Attached files
| file | filename |
|---|---|
| EX-31.1 - EX-31.1 - LDR HOLDING CORP | ex311.htm |
| EX-32.1 - EX-32.1 - LDR HOLDING CORP | ex321.htm |
| EX-31.2 - EX-31.2 - LDR HOLDING CORP | ex312.htm |
| EX-10.2 - EX-10.2 - LDR HOLDING CORP | ex102.htm |
| EX-10.1 - EX-10.1 - LDR HOLDING CORP | ex101.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
_____________________
FORM 10-Q
(Mark One) | ||
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended March 31, 2016
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.
x Large Accelerated Filer | o 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 29,232,859 as of May 6, 2016.
LDR HOLDING CORPORATION AND SUBSIDIARIES
Table of Contents
Page | ||
Certifications | ||
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LDR HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
March 31, 2016 | December 31, 2015 | |||||||
Unaudited | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 103,254 | $ | 115,084 | ||||
Accounts receivable, net of allowance of $2,305 and $2,176 at March 31, 2016 and December 31, 2015, respectively | 27,768 | 29,412 | ||||||
Inventory, net | 31,759 | 29,721 | ||||||
Other current assets | 8,943 | 7,924 | ||||||
Prepaid expenses | 2,166 | 1,886 | ||||||
Total current assets | 173,890 | 184,027 | ||||||
Property and equipment, net of accumulated depreciation and amortization of $18,914 and $17,846 at March 31, 2016 and December 31, 2015, respectively | 24,389 | 20,653 | ||||||
Goodwill | 6,621 | 6,621 | ||||||
Intangible assets, net of accumulated amortization of $4,514 and $4,157 at March 31, 2016 and December 31, 2015, respectively | 4,165 | 4,028 | ||||||
Long-term investments | 2,835 | 2,738 | ||||||
Restricted cash | 1,000 | 1,000 | ||||||
Deferred tax assets | 8,957 | 7,043 | ||||||
Other assets | 539 | 529 | ||||||
Total assets | $ | 222,396 | $ | 226,639 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 11,170 | $ | 11,428 | ||||
Accrued expenses | 18,641 | 19,495 | ||||||
Short-term financing | 5,807 | 4,486 | ||||||
Current portion of long-term debt | 571 | 601 | ||||||
Total current liabilities | 36,189 | 36,010 | ||||||
Long-term debt, net of discount and current portion | 591 | 677 | ||||||
Other long-term liabilities | 610 | 670 | ||||||
Total liabilities | 37,390 | 37,357 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Common stock; $0.001 par value; 107,000,000 shares authorized at March 31, 2016 and December 31, 2015; 29,232,971 shares issued and 29,232,622 shares outstanding at March 31, 2016; 29,148,544 shares issued and 29,148,195 shares outstanding at December 31, 2015 | 29 | 29 | ||||||
Treasury stock at cost | (8 | ) | (8 | ) | ||||
Additional paid-in capital | 309,445 | 306,509 | ||||||
Accumulated other comprehensive loss | (6,229 | ) | (6,657 | ) | ||||
Accumulated deficit | (118,231 | ) | (110,591 | ) | ||||
Total stockholders’ equity | 185,006 | 189,282 | ||||||
Total liabilities and stockholders’ equity | $ | 222,396 | $ | 226,639 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
2
LDR HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands, except share and per share amounts)
(Unaudited)
Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||
Revenue | 42,391 | 39,115 | ||||||
Cost of goods sold | 7,186 | 6,443 | ||||||
Gross profit | 35,205 | 32,672 | ||||||
Operating expenses: | ||||||||
Research and development | 3,395 | 3,013 | ||||||
Sales and marketing | 30,249 | 26,384 | ||||||
General and administrative | 11,034 | 8,536 | ||||||
Total operating expenses | 44,678 | 37,933 | ||||||
Operating loss | (9,473 | ) | (5,261 | ) | ||||
Other income (expense): | ||||||||
Other income (expense) | 323 | 2,844 | ||||||
Interest income | 25 | 1 | ||||||
Interest expense | (51 | ) | (185 | ) | ||||
Total other income (expense), net | 297 | 2,660 | ||||||
Loss before income taxes | (9,176 | ) | (2,601 | ) | ||||
Income tax benefit (expense) | 1,536 | (583 | ) | |||||
Net loss | (7,640 | ) | (3,184 | ) | ||||
Other comprehensive loss: | ||||||||
Foreign currency translation | 428 | (3,760 | ) | |||||
Comprehensive loss | $ | (7,212 | ) | $ | (6,944 | ) | ||
Net loss per common share: | ||||||||
Basic and diluted | $ | (0.26 | ) | $ | (0.12 | ) | ||
Weighted average number of shares outstanding: | ||||||||
Basic and diluted | 29,605,620 | 26,770,071 | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
LDR HOLDING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) | ||||||||
Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||
Operating activities: | ||||||||
Net loss | $ | (7,640 | ) | (3,184 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Bad debt expense | 389 | 210 | ||||||
Provision for excess and obsolete inventories | 364 | 84 | ||||||
Depreciation and amortization | 1,659 | 1,442 | ||||||
Stock-based compensation | 3,012 | 2,391 | ||||||
Amortization of debt issuance costs | 4 | 4 | ||||||
Deferred income tax benefit | (1,630 | ) | — | |||||
Loss on disposal of assets | 368 | 8 | ||||||
Unrealized foreign currency gain | (271 | ) | (2,514 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 1,503 | (1,492 | ) | |||||
Prepaid expenses and other current assets | (1,050 | ) | (4,920 | ) | ||||
Inventory | (1,815 | ) | (2,393 | ) | ||||
Accounts payable | (1,959 | ) | 421 | |||||
Accrued expenses | (1,742 | ) | 2,668 | |||||
Other long-term liabilities | — | 200 | ||||||
Net cash used in operating activities | (8,808 | ) | (7,075 | ) | ||||
Investing activities: | ||||||||
Proceeds from sale of property and equipment | 5 | 30 | ||||||
Purchase of intangible assets | (350 | ) | (211 | ) | ||||
Purchase of property and equipment | (3,810 | ) | (1,452 | ) | ||||
Net cash used in investing activities | (4,155 | ) | (1,633 | ) | ||||
Financing activities: | ||||||||
Exercise of stock options | 94 | 688 | ||||||
Cash paid for settlement of income tax withholding | (170 | ) | (238 | ) | ||||
Proceeds from Employee Stock Purchase Plan | 593 | 517 | ||||||
Payments on capital leases | (2 | ) | (4 | ) | ||||
Net proceeds (payments) on short-term financings | 1,113 | (131 | ) | |||||
Payments on long-term debt | (156 | ) | (268 | ) | ||||
Net cash provided by financing activities | 1,472 | 564 | ||||||
4
LDR HOLDING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued) (in thousands) (Unaudited) | ||||||||
Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||
Effect of exchange rate on cash | (339 | ) | (329 | ) | ||||
Net change in cash and cash equivalents | (11,830 | ) | (8,473 | ) | ||||
Cash and cash equivalents, beginning of period | 115,084 | 73,883 | ||||||
Cash and cash equivalents, end of period | $ | 103,254 | $ | 65,410 | ||||
Supplemental disclosure of interest and income taxes paid: | ||||||||
Cash paid for interest | $ | 23 | $ | 191 | ||||
Cash paid for taxes | 779 | 373 | ||||||
Supplemental disclosure of non-cash investing and financing activities: | ||||||||
Increase (decrease) in purchase of property and equipment in accounts payable | (1,366 | ) | (1,636 | ) | ||||
Capital lease related to purchase of fixed assets | 52 | — | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
5
LDR HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Organization and Business Description
Description of Business
LDR Holding Corporation (Holding), a Delaware corporation, and its subsidiaries, LDR Spine USA, Inc. (Spine), LDR Médical, S.A.S. (Médical) and LDR Brasil Comercio, Importacao e Exportacao Ltda. (LDR Brazil and collectively, the Company), operates as a medical device company that designs and commercializes novel and proprietary surgical technologies for the treatment of patients suffering from spine disorders. The Company’s primary products are the Mobi-C cervical disc replacement device and its MIVo portfolio which includes a range of devices to support lumbar and cervical fusion procedures. 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.
Reclassifications
Certain reclassifications have been made to prior periods’ consolidated financial statements to conform to the current period presentation. These reclassifications did not result in any change in previously reported net loss, total assets or stockholders’ deficit.
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, 2015.
(c) Recent Accounting Pronouncements
In April 2016, the Financial Accounting Standards Board, or FASB, issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09), which simplifies various aspects of the accounting for share-based payments including (1) recording all excess tax benefits and tax deficiencies as an income tax benefit or expense in the income statement; (2) electing a policy to either estimate the number of forfeitures or account for forfeitures when they occur; and (3) withholding up to the maximum individual statutory tax rate without classifying the awards as a liability. The Company adopted the provisions of ASU 2016-09 relating to recording all excess tax benefits and tax deficiencies as an income tax benefit or expense in the income statement as of January 1, 2016 using the cumulative-effect method. The Company elected a policy to continue to estimate the number of forfeitures related to share-based payments. The cash paid to satisfy the statutory income tax withholding obligation is classified as a financing activity in the statement of cash flows. The prior period statement of cash flows has been reclassified to conform to current year
6
presentation. Except for the reclassification of cash paid to satisfy the statutory income tax withholding obligation from operating to financing activities, there was no other material impact to the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02), which will require companies to recognize most leases on the balance sheet, thereby increasing reported assets and liabilities. Extensive quantitative and qualitative disclosures, including significant judgments made by management, will be required. ASU 2016-02 requires adoption using a modified restrospective transitions with application of the guidance at the beginning of the earliest comparative period presented. ASU 2016-02 will be effective for the Company on January 1, 2019. Early adoption is permitted. The Company is evaluating the effect that ASU 2016-02 will have on its consolidated financial statements and related disclosures. The Company has not determined the effect of the standard on its ongoing financial reporting.
In July 2015, the 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 does not expect the adoption of ASU 2015-11 will have a material effect 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. The Company adopted ASU 2015-03 as of January 1, 2016 using the retrospective method, resulting in no impact to the Company’s consolidated 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 March 31, 2016 and December 31, 2015, the fair value of the Company’s long-term debt and short-term financing 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.
7
(e) Inventory
Inventory is carried at the lower of cost or market using the weighted average method, net of an allowance for excess and obsolete inventory. The components of inventory, net of allowance, as of March 31, 2016 and December 31, 2015 are as follows (in thousands):
March 31, 2016 | December 31, 2015 | |||||||
Finished goods | $ | 30,164 | $ | 26,351 | ||||
Work in process | 1,143 | 3,072 | ||||||
Raw materials | 452 | 298 | ||||||
Total | $ | 31,759 | $ | 29,721 | ||||
As of March 31, 2016 and December 31, 2015, inventory held by hospitals and sales agents on behalf of the Company was $10.4 million and $9.8 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 $7.1 million and $6.6 million and as of March 31, 2016 and December 31, 2015, 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 (U.S., 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. Outside the U.S., the Company 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.
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, 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 either the Company’s trade receivables as of March 31, 2016 and December 31, 2015, or revenues for the three months ended March 31, 2016 and 2015.
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4. Accrued Expenses
Accrued expenses consist of the following (in thousands):
March 31, 2016 | December 31, 2015 | |||||||
Compensation and other employee related costs | $ | 11,334 | $ | 12,354 | ||||
Contributions withheld for Employee Stock Purchase Plan | 770 | 120 | ||||||
Royalties | 2,155 | 1,288 | ||||||
Clinical, regulatory and professional fees | 289 | 740 | ||||||
Government grants | 483 | 514 | ||||||
Rent | 1,624 | 1,523 | ||||||
Taxes | 494 | 1,345 | ||||||
Other | 1,492 | 1,611 | ||||||
$ | 18,641 | $ | 19,495 | |||||
5. Debt
Debt consists of the following (in thousands):
March 31, 2016 | December 31, 2015 | |||||||
Short-term financing | 5,807 | 4,486 | ||||||
Various notes payable | 1,162 | 1,278 | ||||||
Total debt | 6,969 | 5,764 | ||||||
Less current portion of long-term debt and short-term financing | (6,378 | ) | (5,087 | ) | ||||
Long-term debt, net of discount and current portion | $ | 591 | $ | 677 | ||||
(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 had the right to reset the tangible net worth covenant annually, beginning February 28, 2015.
In August 2015, in connection with the Company’s follow-on public offering, the Line of Credit was repaid in full, resulting in a zero outstanding balance as of March 31, 2016. As of March 31, 2016, the Company had $25.0 million available under the Line of Credit. The Line of Credit expired in April 2016.
(b) Short-Term Financing
Médical borrows funds from various financial institutions in France on a short-term basis with variable interest rates based on Euribor one-month rates. The funds are typically repaid within 90 days and are collateralized by certain assets of Médical, including accounts receivable. The weighted average interest rate for the short-term balances outstanding at March 31, 2016 and December 31, 2015 was 2.3% and 2.6%, respectively.
(c) Various Notes Payable
Médical has loan agreements with three different entities as of March 31, 2016 and December 31, 2015. The amounts of the outstanding loans vary from approximately $61,000 to $396,000 with interest rates varying between 2.53% and 3.87% at March 31, 2016 and $83,000 to $437,000 with interest rates varying between 2.53% and 3.87% at December 31, 2015. Maturity dates for these loans vary from 2016 to 2019, and the loans are secured by certain assets of Médical.
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6. Stock-Based Compensation
(a) Stock Option Activity
A summary of the stock option activity for the Company for the three months ended March 31, 2016 is as follows:
Shares | Weighted - Average Exercise Price | Weighted - Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||
(Years) | ($000's) | ||||||||||||
Outstanding - December 31, 2015 | 1,992,447 | $ | 24.80 | 7.96 | $ | 10,668 | |||||||
Options granted | 169,768 | 25.12 | |||||||||||
Options exercised | (17,708 | ) | 5.62 | ||||||||||
Options forfeited | (24,879 | ) | 34.38 | ||||||||||
Outstanding - March 31, 2016 | 2,119,628 | $ | 24.88 | 7.87 | $ | 10,662 | |||||||
Options vested and expected to vest at March 31, 2016 | 2,020,724 | $ | 24.49 | 7.81 | $ | 10,635 | |||||||
Options exercisable at March 31, 2016 | 1,003,876 | $ | 19.62 | 7.87 | $ | 9,177 | |||||||
The aggregate intrinsic value in the table above represents the total pre-tax value of the options shown, calculated as the difference between the Company’s closing stock price on March 31, 2016 and the exercise prices of the options shown, multiplied by the number of in-the money options. This is the aggregate amount that would have been received by the option holders if they had all exercised their options on March 31, 2016 and sold the shares thereby received at the closing price of the Company’s stock on that date. This amount changes based on the closing price of the Company’s stock.
Additional information regarding options is as follows (in thousands except for per share amounts):
Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||
Weighted-average grant date fair value per share of options granted during the period | $ | 11.96 | $ | 14.40 | ||||
Aggregate intrinsic value of options exercised during the period | $ | 304 | $ | 2,656 | ||||
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 $13.4 million at March 31, 2016 and is expected to be recognized over a weighted-average period of three years.
(b) Restricted Stock Unit Activity
A summary of the restricted stock unit activity for the Company for the three months ended March 31, 2016 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, 2015 | 150,496 | $ | 30.98 | 1.15 | $ | 3,779 | |||||||
Restricted stock units granted | 199,772 | 20.76 | |||||||||||
Restricted stock units vested | (45,750 | ) | 31.39 | ||||||||||
Restricted stock units forfeited | (1,371 | ) | 17.60 | ||||||||||
Unvested - March 31, 2016 | 303,147 | $ | 24.24 | 2.02 | $ | 7,727 | |||||||
The unrecognized compensation expense related to unvested restricted stock units was $6.3 million at March 31, 2016 and is expected to be recognized over a weighted-average period of approximately three years.
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(c) Performance-Based Restricted Stock Unit Activity
In January 2016, 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 100,131 to 300,390 shares depending on the attainment of certain revenue targets. A summary of the performance-based restricted stock unit activity for the Company for the three months ended March 31, 2016 is as follows and is based on attainment of revenue at the target thresholds which the Company believes are probable of occurrence:
Units | Weighted - Average Grant Date Fair Value Per Share | Weighted - Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||
(Years) | ($000's) | ||||||||||||
Unvested - December 31, 2015 | 80,400 | $ | 32.78 | 1.5 | $ | 2,019 | |||||||
Performance-based restricted stock units granted | 203,643 | 20.98 | |||||||||||
Performance-based restricted stock units vested | (30,184 | ) | 32.78 | ||||||||||
Performance-based restricted stock units forfeited | (7,828 | ) | 17.60 | ||||||||||
Unvested - March 31, 2016 | 246,031 | $ | 23.49 | 1.68 | $ | 6,271 | |||||||
The unrecognized compensation expense related to unvested performance-based restricted stock units was $4.1 million at March 31, 2016 and is expected to be recognized over a weighted-average period of approximately two years.
(d) Stock-Based Compensation
The Company’s stock-based compensation expense related to employee stock options, restricted stock units, performance-based stock units and employee stock purchase plan awards for the three months ended March 31, 2016 and 2015 was as follows (in thousands):
Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||
Research and development | $ | 92 | $ | 94 | ||||
Sales and marketing | 904 | 1,022 | ||||||
General and administrative | 2,016 | 1,275 | ||||||
Total | $ | 3,012 | $ | 2,391 | ||||
7. Income Taxes
The following table summarizes the total income tax expense, and the related effective tax rate, for the three months ended March 31, 2016 and 2015 (in thousands):
Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||
Income tax benefit (expense) | $ | 1,536 | $ | (583 | ) | |||
Effective tax rate | 16.7 | % | (22.4 | )% | ||||
The provision for income taxes for the three months ended March 31, 2016 and 2015 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 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.
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As of March 31, 2016 and December 31, 2015, 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 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 2013 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 March 31, 2016 and December 31, 2015, the deferred income tax charge was $1.4 million and $1.5 million, respectively.
Earnings occurring outside the U.S. are deemed to be indefinitely reinvested outside of the U.S. to support the Company’s foreign operations. As a result, if the Company accumulates earnings overseas, it will be used for investment in the Company’s business outside the U.S. The Company expects to use cash generated from U.S. operations and existing cash and cash equivalents to meet the Company’s U.S. cash needs. There were no undistributed earnings as of March 31, 2016 or December 31, 2015.
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). Some of the Company’s restricted stock units and performance-based restricted stock units 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, warrants and restricted stock units and performance-based restricted stock units that do not participate in any dividends declared by the Company 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 months ended March 31, 2016 and 2015 was as follows (in thousands):
Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||
Numerator | ||||||||
Net loss attributable to common stockholders | $ | (7,640 | ) | $ | (3,184 | ) | ||
Denominator | ||||||||
Weighted average shares outstanding - basic | 29,606 | 26,770 | ||||||
Dilutive effect of options and warrants | — | — | ||||||
Weighted average shares outstanding - diluted | 29,606 | 26,770 | ||||||
The following common equivalent shares were excluded from the diluted net loss per share calculation as their inclusion would have been anti-dilutive (in thousands):
Three Months Ended March 31, | ||||||
2016 | 2015 | |||||
Stock options | 2,120 | 1,977 | ||||
Non-participating restricted stock units | 118 | — | ||||
Non-participating performance-based restricted stock units | 121 | — | ||||
9. Commitments and Contingencies
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.
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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 the Asia Pacific region and Latin America.
The following table represents total sales by geographic area, based on the location of the customer (in thousands):
Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||
United States | $ | 33,913 | $ | 31,320 | ||||
Other Countries (1) | 8,478 | 7,795 | ||||||
Total | $ | 42,391 | $ | 39,115 | ||||
__________
(1) No additional locations are individually significant.
The Company classifies its products into three categories: Mobi-C, MIVo and traditional fusion products. During the first quarter of 2016, the Company changed the classification of its products. The prior period has been reclassified to conform to current period presentation. The following table represents total sales by product category (in thousands):
Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||
Mobi-C | $ | 17,273 | $ | 13,407 | ||||
MIVo | 21,937 | 22,492 | ||||||
Traditional fusion products | 3,181 | 3,216 | ||||||
Total | $ | 42,391 | $ | 39,115 | ||||
The following table represents long-lived assets by geographic area (in thousands):
March 31, 2016 | December 31, 2015 | |||||||
United States | $ | 15,648 | $ | 13,853 | ||||
France | 6,844 | 5,016 | ||||||
Other Countries (1) | 1,897 | 1,784 | ||||||
Total | $ | 24,389 | $ | 20,653 | ||||
__________
(1) No additional locations are individually significant.
11. Subsequent Events
At the Company’s 2016 annual meeting of stockholders held on April 28, 2016, the Company’s stockholders approved the Rules of the LDR Holding Corporation 2013 Equity Incentive Plan For the Grant of Options, Performance Units and Restricted Stock Units to Participants in France (the French Subplan), which was adopted by the Company’s Board of Directors in February 2016. Any options, performance units or restricted stock units that the Company grants under the French Subplan to individuals who are subject to taxation under French law may qualify for more favorable income tax and social tax treatment in France. A copy of the French Subplan is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q.
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 commenced in April 2016, at which time Médical relocated its headquarters to the New Premises. Médical’s previous lease terminated by mutual agreement with the previous landlord in April 2016.
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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, 2015. 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,” “projects,” “intends,” “strategy,” “future”, “likely,” “may,” “plans,” “goals,” “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 the Mobi-C cervical disc replacement device and our MIVo portfolio of products which include a range of devices to support lumbar and cervical fusion procedures. We believe our Mobi-C and MIVo 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 Mobi-C and MIVo platform products are used in the fastest growing segments of the global spine implant market, including the cervical disc replacement segment, the MIS lumbar fusion segment and the stand-alone cervical fusion segment. In August 2013, we received approval from the U.S. Food and Drug Administration, or FDA, for the Mobi-C cervical disc 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 Mobi-C and MIVo products will continue to increase due to continued market penetration in key global markets.
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Components of our Results of Operations
Revenue
We generate revenue primarily from the sales of Mobi-C and our MIVo portfolio of products. 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 MIVo products 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 U.S. 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, foreign exchange rates, 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 further impacted by 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, customer service, distribution 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, bad debt expense and a 2.3% excise tax on the sale of medical devices in the U.S. In December 2015, legislation was passed which provides for a two-year moratorium on the medical device excise tax for 2016 and 2017. 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 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 U.S., 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 whether or not a valuation allowance should be recorded against our net deferred tax assets. Deferred tax assets and liabilities are determined
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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 U.S., we have established a full valuation allowance relating to substantially all of our net deferred tax assets in the U.S. as of March 31, 2016 and December 31, 2015. 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 March 31, | ||||||||||||||
2016 | 2015 | |||||||||||||
(in thousands, except percentages) | ||||||||||||||
Revenue | $ | 42,391 | 100 | % | $ | 39,115 | 100 | % | ||||||
Cost of goods sold | 7,186 | 17 | 6,443 | 16 | ||||||||||
Gross profit | 35,205 | 83 | 32,672 | 84 | ||||||||||
Operating expenses: | ||||||||||||||
Research and development | 3,395 | 8 | 3,013 | 8 | ||||||||||
Sales and marketing | 30,249 | 71 | 26,384 | 67 | ||||||||||
General and administrative | 11,034 | 26 | 8,536 | 22 | ||||||||||
Total operating expenses | 44,678 | 105 | 37,933 | 97 | ||||||||||
Operating loss | (9,473 | ) | (22 | ) | (5,261 | ) | (13 | ) | ||||||
Total other income (expense), net | 297 | 1 | 2,660 | 7 | ||||||||||
Loss before income taxes | (9,176 | ) | (22 | ) | (2,601 | ) | (7 | ) | ||||||
Income tax benefit (expense) | 1,536 | 4 | (583 | ) | (1 | ) | ||||||||
Net loss | $ | (7,640 | ) | (18 | )% | $ | (3,184 | ) | (8 | )% | ||||
Three Months Ended March 31, 2016 Compared to the Three Months Ended March 31, 2015
Revenue
The following table sets forth, for the periods indicated, our revenue by product category and geography expressed as dollar amounts and the changes in revenue between the specified periods expressed in dollar amounts in thousands and as percentages:
Three Months Ended March 31, | Change 2016/2015 | ||||||||||||||
2016 | 2015 | $ | % | ||||||||||||
Mobi-C | $ | 17,273 | $ | 13,407 | $ | 3,866 | 28.8 | % | |||||||
MIVo | 21,937 | 22,492 | (555 | ) | (2.5 | ) | |||||||||
Traditional | 3,181 | 3,216 | (35 | ) | (1.1 | ) | |||||||||
Total revenue | $ | 42,391 | $ | 39,115 | 3,276 | 8.4 | % | ||||||||
Three Months Ended March 31, | Change 2016/2015 | ||||||||||||||
2016 | 2015 | $ | % | ||||||||||||
United States | $ | 33,913 | $ | 31,320 | $ | 2,593 | 8.3 | % | |||||||
International | 8,478 | 7,795 | 683 | 8.8 | |||||||||||
Total revenue | $ | 42,391 | $ | 39,115 | $ | 3,276 | 8.4 | % | |||||||
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The increase in total revenue in the three months ended March 31, 2016 compared to the three months ended March 31, 2015 was primarily driven by an increase in revenue from our Mobi-C product in the U.S., which increased 36.0% in the first quarter of 2016 to $15.1 million, compared to $11.1 million in the first quarter of 2015, and increased penetration in existing markets through the expansion of our network of independent sales agencies and direct sales representatives. Total revenue growth was driven by a 28.8% increase in Mobi-C revenue, offset by decreases in MIVo and traditional products.
Cost of Goods Sold
Cost of goods sold was $7.2 million in the three months ended March 31, 2016 compared to $6.4 million in the three months ended March 31, 2015, an increase of $743,000 or 12%. The increase was primarily due to an increase in product costs associated with the increase in sales volume and an increase in inventory reserves offset by a decrease in royalties. Cost of goods sold increased as a percentage of revenue primarily due to the increase in inventory reserves offset by a decrease in royalties.
Research and Development Expenses
Research and development expenses were $3.4 million in the three months ended March 31, 2016 compared to $3.0 million in the three months ended March 31, 2015, an increase of $382,000 or 13%. The increase was primarily due to a $196,000 increase in fees and expenses associated with product testing and clinical trials and a $190,000 increase associated with salaries and benefits.
Sales and Marketing Expenses
Sales and marketing expenses were $30.2 million in the three months ended March 31, 2016 compared to $26.4 million in the three months ended March 31, 2015, an increase of $3.9 million or 15%. The increase was primarily due to a $3.7 million increase in compensation costs associated with our investments in our sales organizations, including hiring of additional direct sales personnel and commissions, a $438,000 increase in expenses associated with medical training workshops and product promotion and a $107,000 increase in depreciation expense. These increases were offset by a $118,000 decrease in stock-based compensation expense and a $322,000 decrease in expenses associated with our instrument sets and cases.
General and Administrative Expenses
General and administrative expenses were $11.0 million in the three months ended March 31, 2016 compared to $8.5 million in the three months ended March 31, 2015, an increase of $2.5 million or 29%. The increase was primarily due to a $914,000 increase in employee salaries and benefits associated with the increase in general and administrative personnel, a $741,000 increase in stock-based compensation expense, a $528,000 increase in rent and facility expenses, a $285,000 increase in bad debt and bank fees and a $142,000 increase in software license fees. These increases were offset by a $276,000 decrease to medical device and other taxes.
Total Other Income (Expense), net
Total other income (expense), net of $297,000 in the three months ended March 31, 2016 primarily consisted of $646,000 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 $322,000 loss on disposal of fixed assets.
Income Tax Benefit (Expense)
Income tax benefit was $1.5 million in the three months ended March 31, 2016 compared to an expense of $583,000 in the three months ended March 31, 2015. Our effective tax rate calculated as a percentage of income before income taxes was 16.7% for the three months ended March 31, 2016 and (22.4)% for the three months ended March 31, 2015. 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 U.S. 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.
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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.
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 March 31, | ||||||||
2016 | 2015 | |||||||
Net loss | $ | (7,640 | ) | $ | (3,184 | ) | ||
Interest (income) expense, net | 26 | 184 | ||||||
Income tax (benefit) expense | (1,536 | ) | 583 | |||||
Depreciation and amortization | 1,659 | 1,442 | ||||||
EBITDA | (7,491 | ) | (975 | ) | ||||
Stock-based compensation | 3,012 | 2,391 | ||||||
Other (income) expense, net | (323 | ) | (2,844 | ) | ||||
Adjusted EBITDA | $ | (4,802 | ) | $ | (1,428 | ) | ||
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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 March 31, | |||||||||||||||||||||||
GAAP | Foreign Exchange Impact on International Revenue | Non-GAAP Revenue on a Constant Currency Basis (1) | GAAP | 2016 on a Constant Currency Basis / 2015 | |||||||||||||||||||
2016 | 2016 | 2016 | 2015 | $ | % | ||||||||||||||||||
Revenue in the United States | $ | 33,913 | $ | — | $ | 33,913 | $ | 31,320 | $ | 2,593 | 8.3 | % | |||||||||||
International revenue | 8,478 | 514 | 8,992 | 7,795 | 1,197 | 15.4 | |||||||||||||||||
Total revenue | $ | 42,391 | $ | 514 | $ | 42,905 | $ | 39,115 | $ | 3,790 | 9.7 | ||||||||||||
Mobi-C | $ | 17,273 | $ | 110 | $ | 17,383 | $ | 13,407 | $ | 3,976 | 29.7 | % | |||||||||||
MIVo | 21,937 | 240 | 22,177 | 22,492 | (315 | ) | (1.4 | ) | |||||||||||||||
Traditional fusion products | 3,181 | 164 | 3,345 | 3,216 | 129 | 4.0 | |||||||||||||||||
Total revenue | $ | 42,391 | $ | 514 | $ | 42,905 | $ | 39,115 | $ | 3,790 | 9.7 | ||||||||||||
__________
(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 cash generated from U.S. operations and 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 three months ended March 31, 2016 and 2015 (in thousands):
Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||
Net cash used in operating activities | $ | (8,808 | ) | $ | (7,075 | ) | ||
Net cash used in investing activities | (4,155 | ) | (1,633 | ) | ||||
Net cash provided by financing activities | 1,472 | 564 | ||||||
Effect of exchange rate on cash | (339 | ) | (329 | ) | ||||
Net change in cash and cash equivalents | $ | (11,830 | ) | $ | (8,473 | ) | ||
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Cash Used in Operating Activities
Net cash used in operating activities was $8.8 million in the three months ended March 31, 2016, compared to $7.1 million in the three months ended March 31, 2015, an increase of $1.7 million. The increase in net cash used in operating activities was primarily attributable to $6.8 million decrease in the change in accounts payable and accrued expenses and the $4.5 million increase in net loss. These increases were partially offset by a $2.3 million net decrease in non-cash charges, which included stock-based compensation and unrealized foreign currency gains, $3.9 million decrease in the change in prepaids and other current assets, a $3.0 million decrease in the change in accounts receivable and a $578,000 decrease in the change in inventory.
Cash Used in Investing Activities
Net cash used in investing activities was $4.2 million in the three months ended March 31, 2016 compared to $1.6 million in the three months ended March 31, 2015, an increase of $2.5 million. The increase in net cash used in investing activities was primarily attributable to a $2.4 million increase in cash paid for the purchase of instruments and cases during the three months ended March 31, 2016.
Cash Provided by Financing Activities
Net cash provided by financing activities was $1.5 million in the three months ended March 31, 2016 compared to $564,000 provided in the three months ended March 31, 2015, an increase of $908,000. The increase was primarily attributable to the $1.4 million increase in net proceeds from short-term financings, partially offset by the $594,000 decrease in proceeds from the exercise of stock options.
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 which expired in April 2016. The Comerica loan agreement contains various restrictive covenants, including limitations on our ability to pay dividends, to enter into a merger or acquisition and the amount of capital expenditures we may make in any given fiscal year. As of March 31, 2016, 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 March 31, 2016. As of March 31, 2016, we had $25.0 million available under the Comerica loan agreement. The Comerica loan agreement expired in April 2016.
We are also party to various loan agreements with three different financial institutions in France. As of March 31, 2016, the amounts of the outstanding loans vary from approximately $61,000 to $396,000 and bear interest at rates varying from 2.53% to 3.87%. Maturity dates for these loans vary from 2016 to 2019 and are secured by certain assets of Médical. In addition, Médical can borrow funds from various financial institutions in France on a short-term basis. The funds are typically repaid within 90 days and are collateralized by certain assets of Médical, including accounts receivable. The weighted average interest rate for the short-term balances outstanding as of March 31, 2016 was 2.3%.
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, 2015.
Recent Accounting Pronouncements
In April 2016, the Financial Accounting Standards Board, or FASB, issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09), which simplifies various aspects of the accounting for share-based payments including (1) recording all excess tax benefits and tax deficiencies as an income tax benefit or expense in the income statement; (2) electing a policy to either estimate the number of forfeitures or account for forfeitures when they occur; and (3) withholding up to the maximum individual statutory tax rate without classifying the awards as a liability. We adopted the provisions of ASU 2016-09 relating to recording all excess tax benefits and tax deficiencies as an income tax benefit or expense in the income statement as of January 1, 2016 using the cumulative-effect method. We elected a policy to continue to estimate the number of forfeitures related to share-based payments. The cash paid to satisfy the statutory income tax withholding obligation is classified as a financing activity in the statement of cash flows. The prior period statement of cash flows has been reclassified to conform to current period presentation. Except for the reclassification of cash paid to satisfy the statutory income tax withholding obligation from operating to financing activities, there was no other material impact to our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02), which will require companies to recognize most leases on the balance sheet, thereby increasing reported assets and liabilities. Extensive quantitative and qualitative disclosures, including significant judgments made by management, will be required. ASU 2016-02 requires adoption using a modified restrospective transitions with application of the guidance at the beginning of the earliest comparative period presented. ASU 2016-02 will be effective for the Company on January 1, 2019. Early adoption is permitted. We are evaluating the effect that ASU 20116-02 will have on our consolidated financial statements and related disclosures. We have not determined the effect of the standard on our ongoing financial reporting.
In July 2015, the 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 do not expect the adoption of ASU 2015-11 will have a material impact on our 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
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from the carrying amount of that debt liability, consistent with debt discounts. We adopted ASU 2015-03 as of January 1, 2016 using the retrospective method, resulting in no impact to the Company’s consolidated 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.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
We are exposed to various market risks, which may result in potential losses arising from adverse changes in market rates, such as interest rates and foreign exchange rates. We do not enter into derivatives or other financial instruments for trading or speculative purposes and do not believe we are exposed to material market risk with respect to our cash and cash equivalents.
Interest Rate Risk
We are exposed to interest rate risk in connection with any future borrowings under our Comerica loan agreements, which bears interest at a floating rate based on Comerica’s prime rate plus an applicable borrowing margin. For variable rate debt, interest rate changes generally do not affect the fair value of the debt instrument, but do impact future earnings and cash flows, assuming other factors are held constant. In the ordinary course of business, we may enter into contractual arrangements to reduce our exposure to interest rate risks.
Foreign Exchange Risk
We operate in countries other than the United States, and, therefore, we are exposed to foreign currency risks. Revenue from sales outside of the United States represented approximately 20.0% of our total revenue in the three months ended March 31, 2016. 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 gains of $428,000 in the three months ended March 31, 2016. We do not currently hedge our exposure to foreign currency exchange rate fluctuations; however, we may choose to hedge our exposure in the future.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to a company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2016, 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.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are not aware of any pending or threatened legal proceeding against us that could have a material adverse effect on our business, operating results or financial condition. The medical device industry is characterized by frequent claims and litigation, including claims regarding patent and other intellectual property rights as well as improper hiring practices. As a result, we may be involved in various additional legal proceedings from time to time.
Item 1A. Risk Factors
There have been no material changes from the risk factors set forth in Part I, Item IA, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed with the SEC on February 23, 2016.
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: | May 10, 2016 | By: | /s/ Christophe Lavigne | |
Christophe Lavigne | ||||
President and Chief Executive Officer | ||||
(Principal Executive Officer) | ||||
Dated: | May 10, 2016 | 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 | |
10.1#* | Rules of the LDR Holding Corporation 2013 Equity Incentive Plan for the Grant of Options, Performance Units and Restricted Stock Units to Participants in France. | |
10.2##* | Letter of Amendment, dated January 28, 2016, in Respect of the Supply Agreement between Invibio Ltd. and LDR Médical SAS. | |
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. | |
__________
# Indicates a management contract or compensatory plan.
## | Confidential treatment has been requested for portions of this exhibit. These portions have been omitted from the exhibit filed with the Securities and Exchange Commission and submitted separately to the Securities and Exchange Commission. |
* Filed herewith.
** Furnished herewith.
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