as follows (in thousands):
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Research and development
 
$
68

 
$
145

 
$
231

 
$
410

Sales and marketing
 
465

 
702

 
2,779

 
2,028

General and administrative
 
1,542

 
410

 
4,263

 
1,202

Total
 
$
2,075

 
$
1,257

 
$
7,273

 
$
3,640

7. Income Taxes
The following table summarizes the total income tax expense, and the related effective tax rate, for the three and nine months ended September 30, 2015 and 2014 (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Income tax expense (benefit)
 
$
(4,390
)
 
$
936

 
$
(4,131
)
 
$
1,497

Effective tax rate
 
67.8
%
 
(86.4
)%
 
27.1
%
 
(23.6
)%
The provision for income taxes for the three and nine months ended September 30, 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 changes on domestic deferred tax assets, foreign tax rate differentials and deferred taxes on intercompany sales.
The Company assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of existing deferred tax assets. The amount of the deferred tax asset considered realizable could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence is determined to exist. Due to the objective negative evidence of lack of earning history in the United States, the Company has established a full valuation allowance relating to substantially all of its U.S. net deferred tax assets.  In assessing

12


the deferred tax assets in France, there is no significant objective negative evidence that limits Company’s ability to consider projections of future growth in determining that it is more likely than not that the tax benefit associated with the net operating loss of our French subsidiary will be realized.
As of September 30, 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 United States, France and Brazil. The Company’s returns are currently under examination by the French Taxing Authority for the tax years 2012, 2013 and 2014. 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 2010 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 unrelated third party. The deferred income tax charge is included in other current assets in the consolidated balance sheets. As of September 30, 2015 and December 31, 2014, the deferred income tax charge was $1.7 million and $2.7 million, respectively.
Earnings occurring outside the United States are deemed to be indefinitely reinvested outside of the United States 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. As of September 30, 2015 and December 31, 2014, the amount of undistributed earnings were approximately $5.4 million and $22.9 million, respectively. If all of these indefinitely reinvested earnings were distributed, the Company has sufficient net operating loss carryforwards in the United States to offset any tax expense resulting from the distribution.
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 stock options and warrants are antidilutive.
Net loss per share for the three and nine months ended September 30, 2015 and 2014 was as follows (in thousands):
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Numerator
 
 
 
 
 
 
 
 
Net loss attributable to common stockholders
 
$
(2,088
)
 
$
(2,019
)
 
$
(11,097
)
 
$
(7,846
)
Denominator
 
 
 
 
 
 
 
 
Weighted average shares outstanding - basic
 
28,065

 
26,011

 
27,244

 
25,005

Dilutive effect of options and warrants
 

 

 

 

Weighted average shares outstanding - diluted
 
28,065

 
26,011

 
27,244

 
25,005

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 September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Stock options
 
1,986

 
1,983

 
1,986

 
1,983


13


9. Commitments and Contingencies
On March 6, 2015, 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 the second quarter of 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. In addition to the annual base rent, Médical is required to pay a supplemental rent of €74,000 per year for nine years.
On October 8, 2015, Spine entered into a Second Amendment to Lease Agreement (the Amendment) with FPG Aspen Lake Owner LP. The Amendment amends certain terms of Spine’s existing lease dated August 10, 2011 and as amended on November 5, 2012, pursuant to which Spine leases office and warehouse space in Austin, Texas as its global headquarters for the Company. Subject to certain conditions described in the Amendment, the Amendment: (1) expands the net rentable square feet under the Lease by approximately 21,800 square feet, and (2) extends the term of the Lease by sixty months to approximately November 30, 2024. It is anticipated that Spine will become responsible for paying rent with respect to such additional square footage under the Amendment in the first quarter of 2016. Under the operating lease, the Company is required to maintain a $1.0 million letter of credit with a restricted cash balance at the Company’s bank.
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.
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 Western Europe as well as key markets in Asia Pacific and Latin America.
The following table represents total sales by geographic area, based on the location of the customer (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
United States
 
$
32,285

 
$
28,084

 
$
96,898

 
$
77,587

France
 
2,363

 
2,666

 
8,688

 
9,298

Other Countries (1)
 
4,646

 
5,151

 
14,332

 
14,836

Total
 
$
39,294

 
$
35,901

 
$
119,918

 
$
101,721

__________
(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 September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Exclusive cervical products
 
$
27,548

 
$
22,759

 
$
82,664

 
$
61,529

Exclusive lumbar products
 
9,201

 
9,341

 
28,218

 
27,638

Exclusive technology products
 
36,749

 
32,100

 
110,882

 
89,167

Traditional fusion products
 
2,545

 
3,801

 
9,036

 
12,554

Total
 
$
39,294

 
$
35,901

 
$
119,918

 
$
101,721


14


The following table represents long-lived assets by geographic area (in thousands):
 
 
September 30, 2015
 
December 31, 2014
United States
 
$
14,343

 
$
13,873

France
 
4,661

 
3,472

Other Countries (1)
 
1,794

 
1,680

Total
 
$
20,798

 
$
19,025

__________
(1) No additional locations are individually significant.

15


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 and Mobi products will continue to increase due to continued market penetration in key global markets.

16


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 vary as a percentage of revenue as a result of changes in third-party product costs, freight charges, inventory reserve adjustments 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. The increase in expenses may be offset by the fluctuations in foreign exchange rates as a majority of our research and development expenses are incurred in euros.
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.
Income Tax Expense
Our effective tax rate is based on income, statutory tax rates, and tax planning opportunities available to us in the various jurisdictions 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

17


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. On a quarterly basis, we assess the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. The amount of the deferred tax asset considered realizable could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence is determined to exist. Due to the objective negative evidence of lack of earning history in the United States, we have established a full valuation allowance relating to substantially all of our net deferred tax assets in the United States as of September 30, 2015 and December 31, 2014. In assessing the deferred tax assets in France, there is no significant objective negative evidence that limits our ability to consider projections of future growth in determining that it is more likely than not that the tax benefit associated with the net operating loss of our French subsidiary will be realized.
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 September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands, except percentages)
 
(in thousands, except percentages)
Revenue
 
$
39,294

 
100
 %
 
$
35,901

 
100
 %
 
$
119,918

 
100
 %
 
$
101,721

 
100
 %
Cost of goods sold
 
6,086

 
15

 
6,462

 
18

 
19,354

 
16

 
17,575

 
17

Gross profit
 
33,208

 
85

 
29,439

 
82

 
100,564

 
84

 
84,146

 
83

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
 
2,704

 
7

 
2,831

 
8

 
8,523

 
7

 
9,309

 
9

Sales and marketing
 
25,895

 
66

 
21,610

 
60

 
79,691

 
66

 
61,238

 
60

General and administrative
 
9,873

 
25

 
7,238

 
20

 
27,953

 
23

 
20,653

 
20

Total operating expenses
 
38,472

 
98

 
31,679

 
88

 
116,167

 
97

 
91,200

 
90

Operating loss
 
(5,264
)
 
(13
)
 
(2,240
)
 
(6
)
 
(15,603
)
 
(13
)
 
(7,054
)
 
(7
)
Total other income (expense), net
 
(1,214
)
 
(3
)
 
1,157

 
3

 
375

 

 
705

 
1

Loss before income taxes
 
(6,478
)
 
(16
)
 
(1,083
)
 
(3
)
 
(15,228
)
 
(13
)
 
(6,349
)
 
(6
)
Income tax benefit (expense)
 
4,390

 
11

 
(936
)
 
(3
)
 
4,131

 
3

 
(1,497
)
 
(1
)
Net loss
 
$
(2,088
)
 
(5
)%
 
$
(2,019
)
 
(6
)%
 
$
(11,097
)
 
(9
)%
 
$
(7,846
)
 
(8
)%

18


Three Months Ended September 30, 2015 Compared to the Three Months Ended September 30, 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 September 30,
 
Change 2015/2014
 
 
2015
 
2014
 
$
 
%
Exclusive cervical products
 
$
27,548

 
$
22,759

 
$
4,789

 
21
 %
Exclusive lumbar products
 
9,201

 
9,341

 
(140
)
 
(1
)%
Exclusive technology products
 
36,749

 
32,100

 
4,649

 
14
 %
Traditional fusion products
 
2,545

 
3,801

 
(1,256
)
 
(33
)%
Total revenue
 
$
39,294

 
$
35,901

 
$
3,393

 
9
 %
 
 
Three Months Ended September 30,
 
Change 2015/2014
 
 
2015
 
2014
 
$
 
%
United States
 
$
32,285

 
$
28,084

 
$
4,201

 
15
 %
International
 
7,009

 
7,817

 
(808
)
 
(10
)
Total revenue
 
$
39,294

 
$
35,901

 
$
3,393

 
9
 %
The increase in total revenue in the three months ended September 30, 2015 compared to the three months ended September 30, 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 21% increase in revenue from our exclusive cervical products, offset by a 1% decrease in revenue from our exclusive lumbar products. Sales of our exclusive cervical and lumbar products represented 75% and 25% of total exclusive technology revenue, respectively, for the three months ended September 30, 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 $6.1 million in the three months ended September 30, 2015 compared to $6.5 million in the three months ended September 30, 2014, a decrease of $376,000 or 6%. The decrease was primarily due to a decrease in royalties and inventory reserves, partially offset by an increase in freight charges associated with the increase in sales volume and mix. Cost of goods sold decreased as a percentage of revenue due to geographic mix, lower product costs due to foreign currency exchange rates, royalties and lower inventory reserves associated with the value our inventory, partially offset by an increase in freight charges.
Research and Development Expenses
Research and development expenses were $2.7 million in the three months ended September 30, 2015 compared to $2.8 million in the three months ended September 30, 2014, a decrease of $127,000 or 4%. The decrease was primarily due to a $77,000 decrease in stock-based compensation expense, a $30,000 decrease associated with salaries and benefits and a $19,000 decrease in fees and expenses associated with product testing and clinical trials. Excluding foreign exchange impacts, our research and development expenses increased. However, as the majority of our research and development expenses are incurred in euros and due to fluctuations in foreign exchange rates, the expenses as reported in U.S. dollars decreased.
Sales and Marketing Expenses
Sales and marketing expenses were $25.9 million in the three months ended September 30, 2015 compared to $21.6 million in the three months ended September 30, 2014, an increase of $4.3 million or 20%. The increase was primarily due to a $3.4 million increase in compensation costs associated with our investments in our sales organizations, including hiring of additional direct sales personnel and commissions as a result of the increase in sales volume, a $687,000 increase in expenses associated with medical training workshops and product promotion and a $363,000 increase in depreciation expense and other expenses

19


associated with our instrument sets and cases. These increases were offset by a $237,000 decrease in stock-based compensation expense.
General and Administrative Expenses
General and administrative expenses were $9.9 million in the three months ended September 30, 2015 compared to $7.2 million in the three months ended September 30, 2014, an increase of $2.6 million or 36%. The increase was primarily due to a $698,000 increase in employee salaries and benefits associated with the increase in general and administrative personnel, a $1.1 million increase in stock-based compensation expense and a $654,000 increase in bad debt and bank fees.
Total Other Income (Expense), net
Total other income (expense), net of $(1.2) million in the three months ended September 30, 2015 primarily consisted of $1.0 million loss due to the effect of changes in foreign exchange rates on payables and receivables held in currencies other than their functional (local) currency, and $123,000 in interest expense associated with our long-term debt.
Income Tax Benefit (Expense)
Income tax benefit was $4.4 million in the three months ended September 30, 2015 compared to expense of $936,000 in the three months ended September 30, 2014. Our effective tax rate calculated as a percentage of income before income taxes was 67.8% for the three months ended September 30, 2015 and (86.4)% for the three months ended September 30, 2014. The change in the effective tax rate was a result of the recognition of deferred foreign tax benefit related to intercompany sales and resulting net operating loss carryforwards generated in France while we remain in a full valuation allowance position for net operating losses generated in the United States. On a quarterly basis, we assess the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets.  The amount of the deferred tax asset considered realizable could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence is determined to exist.
Nine Months Ended September 30, 2015 Compared to the Nine Months Ended September 30, 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: 
 
 
Nine Months Ended September 30,
 
Change 2015/2014
 
 
2015
 
2014
 
$
 
%
Exclusive cervical products
 
$
82,664

 
$
61,529

 
$
21,135

 
34
 %
Exclusive lumbar products
 
28,218

 
27,638

 
580

 
2

Exclusive technology products
 
110,882

 
89,167

 
21,715

 
24
 %
Traditional fusion products
 
9,036

 
12,554

 
(3,518
)
 
(28
)
Total revenue
 
$
119,918

 
$
101,721

 
$
18,197

 
18
 %
 
 
Nine Months Ended September 30,
 
Change 2015/2014
 
 
2015
 
2014
 
$
 
%
United States
 
$
96,898

 
$
77,587

 
$
19,311

 
25
 %
International
 
23,020

 
24,134

 
(1,114
)
 
(5
)
Total revenue
 
$
119,918

 
$
101,721

 
$
18,197

 
18
 %
The increase in total revenue in the nine months ended September 30, 2015 compared to the nine months ended September 30, 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 34% increase in revenue from our exclusive cervical products and by a 2% increase in revenue from our exclusive lumbar products. Sales of our exclusive cervical and lumbar products represented 75% and 25% of total exclusive technology revenue, respectively, for the nine months ended September 30, 2015.

20


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 $19.4 million in the nine months ended September 30, 2015 compared to $17.6 million in the nine months ended September 30, 2014, an increase of $1.8 million or 10%. 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 geographic mix, lower product costs due to foreign currency exchange rates and lower inventory reserves associated with the value our inventory.
Research and Development Expenses
Research and development expenses were $8.5 million in the nine months ended September 30, 2015 compared to $9.3 million in the nine months ended September 30, 2014, a decrease of $786,000 or 8%. The decrease was primarily due to a $417,000 decrease in fees and expenses associated with product testing and clinical trials, a decrease of $170,000 associated with salaries and benefits and a $179,000 decrease in stock-based compensation expense. Excluding foreign exchange impacts, our research and development expenses increased. However, as the majority of our research and development expenses are incurred in euros and due to fluctuations in foreign exchange rates, the expenses as reported in U.S. dollars decreased.
Sales and Marketing Expenses
Sales and marketing expenses were $79.7 million in the nine months ended September 30, 2015 compared to $61.2 million in the nine months ended September 30, 2014, an increase of $18.5 million or 30%. The increase was primarily due to a $12.5 million increase in compensation costs associated with our investments in our sales organizations, including hiring of additional direct sales personnel and commissions as a result of the increase in sales volume, a $751,000 increase in stock-based compensation expense, a $3.9 million increase in expenses associated with medical training workshops and product promotion and a $1.2 million increase in depreciation expense and other expenses associated with our instrument sets and cases.
General and Administrative Expenses
General and administrative expenses were $28.0 million in the nine months ended September 30, 2015 compared to $20.7 million in the nine months ended September 30, 2014, an increase of $7.3 million or 35%. The increase was primarily due to an $2.6 million increase in employee salaries and benefits associated with the increase in general and administrative personnel, a $3.1 million increase in stock-based compensation expense, a $444,000 increase in professional fees associated with general corporate initiatives, a $912,000 increase in bad debt and bank fees, an increase of $152,000 in product liability insurance and a $100,000 increase in software license fees.
Total Other Income (Expense), net
Total other income (expense), net of $375,000 in the nine months ended September 30, 2015 primarily consisted of $830,000 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 $492,000 in interest expense associated with our long-term debt.
Income Tax Benefit (Expense)
Income tax benefit was $4.1 million in the nine months ended September 30, 2015 compared to expense of $1.5 million in the nine months ended September 30, 2014. Our effective tax rate calculated as a percentage of income before income taxes was 27.1% for the nine months ended September 30, 2015 and (23.6)% for the nine months ended September 30, 2014. The change in the effective tax rate was a result of the recognition of deferred foreign tax expense related to intercompany sales and net operating loss carryforwards generated in France while we remain in a full valuation allowance position for net operating losses generated in the United States. On a quarterly basis, we assess the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets.  The amount of the deferred tax asset considered realizable could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence is determined to exist.
Non-GAAP Financial Measures
We define EBITDA as net income (loss) plus interest (income) expense, net, income tax expense (benefit) and depreciation and amortization. We define Adjusted EBITDA as EBITDA plus stock-based compensation expense and other interest (expense), net. 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.

21


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.
Management calculates revenue on a constant currency basis by using the average foreign exchange rates for each month during the previous year and applying these rates to foreign-denominated revenue in the corresponding months in the current quarter. The difference between revenue calculated based on these foreign exchange rates and revenue calculated in accordance with GAAP is referred to as the foreign exchange impact on revenue. Management uses revenue on a constant currency basis to improve comparability between periods as though fluctuations from changes in foreign currency did not exist.
Revenue on a constant currency basis should not be considered in isolation or as a substitute for revenue prepared in accordance with GAAP as it is not indicative of revenue as determined under GAAP. Management’s calculation of revenue on a constant currency basis may differ from that of other companies.
Non-GAAP Adjusted EBITDA
The following table presents a reconciliation of net loss to Adjusted EBITDA for the periods presented:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Net loss
 
$
(2,088
)
 
$
(2,019
)
 
$
(11,097
)
 
$
(7,846
)
Interest (income) expense, net
 
114

 
209

 
480

 
698

Income tax (benefit) expense
 
(4,390
)
 
936

 
(4,131
)
 
1,497

Depreciation and amortization
 
1,628

 
1,226

 
4,635

 
3,349

EBITDA
 
(4,736
)
 
352

 
(10,113
)
 
(2,302
)
Stock-based compensation
 
2,075

 
1,257

 
7,273

 
3,640

Other (income) expense, net
 
1,100

 
(1,366
)
 
(855
)
 
(1,403
)
Adjusted EBITDA
 
$
(1,561
)
 
$
243

 
$
(3,695
)
 
$
(65
)
Non-GAAP Revenue on a Constant Currency Basis
The following tables present reconciliations of GAAP revenue to revenue on a constant currency basis for the periods presented:
 
 
Three Months Ended September 30,
 
 
 
 
GAAP
 
Foreign Exchange Impact on International Revenue
 
Non-GAAP Revenue on a Constant Currency Basis (1)
 
GAAP
 
2015 on a Constant Currency Basis /
2014
 
 
2015
 
2015
 
2015
 
2014
 
$
 
%
Revenue in the United States
 
$
32,285

 
$

 
$
32,285

 
$
28,084

 
$
4,201

 
15.0
 %
International revenue
 
7,009

 
1,699

 
8,708

 
7,817

 
891

 
11.4

Total revenue
 
$
39,294

 
$
1,699

 
$
40,993

 
$
35,901

 
$
5,092

 
14.2

 
 
 
 
 
 
 
 
 
 
 
 

Exclusive cervical products
 
$
27,548

 
$
945

 
$
28,493

 
$
22,759

 
$
5,734

 
25.2
 %
Exclusive lumbar products
 
9,201

 
189

 
9,390

 
9,341

 
49

 
0.5

Exclusive technology products
 
36,749

 
1,134

 
37,883

 
32,100

 
5,783

 
18.0

Traditional fusion products
 
2,545

 
565

 
3,110

 
3,801

 
(691
)
 
(18.2
)
Total revenue
 
$
39,294

 
$
1,699

 
$
40,993

 
$
35,901

 
$
5,092

 
14.2



22


 
 
Nine Months Ended September 30,
 
 
 
 
GAAP
 
Foreign Exchange Impact on International Revenue
 
Non-GAAP Revenue on a Constant Currency Basis (1)
 
GAAP
 
2015 on a Constant Currency Basis /
2014
 
 
2015
 
2015
 
2015
 
2014
 
$
 
%
Revenue in the United States
 
$
96,898

 
$

 
$
96,898

 
$
77,587

 
$
19,311

 
24.9
 %
International revenue
 
23,020

 
5,505

 
28,525

 
24,134

 
4,391

 
18.2

Total revenue
 
$
119,918

 
$
5,505

 
$
125,423

 
$
101,721

 
$
23,702

 
23.3

 
 
 
 
 
 
 
 
 
 
 
 
 
Exclusive cervical products
 
$
82,664

 
$
2,791

 
$
85,455

 
$
61,529

 
$
23,926

 
38.9
 %
Exclusive lumbar products
 
28,218

 
724

 
28,942

 
27,638

 
1,304

 
4.7

Exclusive technology products
 
110,882

 
3,515

 
114,397

 
89,167

 
25,230

 
28.3

Traditional fusion products
 
9,036

 
1,990

 
11,026

 
12,554

 
(1,528
)
 
(12.2
)
Total revenue
 
$
119,918

 
$
5,505

 
$
125,423

 
$
101,721

 
$
23,702

 
23.3

__________
(1)
Revenue on a constant currency basis is calculated using the average foreign exchange rates for each month during the previous year and applying these rates to foreign-denominated revenue in the corresponding months in the current quarter. The difference between revenue calculated based on these foreign exchange rates and revenue calculated in accordance with GAAP is listed as foreign exchange impact in the table above.
Liquidity and Capital Resources
We assess liquidity in terms of our ability to generate cash to fund operating, investing, and financing activities. Our primary sources of liquidity are cash flows generated from our operations, available cash and cash equivalents, and availability under our loan agreements. We believe that our existing cash and cash equivalents will be sufficient to fund our operations and satisfy our current cash requirements for at least the next 12 months. From time to time, we may explore additional financing sources to meet our working capital requirements, make continued investment in research and development and make capital expenditure needed for us to maintain and expand our business. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, or we may even have to scale back our operations. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock.
The following table summarizes our net cash provided by (used in) operating, investing and financing activities for the nine months ended September 30, 2015 and 2014 (in thousands):
 
 
Nine Months Ended September 30,
 
 
2015
 
2014
Net cash used in operating activities
 
$
(11,384
)
 
$
(5,179
)
Net cash used in investing activities
 
(6,795
)
 
(5,442
)
Net cash provided by financing activities
 
68,154

 
37,141

Effect of exchange rate on cash
 
(347
)
 
(162
)
Net change in cash and cash equivalents
 
$
49,628

 
$
26,358


23


Cash Used in Operating Activities
Net cash used in operating activities was $11.4 million in the nine months ended September 30, 2015, compared to $5.2 million in the nine months ended September 30, 2014, an increase of $6.2 million. The increase in net cash used in operating activities was primarily attributable to $4.9 million decrease in the change in accounts payable and accrued expenses, the $3.3 million increase in net loss and the elimination of the requirement to maintain a $2.0 million balance in restricted cash under our Comerica loan agreement. These increases were partially offset by a $1.2 million net decrease in non-cash charges, which included stock-based compensation and unrealized foreign currency gains, a $2.5 million decrease in the change in inventory and a $514,000 decrease in the change in accounts receivable.
Cash Used in Investing Activities
Net cash used in investing activities was $6.8 million in the nine months ended September 30, 2015 compared to $5.4 million in the nine months ended September 30, 2014, an increase of $1.4 million. The increase in net cash used in investing activities was primarily attributable to a $1.3 million increase in cash paid for the purchase of instruments and cases during the nine months ended September 30, 2015.
Cash Provided by Financing Activities
Net cash provided by financing activities was $68.2 million in the nine months ended September 30, 2015 compared to $37.1 million provided in the nine months ended September 30, 2014, an increase of $31.0 million. The increase was primarily attributable to the increase of $55.4 million raised during our public offering in 2015 compared to our public offering in 2014 and the $1.4 million increase in proceeds from the exercise of stock options. These increases were partially offset by the $18.2 repayment on the line of credit in August 2015, the $4.7 million increase in net payments on short-term financings and long-term debt, the $2.5 million increase in stock offering costs and the $570,000 decrease in contributions by employees for the Employee Stock Purchase Plan.
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 September 30, 2015, we were in compliance will all covenants under our loan agreement. In August 2015, in connection with our public offering, the Comerica loan agreement was repaid in full, resulting in a zero outstanding balance as of September 30, 2015. As of September 30, 2015, we had $25.0 million available under the Comerica loan agreement.
We are also party to various loan agreements with four different financial institutions in France. As of September 30, 2015, the amounts of the outstanding loans vary from approximately $8,000 to $506,000 and bear interest at rates varying from 2.53% to 3.95%. 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 September 30, 2015 was 2.6%.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Seasonality
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.

24


Recent Accounting Pronouncements
In July 2015, the Financial Accounting Standards Board, or FASB, issued ASU No. 2015-11, Simplifying the Measurement of Inventory (ASU 2015-11), which simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 will be effective for us on January 1, 2017. We are evaluating the effect that ASU 2015-11 will have on its consolidated financial statements.
In April 2015, the 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 us 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 will be effective for us on January 1, 2018. 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 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, as amended, or the Sarbanes-Oxley Act;
we are permitted to provide less extensive disclosure about our executive compensation arrangements;
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, the aggregate worldwide market value of our common equity securities held by non-affiliates as of June 30, 2015 (the last business day of our most recently completed second fiscal quarter) exceeded $700 million, and we therefore will cease to satisfy the conditions of remaining an emerging growth company as of December 31, 2015 and will no longer be able to take advantage of certain exemptions from public company reporting requirements as listed above.
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.

25


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 19% of our total revenue in the nine months ended September 30, 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 $2.5 million in the nine months ended September 30, 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 September 30, 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.

26


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
We have incurred and will continue to incur significant additional costs as a result of being a public company, and our management is required to devote substantial time to compliance initiatives.
The Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, the Securities and Exchange Commission, or the SEC, and NASDAQ impose various requirements on public companies, including the establishment and maintenance of effective disclosure and financial control and specific corporate governance practices.  These rules and regulations increase our accounting, legal and financial compliance costs and make some activities more time-consuming and costly.  In addition, we expect that our management and other personnel will need to divert attention from operational and other business matters to devote substantial time to these public company requirements.  In particular, we will cease to be an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, on December 31, 2015 and will no longer be able to take advantage of certain exemptions from public company reporting requirements.  Our inability to continue to take advantage of these exemptions may place additional strain on our resources and divert our management’s attention from other business concerns, which could harm our business and operating results.
These rules and regulations could make it more expensive for us to maintain directors’ and officers’ liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage.  As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees, or as executive officers.
New laws and regulations, as well as changes to existing laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act, the Dodd-Frank Act and rules adopted by the SEC and NASDAQ, would likely result in increased costs to us as we respond to their requirements, which may adversely affect our operating results and financial condition.
If we experience material weaknesses in the future or otherwise fail to maintain an effective system of internal controls in the future, we may not be able to accurately report our financial condition or results of operations which may adversely affect investor confidence in us and, as a result, the value of our common stock.
As a public company, we are required, under Section 404 of the Sarbanes-Oxley Act to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting.  The results of this assessment need to be included in our annual report and we are required to disclose any material weaknesses identified by our management in our internal control over financial reporting.  A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of a company’s annual and interim financial statements will not be prevented, or detected and corrected, on a timely basis.
We devoted significant resources to compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404 for the year ended December 31, 2014.  In future years, we may need to devote more resources to Section 404 compliance, and we may not be able to complete our annual evaluations, testing and any required remediations in a timely fashion.  During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control is effective.  Lack of effective controls could severely inhibit our ability to accurately report our financial condition or results of operations.  We cannot assure you that there will not be material weaknesses and/or significant deficiencies in our internal controls in the future.
If we are unable to conclude that our internal control over financial reporting is effective, we could lose investor confidence in the accuracy and completeness of our financial reports, which would likely cause the price of our common stock to decline.
Additionally, on December 31, 2015, we will cease to be an “emerging growth company,” as defined in the JOBS Act.  Once we are no longer an emerging growth company, our independent registered public accounting firm will be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act.  As a result, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff.  If we are unable to confirm that our internal control over financial reporting is effective, or if our auditors are unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline.

27


We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions and relief from various reporting requirements that are applicable to other public companies that are not emerging growth companies.  In particular, while we are an emerging growth company, (i) we will not be required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, (ii) we will be exempt from any rules that may be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotations or a supplement to the auditor’s report on financial statements, (iii) we will be subject to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and (iv) we will not be required to hold nonbinding advisory votes on executive compensation or stockholder approval of any golden parachute payments not previously approved. In addition, while we are an emerging growth company we will not be required to comply with any new financial accounting standard until such standard is generally applicable to private companies.
The exact implications of the JOBS Act are still subject to interpretations and guidance by the SEC and other regulatory agencies, and we cannot assure you that we will be able to take advantage of all of the benefits of the JOBS Act.
As a result, our financial statements may not be comparable to companies that are not “emerging growth companies” or elect not to avail themselves of this provision.
However, we will cease to be an emerging growth company on December 31, 2015, the day on which we will be deemed to be a “large accelerated filer” under the Exchange Act because the aggregate worldwide market value of our common securities held by non-affiliates as of June 30, 2015 exceeded $700 million.  We cannot predict whether investors will find our common stock less attractive to the extent we have relied on the exemptions available to emerging growth companies.  If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
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.

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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:
November 4, 2015
 
By:
/s/ Christophe Lavigne
 
 
 
 
Christophe Lavigne
 
 
 
 
President and Chief Executive Officer
 
 
 
 
(Principal Executive Officer)
 
 
 
 
 
 
 
 
 
 
Dated:
November 4, 2015
 
By:
/s/ Robert McNamara
 
 
 
 
Robert McNamara
 
 
 
 
Executive Vice President and Chief Financial Officer
 
 
 
 
(Principal Financial Officer)


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INDEX TO EXHIBITS
Exhibit Nos.
 
Description
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.


30