As filed with the Securities and Exchange Commission on August 28, 2013
Registration No. 333-190829
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
THE SECURITIES ACT OF 1933
LDR Holding Corporation
(Exact name of registrant as specified in its charter)
LDR Holding Corporation
13785 Research Boulevard, Suite 200, Austin, Texas 78750
(Address, including zip code, and telephone number, including area code, of registrants principal executive offices)
Scott E. Way
LDR Holding Corporation
13785 Research Boulevard, Suite 200, Austin, Texas 78750
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ¨
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (check one) ¨
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant files a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may not sell these securities until the Securities and Exchange Commission declares our registration statement effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Subject to completion, dated August 28, 2013
$ per share
This investment involves risk. See Risk Factors beginning on page 14.
We are an emerging growth company as defined by the Jumpstart Our Business Startups Act of 2012 and, as such, we have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings.
The underwriters have a 30-day option to purchase up to additional shares of common stock from us to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities commission has approved of anyones investment in these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is , 2013.
You should rely only on the information contained in this prospectus or any related free writing prospectus we may authorize to be delivered to you. We have not, and the underwriters have not, authorized anyone to provide you with information different from, or in addition to, that contained in this prospectus and any related free writing prospectus. We and the underwriters take no responsibility for, and can provide no assurances as to the reliability of, any information that others may give you. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any jurisdiction
where the offer or sale is not permitted. The information contained in this prospectus is only accurate as of the date of this prospectus, regardless of the time or delivery of this prospectus and any sale of our common stock.
Until and including , 2013 (25 days after the date of this prospectus), all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
The items in the following summary are described in more detail later in this prospectus. This summary provides an overview of selected information and does not contain all of the information you should consider. Before investing in our common stock, you should read the entire prospectus carefully, including the information set forth under the headings Risk Factors and the consolidated financial statements and related notes included in this prospectus.
Unless the context otherwise requires, references in this prospectus to LDR Holding, LDR, we, our, us and the company refer to LDR Holding Corporation together with its subsidiaries.
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. 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. Industry sources expect that the cervical disc replacement market, which is currently relatively small, will be one of the fastest growing segments of the U.S. spine implant market.
For the years ended December 31, 2010, 2011 and 2012, our total revenues were $58.9 million, $78.0 million and $90.9 million, respectively, and our net income was $1.9 million in 2010, and we had net losses of $1.8 million and $9.7 million in 2011 and 2012, respectively. We expect to continue to incur losses in the near term. For the past three calendar years, revenue from our VerteBRIDGE and Mobi platform products has grown at a compounded annual growth rate, or CAGR, of 31% and represented approximately 80% of our revenue in 2012. Through June 30, 2013, we had an accumulated deficit of $60.7 million.
Our highly differentiated VerteBRIDGE fusion platform targets the cervical and lumbar spine fusion markets. Our VerteBRIDGE products are designed around our proprietary plating technology that enables surgeons to implant VerteBRIDGE devices with direct visualization of the disc and to affix the devices to the vertebrae from inside the spinal disc space. We believe that VerteBRIDGE is the first platform of interbody devices with integrated fixation to market that may be implanted without screws, resulting in a zero-profile construct without hardware protruding outside of the vertebral body. We believe these differentiated features offer distinct advantages over other interbody devices, including simplified and less invasive surgical techniques for both cervical and lumbar fusion procedures. While these products only address a specific segment of the overall spine implant market, our VerteBRIDGE products have been used in more than 30,000 device implantations since the introduction of the VerteBRIDGE platform in 2007.
Our Mobi non-fusion platform is highlighted by Mobi-C, a cervical disc replacement device with a patented mobile bearing core that is designed to replicate the natural anatomical movement of the spine by facilitating independent bending and twisting similar to a healthy disc. Mobi-C is the first and only cervical disc replacement device to have received FDA approval for both one-level and two-level cervical disc replacement procedures. In addition, Mobi-C is the only cervical disc replacement device that has demonstrated overall clinical superiority in an FDA pivotal clinical trial as compared to two-level traditional fusion. Mobi-C is implanted without the use of keels or screws, allowing for what we believe
is a simplified, less invasive and bone sparing surgical approach as compared to other existing cervical disc replacement devices. Mobi-C is further differentiated by its ability to be easily adjusted, removed or repositioned intra-operatively. We estimate that 30% of U.S. patients indicated for surgery with symptomatic cervical disc disease may be candidates for two-level cervical disc replacement procedures. As a result, we believe the FDA approval of Mobi-C, its overall clinical superiority as compared to two-level traditional fusion procedures and its innovative design features will allow us to penetrate, and drive growth in, the U.S. cervical disc replacement market, which we believe has the potential to grow relative to the total U.S. spine market. Currently, a market for FDA approved two-level devices does not exist, and Mobi-C is the first-to-market cervical disc device approved for one-level and two-level cervical disc procedures. Accordingly, we need to develop a market for such procedures, which will require investment in time and capital to advocate and support the launch of Mobi-C in the United States. To support this launch, we intend to leverage our extensive international experience with Mobi-C, including clinical and commercial knowledge accumulated from more than 17,000 Mobi-C implantations outside the United States. While the cervical disc market in the United States is currently relatively small, we believe that clinical data from second generation products such as Mobi-C will help drive the growth of the market.
We market and sell our products globally through a highly adaptable worldwide sales organization that allows us to continually expand our sales channels and rapidly penetrate new geographic markets. Our U.S. sales organization consists of sales managers that recruit, develop and lead direct sales representatives and a broad network of independent sales agencies. We estimate that non-captive independent sales agencies drive 35% of total U.S. spine implant market revenue, and Mobi-C is the only cervical disc replacement device currently available to this large independent sales agency network. We believe this market position will facilitate the recruitment of high-quality direct sales representatives and independent sales agencies. We currently generate revenue in more than 25 countries globally, and revenue from outside of the United States represented approximately 29% of our total revenue in 2012. Our international sales organization includes sales managers and direct sales representatives located in various countries, including France, Germany, Spain, South Korea, China and Brazil. We also sell to distributors in certain international markets. A majority of our U.S. and international independent sales agencies and international distributors have agreed to offer one or more of our products on an exclusive basis. We expect to continue to make investments in our sales organization by broadening our relationships with independent sales agencies, expanding exclusivity commitments among these agencies and international distributors and increasing our number of direct sales representatives.
We were founded in 2000 in France, one of the worlds leading regions for spine surgery advancements. We believe our product development capabilities are differentiated by our extensive spine industry experience and our ability to leverage close collaboration with thought leaders in spine surgery. Our capabilities allow us to gain significant design feedback and clinical experience, which facilitates our ability to gain regulatory clearances and market registrations globally. Our product development experience, incorporating input from both European and U.S. thought leaders in spine surgery, is a key component of our ability to design highly differentiated and clinically beneficial technologies. In addition, we have a robust product pipeline that we expect will enhance our product platforms and enable us to continue to penetrate the fastest growing segments of the global spine implant market.
Our VerteBRIDGE and Mobi platform products incorporate design advancements that provide us with competitive advantages in the estimated $9.6 billion global spine implant market. Industry sources estimate that the U.S. spine implant market represented approximately 73% of the global spine market in 2012, or $7.0 billion, and that it is expected to grow to approximately $9.0 billion by 2018. These
sources estimate that the U.S. cervical disc replacement market will grow from $147 million in 2012 to $601 million by 2018, representing a CAGR of 26%, making it one of the fastest growing segments of the U.S. spine implant market. We believe several factors will influence growth in the spine implant market segments in which we compete, including patients and surgeons demand for technologies that allow for less invasive treatment options, the availability of clinical safety and efficacy data demonstrating improved patient outcomes provided by new technologies and an aging global population leading to continued growth in the number of spinal procedures performed.
Treatment Alternatives for Degenerative Conditions of the Spine
Treatment for degenerative conditions of the spine usually begins with medical management in the form of lifestyle changes, such as exercise, weight loss and anti-inflammatory and pain medication. While these treatments can be successful, clinical management of the degenerative process is challenging, and many patients with chronic symptoms that have failed these conservative treatments ultimately require spine surgery.
Fusions are the most common instrumented spine surgical procedure. Fusions are performed in the lumbar spine as well as the cervical spine. Fusion in the cervical spine is referred to as anterior cervical discectomy and fusion, or ACDF. Fusion procedures attempt to alleviate back and neck pain by removing diseased disc material and inserting bone grafts, interbody devices or fixation systems, including rods, screws and plates to restore disc height and permanently join, or fuse, two or more contiguous vertebrae. Fusion procedures are considered highly invasive and are associated with several limitations, including high rates of subsequent surgery, loss of motion, disruption of bone and soft tissues, lengthy surgical procedure times and prolonged patient recovery times.
Recently, there has been a progression toward less invasive fusion procedures, which include stand-alone fusion devices. Stand-alone fusion devices are interbody devices that are placed into the disc space and allow surgeons to restore disc height and eliminate motion at diseased discs that do not require external fixation implants affixed to the vertebrae. Rather, the fixation is integrated into the implant device itself. More recently, non-fusion alternatives, such as cervical disc replacements, have been the subject of extensive clinical research. The goals of cervical disc replacement are to restore natural disc height, thereby decompressing the nerves causing pain, while also maintaining normal spinal motion at the affected vertebral segments.
We believe that our VerteBRIDGE fusion platform addresses many of the limitations of traditional fusion and existing stand-alone implants by offering the following benefits:
We believe that our Mobi-C cervical disc replacement device addresses many of the limitations of traditional ACDF procedures and offers the following benefits:
In addition to addressing many of the limitations associated with ACDF, we believe that our Mobi-C cervical disc replacement device also addresses many of the limitations associated with existing cervical disc replacement devices and offers the following benefits:
Although we believe our VerteBRIDGE fusion platform and Mobi-C cervical disc device provide numerous clinical benefits, not all cervical spine patients may be suitable candidates.
Our Competitive Strengths
We focus on providing novel and proprietary technologies for both fusion and non-fusion applications in the cervical and lumbar spine. Our founders and executive management team collectively have over 100 years of experience in developing and commercializing innovative spine surgery products. We believe that this focus and experience, combined with the following competitive strengths, will allow us to continue to grow our revenue and rapidly increase our presence in the fastest growing segments of the spine implant market:
While we believe that we have designed our VerteBRIDGE and Mobi platform products with characteristics and attributes that provide them with competitive advantages over currently existing alternatives, spine surgeons may not adopt our devices for a variety of reasons, including lack of experience with us or our products, existing relationships with competitors and distributors that sell our competitors products and the time commitment required for training to be able to use our products.
Our goal is to strengthen our position as a global innovator of spine technologies and become a leader in the spine implant market. To achieve our goal, we are pursuing the following strategies:
Our VerteBRIDGE fusion and Mobi non-fusion platform products for both cervical and lumbar applications are characterized by patented technologies and innovative design features that we believe offer distinct advantages compared to other available products. We refer to these products in our financial reporting as our exclusive technology products. We also offer fusion technologies that are not significantly differentiated from competitive devices from a feature or clinical benefit perspective but that augment our VerteBRIDGE and Mobi technologies and allow us to offer our customers comprehensive surgical solutions. We refer to these products in our financial reporting as our traditional fusion products. In 2012, revenue from our exclusive technology products represented approximately 80% of our total revenue, and revenue from our traditional fusion products represented approximately 20% of our total revenue.
Our VerteBRIDGE platform is designed to provide fusion without screws or external plates, thereby providing a zero-profile construct. We believe that the integrated titanium plates that comprise the integrated fixation solution in our VerteBRIDGE fusion products are distinct in their ability to be implanted directly in the plane of the surgical exposure, with a minimally invasive surgical technique and provide screwless fixation intra-discally through the interbody device. VerteBRIDGE plating increases segmental stability, and its multiple sizing options are designed to provide significant intra-operative flexibility. The products in our VerteBRIDGE platform are composed of poly-ether-ether-ketone, or PEEK, a high performance polymer. Some surgeons may choose to use implants composed of alternative implant materials, such as allograft bone or titanium. VerteBRIDGE is applicable for one- or two-level cervical and lumbar fusion with or without supplemental fixation. Our VerteBRIDGE platform products consist of ROI-C, ROI-A, ROI-A Oblique and Avenue L.
Our Mobi non-fusion platform utilizes an ultra-high molecular weight polyethylene core and cobalt chromium alloy superior and inferior endplates. The Mobi platform can be used in cervical and lumbar procedures, although the highlight of our Mobi platform is our Mobi-C cervical disc replacement device. Mobi-C endplates incorporate short, lateral, inclined teeth that provide initial stability and fixation. The endplates are titanium plasma sprayed and coated with hydroxyapatite, an essential ingredient of normal bone, that helps promote bone ongrowth and long-term fixation. The mobile bearing core is designed to move within the prosthesis as the neck bends and twists, thereby simulating the movement of a healthy disc. The mobile core feature is also designed to minimize stresses in the implant-to-bone interface. The surgical technique to implant Mobi-C avoids the need to cut into the vertebral bone above and below the implant or to perform significant endplate preparation. We believe that Mobi-C is further differentiated by its ability to be easily adjusted, removed or repositioned intra-operatively. Mobi-C is indicated in the United States for the treatment of symptomatic cervical disc disease with radiculopathy or myelopathy at one or two contiguous levels.
We also have a broad portfolio of traditional fusion products. Our traditional fusion products include Easyspine, MC+, ROI, ROI-T, SpineTune and C-Plate. Unlike the products in our VerteBRIDGE platform or Mobi-C non-fusion platform, which offer highly differentiated features and benefits not found in competitive devices, our traditional fusion products are those devices that we offer for sale, but which cannot be significantly differentiated from competitive devices from a feature or clinical benefit perspective. Some industry experts may describe such traditional fusion products as spine commodity products. Examples include pedicle screw systems, anterior cervical plates and interbody cages absent integrated fixation.
Risks Affecting Our Business
Our business is subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely affect our business, financial condition, results of operations, cash
flows and prospects, that you should consider before making a decision to invest in our common stock. These risks are discussed more fully in the Risk Factors section of this prospectus, beginning on page 14.
These risks include, but are not limited to, the following:
We currently have a subsidiary, LDR Médical S.A.S., a French société par actions simplifiée, which we refer to as Médical, whose capital stock is currently held by LDR Holding and certain of our existing stockholders and employees. Pursuant to the terms of an amended and restated put-call agreement, as amended, between LDR Holding, Médical and Médicals shareholders and warrant holders, upon consummation of this offering, each share of Médicals Class A Stock (excluding outstanding warrants to purchase Médicals Class A Stock) will be automatically exchanged for 39.15588 shares of our common stock. Following the exchange of capital stock of Médical for the capital stock of LDR Holding, which
we refer to as the Reorganization, Médical will become a wholly owned subsidiary of LDR Holding. As of June 30, 2013, 542,129 shares of Médicals Class A common stock are convertible into 21,227,539 shares of our common stock upon consummation of the Reorganization. Following the consummation of this offering, in the event that any holder of a warrant to purchase Médicals Class A Stock exercises his or her warrant, the shares of Médical received by such holder will be automatically converted into shares of our common stock at the exchange ratio listed above.
Médical was originally formed in 2000. In 2004, LDR Spine USA, Inc., a Delaware corporation, which we refer to as Spine, was formed. In 2006, these entities underwent a corporate reorganization pursuant to which we were incorporated as a Delaware corporation, the stockholders of Spine contributed their shares of Spine to us in exchange for shares of our common stock and certain stockholders of Médical contributed their shares of Médical to us in exchange for shares of our common stock. We refer to these transactions as the 2006 Reorganization. As a result of the 2006 Reorganization, Spine became our wholly owned subsidiary and Médical became a partially owned subsidiary in which we currently hold approximately 53% of its currently outstanding capital stock. Following the Reorganization described above, Médical will become our wholly owned subsidiary.
Our principal executive office is located at 13785 Research Boulevard, Suite 200, Austin, Texas 78750 and our telephone number is (512) 344-3333. Our website address is http://www.ldrholding.com. The information contained in or accessible from our website is not incorporated into this prospectus, and you should not consider it part of this prospectus.
The LDR Holding name, the LDR name, the Mobi, Mobi-C, Mobidisc, Avenue, C-Plate, VerteBRIDGE, ROI, Spinetune, Easyspine, MC+, ROI-A, ROI-C and ROI-T names, and the phrase a passion for innovation and related images, logos and symbols appearing in this prospectus are our properties, trademarks and service marks. Other marks appearing in this prospectus are the property of their respective owners.
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 of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting requirements and is relieved of certain other significant requirements that are otherwise generally applicable to public companies. As an emerging growth company:
We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act of 1933, as amended, or the Securities Act, which such fifth anniversary will occur in 2018. However, if certain events occur prior to the end of such five-year period, including if we become a large accelerated filer, our annual gross revenues exceed $1.0 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period.
The number of shares of common stock outstanding after this offering is based on shares of our common stock outstanding as of June 30, 2013, and excludes:
Except as otherwise noted, all information in this prospectus:
The following tables summarize our consolidated financial and operating data for the periods indicated. The summary consolidated statement of comprehensive income (loss) data for the years ended December 31, 2012 and 2011 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statement of comprehensive income (loss) data for the year ended December 31, 2010 has been derived from our audited consolidated financial statements, which are not included in this prospectus. The consolidated statement of comprehensive income (loss) data for the six months ended June 30, 2013 and 2012 and the summary consolidated balance sheet data as of June 30, 2013 have been derived from our unaudited interim consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future, and our results for the six months ended June 30, 2013 are not necessarily indicative of our full year results. The summary consolidated financial information reflects a for reverse stock split of our common stock to be effected immediately prior to the consummation of this offering.
The summary consolidated financial information should be read in conjunction with the sections of this prospectus entitled Use of Proceeds, Capitalization, Unaudited Pro Forma Financial Information and Selected Consolidated Financial Information and our financial statements and notes thereto included elsewhere in this prospectus.
footnotes continued on following page
The following table presents a reconciliation of net loss to Adjusted EBITDA for the periods presented:
Investing in our common stock involves a high degree of risk. You should carefully consider the following risks and other information contained in this prospectus before you decide whether to buy our common stock. If any of the events contemplated by the following discussion of risks should occur, our business, results of operations and financial condition could suffer significantly. As a result, the market price of our common stock could decline, and you may lose all or part of your investment in our common stock.
Risks Related to Our Business
We have incurred losses in the past and may not be able to achieve or sustain profitability in the future.
We have incurred significant losses in most fiscal years since inception. We earned net income of $1.9 million in 2010, and incurred net losses of $1.8 million, $9.7 million and $4.8 million in 2011, 2012 and the six months ended June 30, 2013, respectively. As a result of ongoing losses, we had an accumulated deficit of $60.7 million at June 30, 2013. We expect to continue to incur significant product development, clinical and regulatory, sales and marketing and other expenses. Additionally, following this offering, our general and administrative expense will increase due to the additional operational and reporting costs associated with being a public company. We will need to generate significant additional revenue to achieve and maintain profitability, and even if we achieve profitability, we cannot be sure that we will remain profitable for any substantial period of time. Our failure to achieve or maintain profitability could negatively impact the value of our common stock.
Our VerteBRIDGE and Mobi platform products represent highly concentrated product offerings that may limit our ability to grow our revenue and compete effectively against other companies, and our business would be adversely affected in the event we are unable to sell one or more of our products.
We offer novel and proprietary surgical technologies for use in both the fusion and non-fusion spine implant markets. Our VerteBRIDGE fusion platform and Mobi non-fusion platform products are designed for both cervical and lumbar applications. Our VerteBRIDGE and Mobi platform products address only a portion of the types of products used in spine implant surgeries. We do not offer surgeons a full range of products to meet all of their needs in spine implant surgeries and product clearances vary by country. For example, our product offering does not include a portfolio of osteobiologic solutions, minimally invasive posterior instrumentation or posterior cervical instrumentation. Our competitors products are often used in the same surgery as our products, and this may limit our ability to compete effectively against our competitors, limiting our revenue growth.
In addition, a substantial amount of our revenue is generated by just a few products. For example, in 2012, 80% of our revenue came from our VerteBRIDGE and Mobi platform products, most of which came from products incorporating our VerteBRIDGE plating technology. These categories of products are dominated by ROI-A and Avenue L, in the lumbar product portfolio, and ROI-C, in the cervical product portfolio. In the event we are unable to market and sell these devices or any future device that represents a substantial amount of our revenue, our results of operations and financial condition will be materially adversely affected.
To be commercially successful, we must convince spine surgeons that our VerteBRIDGE and Mobi platform products are attractive alternatives to our competitors products.
Spine surgeons play a significant role in determining the course of treatment and, ultimately, the type of product that will be used to treat a patient, so we rely on effectively marketing to them. Acceptance of our products depends on educating spine surgeons as to the distinctive characteristics, perceived clinical
benefits, safety and cost-effectiveness of our products as compared to our competitors products and on training spine surgeons in the proper application of our products. If we are not successful in convincing spine surgeons of the merits of our products or educating them on the use of our products, they may not use our products and we will be unable to increase our sales and sustain growth or reach profitability. Our exclusive technology products represented approximately 74% of our sales for the year ended December 31, 2011 and approximately 80% of our sales for the year ended December 31, 2012. As a result, continued market acceptance of those products is critical to our continued success. If the volume of sales of these products declines, our business, financial position and results of operations could be materially and adversely affected.
Furthermore, we believe spine surgeons will not widely adopt our products unless they determine, based on experience, clinical data and published peer-reviewed journal articles, that our products and the techniques to implant them provide benefits or are attractive alternatives to our competitors products. Surgeons may be hesitant to change their medical treatment practices for the following reasons, among others:
In addition, we believe recommendations and support of our products by influential spine surgeons are essential for market acceptance and adoption. If we do not receive support from such surgeons or long-term data does not show the benefits of using our products, surgeons may not use our products. In such circumstances, we may not achieve expected sales and may be unable to achieve profitability.
We only recently received approval from the U.S. Food and Drug Administration for our Mobi-C device and have no experience selling it in the United States.
Our future growth is significantly dependent on the success of Mobi-C, our cervical disc replacement device, in the U.S. market. While we have been selling Mobi-C internationally since 2004, we did not obtain approval for Mobi-C from the U.S. Food and Drug Administration, or FDA, until August of 2013 and are currently in the process of commencing commercial launch of the product in the United States. As a result, we have no history selling Mobi-C in the United States upon which you can evaluate its prospects. We cannot assure you that our launch of Mobi-C in the U.S. market will be successful, and our future growth may be limited.
Even if we are successful with Mobi-Cs launch in the U.S. market, its commercial success depends on surgeon acceptance and third-party payor coverage and reimbursement.
The current standard of care for the treatment of cervical disc disease is anterior cervical discectomy and fusion, or ACDF. The market for cervical disc replacements in the United States is still developing. While we believe that this market will grow in the near future as a result of the introduction of a new generation of advanced cervical disc replacements and broader coverage by commercial payors, there can be no assurance that surgeons will widely adopt cervical disc replacement as an alternative to ACDF, and even if they do, that they will elect to use Mobi-C and not a product, or combination of products, offered by one of our competitors.
The success of Mobi-C depends significantly on the availability and level of government and third-party payor reimbursement for procedures using our Mobi-C device. Many payors, including Medicare contractors, state Medicaid programs and private insurers may not reimburse for use of cervical disc replacement devices, including our Mobi-C device. While we believe there is a trend for broader coverage of cervical disc replacement devices in the United States, we cannot assure you that this coverage will continue to improve or that payors will not cease reimbursing for cervical disc replacement devices altogether. Additionally, even where reimbursement for cervical disc replacement devices exists, it is limited to treatment of cervical disc disease in one vertebral level, or one-level disease. Furthermore, surgeons are reimbursed at a significantly lower amount for performing a procedure using a cervical disc replacement device than traditional ACDF. In addition to its approval for treatment of one-level disease, Mobi-C is the first cervical disc replacement device approved to treat cervical disc disease in two adjacent vertebral levels, or two-level disease. As a result, we will need to work with payors to obtain coverage for the use of Mobi-C to treat two-level cervical disc disease. Payors may, however, conclude that Mobi-C for the treatment of two-level disease should still be considered investigational, may defer coverage pending additional long-term data or may deny coverage based on a combination of these or other factors. Furthermore, even if government and third-party payors elect to reimburse for Mobi-C for the treatment of two-level cervical disc disease, it is possible that these payors may also elect to reimburse for our competitors cervical disc replacement devices when used to treat two-level cervical disc disease, even without our competitors products having FDA approval for such treatment. If the trend towards reimbursement of procedures involving cervical disc replacement devices does not continue, slows or stops altogether, our ability to market and sell Mobi-C would be significantly limited and our business and operations would suffer. Additionally, if we establish reimbursement for Mobi-C for treatment of two-level cervical disc disease, and our competitors products receive the same treatment without FDA approval for such treatment, our competitive advantage in the United States would be limited and that would significantly limit our ability to grow our business.
If reimbursement from third-party payors for our products significantly declines, surgeons, hospitals and other healthcare providers may be reluctant to use our products and our sales may decline.
In the United States, surgeons, hospitals and other healthcare providers who purchase medical devices like our products generally rely on third-party payors, principally federal Medicare, state Medicaid and private health insurance plans, to pay for all or a portion of the costs and fees associated with the spinal surgery and the products utilized in the procedure, including the cost of our products. Our customers access to adequate coverage and reimbursement for the procedures performed using our products by government and third-party payors is central to the acceptance of our current and future products. We may be unable to sell our products on a profitable basis if government and third-party payors deny coverage or reduce their current levels of reimbursement. To contain costs of new technologies, governmental healthcare programs and third-party payors are increasingly scrutinizing new and even existing treatments by requiring extensive evidence of favorable clinical outcomes and cost effectiveness. Surgeons, hospitals and other healthcare providers may not purchase our products if they do not receive satisfactory reimbursement from these third-party payors for the cost of the procedures using our products. Payors continue to review their coverage policies carefully for existing and new therapies and can, without notice, deny coverage for treatments that include the use of our products. If we are not successful in reversing existing non-coverage policies, if other third-party payors issue similar policies or if we are not able to be reimbursed at cost-effective levels, this could have a material adverse effect on our business and operations.
In addition, some healthcare providers in the United States have adopted or are considering a managed care system in which the providers contract to provide comprehensive healthcare for a fixed cost per person. Healthcare providers may attempt to control costs by authorizing fewer surgical procedures or by requiring the use of the least expensive implant available. Additionally, as a result of reform of the U.S. healthcare system, changes in reimbursement policies or healthcare cost containment initiatives may limit or restrict coverage and reimbursement for our products and cause our revenue to decline.
Outside of the United States, reimbursement systems vary significantly by country. Many foreign markets have government-managed healthcare systems that govern reimbursement for spine implants and procedures. Additionally, some foreign reimbursement systems provide for limited payments in a given period and therefore result in extended payment periods. If adequate levels of reimbursement from third-party payors outside of the United States are not obtained, international sales of our products may decline.
If we are unable to maintain and expand our network of direct sales representatives, independent sales agencies and international distributors, we may not be able to generate anticipated sales.
We first began operations in 2000 and have operated in the United States since 2005. We have limited experience marketing and selling our Mobi-C cervical disc replacement device, for which we received FDA approval in August 2013, and we have no experience marketing that device in the United States. Our sales organization consists of regional sales managers that lead direct sales representatives and over 150 independent sales agencies that employ over 450 sales representatives. Our U.S. sales organization includes over 35 sales managers. For the year ending December 31, 2012, the vast majority of our U.S. sales were from independent sales agencies. Outside of the United States, we sell through direct sales representatives and distributors that are often managed by our direct sales managers located in our foreign offices. Our international operations consists of over 150 employees and over 75 distributors, which together had sales in over 25 countries in 2012. Our operating results are directly dependent upon the sales and marketing efforts of not only our employees, but also our independent sales agencies and distributors. We expect our direct sales representatives, independent sales agencies and distributors to develop long-lasting relationships with the surgeons they serve. If our direct sales representatives, independent sales agencies or distributors fail to adequately promote, market and sell our products, our sales could significantly decrease.
We face significant challenges and risks in managing our geographically dispersed distribution network and retaining the individuals who make up that network. If any of our direct sales representatives were to leave us, or if any of our independent sales agencies or distributors were to cease to do business with us, our sales could be adversely affected. Some of our independent sales agencies and distributors account for a significant portion of our sales volume, and if any such independent sales agencies or distributors were to cease to distribute our products, our sales could be adversely affected. In such a situation, we may need to seek alternative independent sales agencies or distributors or increase our reliance on our direct sales representatives, which we may be unable to do in a timely and efficient manner, if at all. While a majority of our independent sales agencies and distributors have contractual exclusivity, that contractual exclusivity is often limited to one or more of our products. Where some level of exclusivity exists, these independent sales agencies and distributors are permitted to offer a competitors products that do not compete directly with our products. Our competitors may require that these sales agents and distributors cease doing business with us. In addition, we may not be able to rely on our independent sales agencies or distributors to distribute new products that we introduce that compete with products of our competitors that they also represent. If a direct sales representative, independent sales agency or distributor were to depart and be retained exclusively by one of our competitors, we may be unable to prevent them from helping competitors solicit business from our existing customers, which could further adversely affect our sales. Because of the intense competition for their services, we may be unable to recruit or retain additional qualified independent sales agencies or distributors or to hire additional direct sales representatives to work with us. We may not be able to enter into agreements with them on favorable or commercially reasonable terms, if at all. Failure to hire or retain qualified direct sales representatives or independent sales agencies or distributors would prevent us from expanding our business and generating sales.
As we launch new products and increase our marketing efforts with respect to existing products, we will need to expand the reach of our marketing and sales networks. Our future success will depend largely on
our ability to continue to hire, train, retain and motivate skilled sales managers, direct sales representatives and independent sales agencies and distributors with significant technical knowledge in various areas, such as spinal care practices, spine injuries and disease and spinal health. New hires require training and take time to achieve full productivity. If we fail to train new hires adequately, or if we experience high turnover in our sales force in the future, we cannot be certain that new hires will become as productive as may be necessary to maintain or increase our sales.
If we are unable to expand our sales and marketing capabilities domestically and internationally, we may not be able to effectively commercialize our products, which would adversely affect our business, results of operations and financial condition.
We operate in a very competitive business environment and if we are unable to compete successfully against our existing or potential competitors, our sales and operating results may be negatively affected and we may not grow.
The spine industry is intensely competitive, subject to rapid change and highly sensitive to the introduction of new products or other market activities of industry participants. Our ability to compete successfully will depend on our ability to develop future products that reach the market in a timely manner, are well adopted by surgeon customers and receive adequate coverage and reimbursement from third-party payors. Because of the size of the potential market, we anticipate that companies will dedicate significant resources to developing products competitive to ours.
We have numerous competitors in the spine market, which include Medtronic Spine and Biologics, DePuy Synthes Spine (a division of Johnson & Johnson), Globus Medical, Nuvasive and Stryker, which together represent a significant portion of the spine market. We also compete with many smaller spine market participants such as Alphatec Spine, Biomet Spine, Integra, Orthofix International and Zimmer. At any time, these or other industry participants may develop alternative treatments, products or procedures for the treatment of spine disorders that compete directly or indirectly with our products. They may also develop and patent processes or products earlier than we can or obtain regulatory clearance or approvals for competing products more rapidly than we can, which could impair our ability to develop and commercialize similar processes or products. If alternative treatments are, or are perceived to be, superior to our spine surgery products, sales of our products could be negatively affected and our results of operations could suffer.
Many of our larger competitors are either publicly traded or divisions or subsidiaries of publicly traded companies. These competitors enjoy several competitive advantages over us, including:
The spine industry is becoming increasingly crowded with new participants. Many of these new competitors specialize in a specific product or focus on a particular market segment, making it more difficult for us to increase our overall market position. The frequent introduction by competitors of products that are, or claim to be, superior to our products, or that are alternatives to our existing or planned products may also create market confusion that may make it difficult to differentiate the benefits of our products over competing products. In addition, the entry of multiple new products and competitors may lead some of our competitors to employ pricing strategies that could adversely affect the pricing of our products and pricing in the spine market generally.
As a result, without the timely introduction of new products and enhancements, our products may become obsolete over time. If we are unable to develop innovative new products, maintain competitive pricing and offer products that spine surgeons perceive to be as reliable as those of our competitors, our sales or margins could decrease, thereby harming our business.
Our reliance on third-party suppliers, including limited source and single source suppliers, for our implants and instruments could harm our ability to meet demand for our products in a timely and cost effective manner.
We rely on third-party suppliers, almost all of which are located in Europe, to manufacture and supply our implants and instruments. We currently rely on a number of limited or single source suppliers, such as Greatbatch, which supplies Mobi-C cervical disc replacement devices for the U.S. market, InTech Medical, which supplies a majority of our surgical instrumentation, and CF Plastiques, which is one of our interbody device suppliers. We generally do not have long-term contracts with our suppliers, and, as a result, our suppliers generally are not required to provide us with any guaranteed minimum production levels. As a result, there can be no assurances that we will be able to obtain sufficient quantities of key components or products in the future, which could have a material adverse effect on our business.
For us to be successful, our suppliers must be able to provide us with products and components in substantial quantities, in compliance with regulatory requirements, in accordance with agreed upon specifications, at acceptable costs and on a timely basis. Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured products ourselves, including reliance on the third party for regulatory compliance and quality assurance, the possibility that products will not be delivered on a timely basis, the possibility of increases in pricing for our products, the possibility of breach of the manufacturing agreement by the third party and the possibility of termination or non-renewal of the agreement by the third party.
In addition, our reliance on third-party suppliers involves a number of risks, including, among other things:
If any of these risks materialize, it could significantly increase our costs and impact our ability to meet demand for our products and could have a material adverse effect on our business. If we are unable to satisfy commercial demand for our products in a timely manner, our ability to generate revenue would be impaired, market acceptance of our products could be adversely affected and customers may instead purchase or use our competitors products. In addition, we could be forced to secure new or alternative components through a replacement supplier. Securing a replacement supplier could be difficult, especially for complex components that are manufactured in accordance with our custom specifications.
There are a limited number of suppliers and third-party manufacturers that operate under the FDAs current Good Manufacturing Practices, or cGMP, maintain certifications of the International Standards Organization, or ISO, that are recognized as harmonized standards in the European Union, and have the necessary expertise and capacity to manufacture our products. As a result, it may be difficult for us to locate manufacturers for our anticipated future needs, and our anticipated growth could strain the ability of our current suppliers to deliver products, materials and components to us. If we are unable to arrange for third-party manufacturing of our products, or to do so on commercially reasonable terms, we may not be able to complete development of, market and sell our new products.
The introduction of new or alternative components may require design changes to our system that are subject to FDA and other regulatory clearances, approvals or new CE Certificates of Conformity. We may also be required to assess the new manufacturers compliance with all applicable regulations and guidelines, which could further impede our ability to manufacture our products in a timely manner. As a result, we could incur increased production costs, experience delays in deliveries of our products, suffer damage to our reputation and experience an adverse effect on our business and financial results.
We may in the future elect to manufacture certain new products developed or certain existing products without the assistance of third parties. However, in order to make that election, we will need to invest substantial additional funds and recruit qualified personnel in order to operate our development manufacturing facility on a commercial basis. There can be no assurance that we will successfully manufacture our own products and if we are not able to make or obtain adequate supplies of our products, it will be more difficult for us to launch new products and compete effectively.
Pricing pressure from hospital customers and our competitors may impact our ability to sell our products at prices necessary to support our current business strategies.
The spine market has attracted numerous new companies and technologies, and encouraged more established companies to intensify competitive pricing pressure. As a result of this increased competition, we believe there will be increased pricing pressure in the future. Because the hospital and other healthcare provider customers that purchase our products typically bill various third-party payors to cover all or a portion of the costs and fees associated with the procedures in which our products are used, including the
cost of the purchase of our products, changes in the amount such payors are willing to reimburse our customers for procedures using our products could create pricing pressure for us. If competitive forces drive down the prices we are able to charge for our products, our profit margins will shrink, which will adversely affect our ability to invest in and grow our business.
Much of the pricing competition relates to traditional fusion products, such as pedicle screws, cervical plates and traditional cages. We may not be successful in convincing third-party payors of the superiority of our innovative products as compared to traditional products, and reimbursement for these products may be significantly impacted. Additionally, as more competitors introduce innovative fusion products, we may face additional pricing pressure for our products that will impact our future results.
Moreover, many hospital customers, through the contracting process, limit the number of spine manufacturers that may sell to their institution. As we have a limited number of products to sell, hospitals may choose to contract with our competitors who have a broader range of products that may be used in a wider variety of spine procedures, regardless of the differentiated attributes of our products or local surgeon preference for our products. In addition, our competitors may actively position their broader product portfolios against us during the hospital contracting process. Limitations on the number of hospitals to which we can sell may significantly restrict our ability to grow.
We obtain some of our products through private-label distribution agreements that subject us to minimum performance requirements and other criteria. Our failure to satisfy those criteria could cause us to lose those rights of distribution.
We have entered into private-label distribution agreements with manufacturers of Spinetune and C-Plate. These manufacturers brand their products according to our specifications, and we may have exclusive rights in certain fields of use and territories to sell these products subject to minimum purchase or other performance criteria. Though these agreements do not individually or in the aggregate represent a material portion of our business, if we do not meet these performance criteria, or if we fail to renew these agreements, we may lose exclusivity in a field of use or territory or cease to have any rights to these products, which could have an adverse effect on our sales and our business. Furthermore, some of these manufacturers are smaller, undercapitalized companies that may not have sufficient resources to continue operations or to continue to supply us sufficient product without additional access to capital.
If our private label manufacturers fail to provide us with sufficient supply of their products, or if their supply fails to meet appropriate quality requirements, our business could suffer.
Our private-label manufacturers are sole source suppliers of the products we purchase from them. We may not be able to locate or establish additional or replacement manufacturers of these products in a timely manner. Moreover, these private-label manufacturers typically own the intellectual property associated with their products, and even if we could find a replacement manufacturer for the product, we may not have sufficient rights to enable the replacement party to manufacture the product. While we have entered into agreements with our private-label manufacturers to provide us sufficient quantities of products, we cannot assure you that they will do so, or that any products they do provide us will not contain defects in quality. Our private-label manufacturing agreements have expiration terms and the manufacturers may not choose to renew them. The agreements also include provisions allowing for termination under certain circumstances such as either partys uncured material breach, either partys insolvency or failure to make minimum purchases.
We also rely on these private-label manufacturers to comply with the regulations and requirements of the FDA, the competent authorities or notified bodies of the EU Member States, Iceland, Liechtenstein and Norway, European Economic Area, or EEA countries, or foreign regulatory authorities and their failure to comply with strictly enforced regulatory requirements could expose us to regulatory action including warning letters, product recalls, termination of distribution, product seizures or civil and criminal
penalties. Any quality control problems that we experience with respect to products manufactured by our private-label manufacturers, any inability by us to provide our customers with sufficient supply of products or any investigations or enforcement actions by the FDA, the competent authorities or notified bodies of the EEA countries or other foreign regulatory authorities could adversely affect our reputation or commercialization of our products and adversely and materially affect our business and operating results.
If we do not successfully implement our business strategy, our business and results of operations will be adversely affected.
We formed our business strategy based on assumptions about the spine market that might prove wrong. We believe that various demographics and industry-specific trends, including the aging of the general population, increasingly active lifestyles, our products, and increasing acceptance of cervical disc replacements, will help drive growth in the spine market and our business, but these demographics and trends are uncertain. Actual demand for our products could differ materially from projected demand if our assumptions regarding these factors prove to be incorrect or do not materialize, or if alternative treatments to those offered by our products gain widespread acceptance.
We may not be able to successfully implement our business strategy. To implement our business strategy, we need to, among other things, establish our Mobi-C cervical disc replacement device as a standard of care for cervical disc replacement, leverage our VerteBRIDGE fusion platform to further penetrate the global spine fusion market, expand the size and productivity of our U.S. and international sales organization and expand our technology portfolio. Our strategy of focusing exclusively on the spine market may limit our ability to grow. In addition, we are seeking to increase our sales and, in order to do so, will need to commercialize additional products and expand the number of our direct sales representatives, independent sales agencies and international distributors in new and existing territories, all of which could result in our becoming subject to additional or different foreign and domestic regulatory requirements with which we may not be able to comply. Moreover, even if we successfully implement our business strategy, our operating results may not improve or may decline. We may decide to alter or discontinue aspects of our business strategy and may adopt different strategies due to business or competitive factors not currently foreseen, such as new medical technologies that would make our products obsolete. Any failure to implement our business strategy may adversely affect our business, results of operations and financial condition.
The proliferation of physician-owned distributorships could result in increased pricing pressure on our products or harm our ability to sell our products to physicians who own or are affiliated with those distributorships.
Physician-owned distributorships, or PODs, are medical device distributors that are owned, directly or indirectly, by physicians. These physicians derive revenue from selling or arranging for the sale of medical devices for use in procedures they perform on their own patients at hospitals or ambulatory surgical centers, or ASCs, that agree to purchase from or through the POD, or that otherwise furnish ordering physicians with income that is based directly or indirectly on those orders of medical devices.
These companies and the physicians who own, or partially own, them have significant market knowledge and access to the surgeons who use our products and the hospitals that purchase our products, and growth in this area may reduce our ability to compete effectively for business from surgeons who own such distributorships. On March 26, 2013, the U.S. Department of Health and Human Services Office of Inspector General issued a special fraud alert on PODs and stated that it views PODs as inherently suspect under the Federal Anti-Kickback Statute and is concerned about the proliferation of PODs. Nonetheless, the number of PODs in the spine industry may continue to grow as economic pressures increase throughout the industry, hospitals, insurers and physicians search for ways to reduce costs, and, in the case of the physicians, search for ways to increase their incomes.
If we are unable to train surgeons on the safe and appropriate use of our products, we may be unable to achieve our expected growth.
An important part of our sales process includes the ability to train surgeons on the safe and appropriate use of our products. If we become unable to attract potential new surgeon customers to our training programs, or if we are unable to attract existing customers to training programs for future products, we may be unable to achieve our expected growth.
There is a learning process involved for spine surgeons to become proficient in the use of our products. It is critical to the success of our commercialization efforts to train a sufficient number of spine surgeons and to provide them with adequate instruction in the use of our products via trade shows and leads generated by our sales force. This training process may take longer than expected and may therefore affect our ability to increase sales. Following completion of training, we rely on the trained surgeons to advocate the benefits of our products in the broader marketplace. Convincing surgeons to dedicate the time and energy necessary for adequate training is challenging, and we cannot assure you we will be successful in these efforts. If surgeons are not properly trained, they may misuse or ineffectively use our products. This may also result in unsatisfactory patient outcomes, patient injury, negative publicity or lawsuits against us, any of which could have an adverse effect on our business.
Although we believe our training methods for surgeons are conducted in compliance with FDA and other applicable regulations, if the FDA determines that our training constitutes promotion of an unapproved use, they could request that we modify our training or subject us to regulatory enforcement actions, including the issuance of a warning letter, injunction, seizure, civil fine and criminal penalty.
We have a limited operating history and may face difficulties encountered by early stage companies in new and rapidly evolving markets.
We began operations in 2000. Accordingly, we have a limited operating history upon which to base an evaluation of our business and prospects. In assessing our prospects, you must consider the risks and difficulties frequently encountered by early stage companies in new and rapidly evolving markets, particularly companies engaged in the development and sales of medical devices. These risks include our ability to:
We can also be negatively affected by general economic conditions. Because of our limited operating history, we may not have insight into trends that could emerge and negatively affect our business.
As a result of these or other risks, our business strategy might not be successful.
Our business could suffer if we lose the services of key members of our senior management, key advisors or personnel.
We are dependent upon the continued services of key members of our executive management and a limited number of key advisors and personnel. In particular, we are highly dependent on the skills and leadership of our founders and executive management team. The loss of any one of these individuals could disrupt our operations or our strategic plans. Additionally, our future success will depend on, among other things, our ability to continue to hire and retain the necessary qualified scientific, technical, sales, marketing and managerial personnel, for whom we compete with numerous other companies, academic institutions and organizations. The loss of members of our management team, key advisors or personnel, or our inability to attract or retain other qualified personnel or advisors, could have a material adverse effect on our business, results of operations and financial condition.
The safety and efficacy of some of our products is not yet supported by long-term clinical data, which could limit sales, and our products might therefore prove to be less safe or effective than initially thought.
Our VerteBRIDGE platform products that we market in the United States either have received premarket clearance under Section 510(k) of the U.S. Federal Food, Drug, and Cosmetic Act, or FDCA, or are exempt from premarket review. The FDAs 510(k) clearance process requires us to show that our proposed product is substantially equivalent to another 510(k)-cleared product. This process is shorter and typically requires the submission of less supporting documentation than other FDA approval processes and does not always require long-term clinical studies. In the European Union, manufacturers of medical devices are required by Directive 93/42/EEC to collect post-marketing clinical data in relation to their CE marked medical devices. Post-market surveillance includes the conduct of post-market clinical follow-up studies permitting manufacturers to gather information concerning quality, safety or performance of medical devices after they have been placed on the market in the EU. All information collected as part of the post-market surveillance process must be reviewed, investigated and analyzed on a regular basis in order to determine whether trending conclusions can be made concerning the safety or performance of the medical device and decisions must be taken in relation to the continued marketing of medical devices currently on the market. We expect to incur ongoing costs to comply with these post-market clinical obligations in France and other EU markets for so long as we continue to market and sell products in those markets. We anticipate that these costs will be immaterial going forward. As a result, except for Mobi-C, we lack the breadth of published long-term clinical data supporting the safety and efficacy of our cervical technology products or our lumbar technology products and the benefits they offer that might have been generated in connection with other approval processes. For these reasons, spine surgeons may be slow to adopt our products, we may not have comparative data that our competitors have or are generating, and we may be subject to greater regulatory and product liability risks. Further, future patient studies or clinical experience, including those that we are starting in France, may indicate that treatment with our products does not improve patient outcomes. Such results would slow the adoption of our products by spine surgeons, would significantly reduce our ability to achieve expected sales and could prevent us from achieving and maintaining profitability. Moreover, if future results and experience indicate that our products cause unexpected or serious complications or other unforeseen negative effects, we could be subject to mandatory product recalls, suspension or withdrawal of FDA or other governments clearance or approval, CE Certificates of Conformity, significant legal liability or harm to our business reputation.
If we do not enhance our product offerings through our research and development efforts, we may be unable to compete effectively.
In order to increase our market share in the spine market, we must enhance and broaden our product offerings in response to changing customer demands and competitive pressures and technologies. We
might not be able to successfully develop, obtain regulatory approval, clearance or CE Certificates of Conformity to market new products, and our future products might not be accepted by the surgeons or the third-party payors who reimburse for many of the procedures performed with our products. The success of any new product offering or enhancement to an existing product will depend on numerous factors, including our ability to:
If we do not develop and obtain regulatory clearance, approval or CE Certificates of Conformity for new products or product enhancements in time to meet market demand, or if there is insufficient demand for these products or enhancements, our results of operations will suffer. Our research and development efforts may require a substantial investment of time and resources before we are adequately able to determine the commercial viability of a new product, technology, material or other innovation. In addition, even if we are able to develop enhancements or new generations of our products successfully, these enhancements or new generations of products may not produce sales in excess of the costs of development and they may be quickly rendered obsolete by changing customer preferences or the introduction by our competitors of products embodying new technologies or features.
If we fail to manage our anticipated growth properly, our business could suffer.
Our growth has placed, and, if it continues, will continue to place, a significant strain on our management and our operational and financial resources and systems. Failure to manage our growth effectively could cause us to over-invest or under-invest in infrastructure, and result in losses or weaknesses in our infrastructure, which could materially adversely affect us. Additionally, our anticipated growth will increase the demands placed on our suppliers, resulting in an increased need for us to monitor our suppliers carefully for quality assurance. Any failure by us to manage our growth effectively could have an adverse effect on our ability to achieve our development and commercialization goals.
We may seek to grow our business through acquisitions of or investments in new or complementary businesses, products or technologies, and the failure to manage any acquisitions or investments, or the failure to integrate them with our existing business, could have a material adverse effect on us.
From time to time we expect to consider opportunities to acquire or make investments in other technologies, products and businesses that may enhance our capabilities, complement our current products or expand the breadth of our markets or customer base. Potential and completed acquisitions and strategic investments involve numerous risks, including:
We have no current commitments with respect to any acquisition or investment and we have never entered into or completed an acquisition. We do not know if we will be able to identify suitable acquisitions, complete any such acquisitions on favorable terms or at all, successfully integrate any acquired business, product or technology into our business or retain any key personnel, suppliers or international distributors. Our ability to grow through acquisitions successfully depends upon our ability to identify, negotiate, complete and integrate suitable target businesses and to obtain any necessary financing. These efforts could be expensive and time-consuming, and may disrupt our ongoing business and prevent management from focusing on our operations. If we are unable to integrate any acquired businesses, products or technologies effectively, our business, results of operations and financial condition will be materially adversely affected.
We are required to maintain high levels of inventory, which could consume a significant amount of our resources and reduce our cash flows.
As a result of the need to maintain substantial levels of inventory, we are subject to the risk of inventory obsolescence. Many of our products come in sets that feature components in a variety of sizes allowing the implant or device to be customized to the patients needs. In order to market our products effectively, we often must maintain and provide surgeons and hospitals with implant sets, back-up products and products of different sizes. For each surgery, fewer than all of the components of the set are used, and therefore certain portions of the set may become obsolete before they can be used. In the event that a substantial portion of our inventory becomes obsolete, it could have a material adverse effect on our earnings and cash flows due to the resulting costs associated with the inventory impairment charges and costs required to replace such inventory.
We provide instrument sets for each surgery performed using our products, which could consume a significant amount of our resources and reduce our cash flows.
We provide instrument sets for each surgery performed using our products. As a result, we are required to maintain significant levels of instrument sets. The amount of this investment is driven by the number of surgeons or hospitals using our products, and as the number of different surgeons and hospitals that use our products increases, the number of instrument sets required to meet this demand will increase. Because we do not have the sales volume of some larger companies, we may not be able to utilize our instrument sets as often and our return on assets may be lower when compared to such companies. In addition, as we introduce new products, new instrument sets may be required, with a significant initial investment required to accommodate the launch of the product.
Consolidation in the healthcare industry could lead to demands for price concessions or to the exclusion of some suppliers from certain of our markets, which could have an adverse effect on our business, results of operations or financial condition.
Because healthcare costs have risen significantly over the past decade, numerous initiatives and reforms initiated by legislators, regulators and third-party payors to curb these costs have resulted in a consolidation trend in the healthcare industry to aggregate purchasing power. As the healthcare industry consolidates, competition to provide products and services to industry participants has become and will continue to become more intense. This in turn has resulted and will likely continue to result in greater pricing pressures and the exclusion of certain suppliers from important market segments as group purchasing organizations, independent delivery networks and large single accounts continue to use their market power to consolidate purchasing decisions for hospitals. We expect that market demand,
government regulation, third-party coverage and reimbursement policies and societal pressures will continue to change the worldwide healthcare industry, resulting in further business consolidations and alliances among our customers, which may reduce competition, exert further downward pressure on the prices of our products and may adversely impact our business, results of operations or financial condition.
Our sales volumes and our operating results may fluctuate over the course of the year.
Our business is generally not seasonal in nature. However, our sales may be influenced by summer vacation and winter holiday periods, during which we have experienced fewer spine surgeries taking place. We have experienced and continue to experience meaningful variability in our sales and gross profit among quarters, as well as within each quarter, as a result of a number of factors, including, among other things:
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 result of becoming a public company, we will be required, under Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting beginning with our Annual Report on Form 10-K for the year ended December 31, 2014. This assessment will need to include disclosure of 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 over financial reporting, such that there is a reasonable possibility that a material misstatement of a companys annual and interim financial statements will not be detected or prevented on a timely basis.
We are further enhancing the computer systems processes and related documentation necessary to perform the evaluation needed to comply with Section 404. We may not be able to complete our evaluation, testing and any required remediation 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 controls are effective. The effectiveness of our controls and procedures may be limited by a variety of factors, including:
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.
When we cease to be an emerging growth company under the federal securities laws, our auditors will be required to express an opinion on the effectiveness of our internal controls. 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.
We expect to incur significant additional costs as a result of being a public company, which may adversely affect our operating results and financial condition.
We expect to incur costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act, as well as rules implemented by 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. These rules and regulations are expected to increase our accounting, legal and financial compliance costs and make some activities more time-consuming and costly. In addition, we will incur additional costs associated with our public company reporting requirements and we expect those costs to increase in the future. For example, we will be required to devote significant resources to complete the assessment and documentation of our internal control system and financial process under Section 404 of the Sarbanes-Oxley Act, including an assessment of the design of our information systems associated with our internal controls. We will incur significant costs to remediate any material weaknesses we identify through these efforts. We also expect these rules and regulations to 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. We cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
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 significant disruptions in our information technology systems, our business may be adversely affected.
We depend on our information technology systems for the efficient functioning of our business, including accounting, data storage, compliance, purchasing and inventory management. Our current systems are not fully redundant; however, we are in the process of upgrading them. We expect these upgrades to take two to three years to complete. While we will attempt to mitigate interruptions, we may experience difficulties in implementing some upgrades which would impact our business operations, or experience difficulties in operating our business during the upgrade, either of which could disrupt our operations, including our ability to timely ship and track product orders, project inventory requirements, manage our supply chain and otherwise adequately service our customers. In the event we experience significant disruptions as a result of the current implementation of our information technology systems, we may not be able to repair our systems in an efficient and timely manner. Accordingly, such events may disrupt or
reduce the efficiency of our entire operation and have a material adverse effect on our results of operations and cash flows.
We are increasingly dependent on sophisticated information technology for our infrastructure. Our information systems require an ongoing commitment of significant resources to maintain, protect and enhance existing systems. Failure to maintain or protect our information systems and data integrity effectively could have a materially adverse effect on our business. For example, third parties may attempt to hack into systems and may obtain our proprietary information.
Fluctuations in insurance cost and availability could adversely affect our profitability or our risk management profile.
We hold a number of insurance policies, including product liability insurance, directors and officers liability insurance, general liability insurance, property insurance and workers compensation insurance. If the costs of maintaining adequate insurance coverage increase significantly in the future, our operating results could be materially adversely affected. Likewise, if any of our current insurance coverage should become unavailable to us or become economically impractical, we would be required to operate our business without indemnity from commercial insurance providers. If we operate our business without insurance, we could be responsible for paying claims or judgments against us that would have otherwise been covered by insurance, which could adversely affect our results of operations or financial condition.
Risks Related to our Legal and Regulatory Environment
Our medical device products and operations are subject to extensive governmental regulation both in the United States and abroad, and our failure to comply with applicable requirements could cause our business to suffer.
Our medical device products and operations are subject to extensive regulation by the FDA and various other federal, state and foreign governmental authorities, such as the competent authorities of EEA countries. Government regulation of medical devices is meant to assure their safety and effectiveness, and includes regulation of, among other things:
The regulations to which we are subject are complex and have tended to become more stringent over time. Regulatory changes could result in restrictions on our ability to carry on or expand our operations, higher than anticipated costs or lower than anticipated sales.
Before we can market or sell a new regulated product or a significant modification to an existing product in the United States, we must obtain either clearance under Section 510(k) of the FDCA or an approval of a premarket approval, or PMA, application unless the device is specifically exempt from premarket review. In the 510(k) clearance process, the FDA must determine that a proposed device is substantially equivalent to a device legally on the market, known as a predicate device, with respect to intended use, technology and safety and effectiveness, in order to clear the proposed device for marketing. Clinical data is sometimes required to support substantial equivalence. In the PMA approval process, the FDA must determine that a proposed device is safe and effective for its intended use based, in part, on extensive data, including, but not limited to, technical, pre-clinical, clinical trial, manufacturing and labeling data. The PMA process is typically required for devices for which the 510(k) process cannot be used and that are deemed to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices. Modifications to products that are approved through a PMA application generally need FDA approval. Similarly, some modifications made to products cleared through a 510(k) may require a new 510(k). The FDAs 510(k) clearance process usually takes from three to 12 months, but may last longer. The process of obtaining a PMA is much more costly and uncertain than the 510(k) clearance process and generally takes from one to three years, or even longer, from the time the application is submitted to the FDA until an approval is obtained.
In the United States, other than Mobi-C, our currently commercialized products either have received premarket clearance under Section 510(k) of the FDCA or are exempt from premarket review. If the FDA requires us to go through a lengthier, more rigorous examination for future products or modifications to existing products than we had expected, our product introductions or modifications could be delayed or canceled, which could cause our sales to decline. The FDA may demand that we obtain a PMA prior to marketing certain of our future products. In addition, if the FDA disagrees with our determination that a product we currently market is subject to an exemption from premarket review, the FDA may require us to submit a 510(k) or PMA in order to continue marketing the product. Further, even with respect to those future products where a PMA is not required, we cannot assure you that we will be able to obtain the 510(k) clearances with respect to those products.
The FDA can delay, limit or deny clearance or approval of a device for many reasons, including:
In addition, the FDA may change its clearance and approval policies, adopt additional regulations or revise existing regulations, or take other actions that may prevent or delay approval or clearance of our products under development or impact our ability to modify our currently approved or cleared products on a timely basis. For example, in 2011, the FDA announced a Plan of Action to modernize and improve the FDAs premarket review of medical devices, and has implemented, and continues to implement, reforms intended to streamline the premarket review process. In addition, as part of the Food and Drug Administration Safety and Innovation Act of 2012, or FDASIA, Congress enacted several reforms entitled the Medical Device Regulatory Improvements and additional miscellaneous provisions which will further affect medical device regulation both pre- and post-approval. Any change in the laws or regulations that govern the clearance and approval processes relating to our current and future products
could make it more difficult and costly to obtain clearance or approval for new products, or to produce, market and distribute existing products.
The FDA could also reclassify some or all of our products that are currently classified as Class II to Class III requiring additional controls, clinical studies and submission of a PMA for us to continue marketing and selling those products. Under new changes instituted by FDASIA, the FDA may now change the classification of a medical device by administrative order instead of by regulation. Although the revised process is simpler, the FDA must still publish a proposed order in the Federal Register, hold a device classification panel meeting and consider comments from affected stakeholders before issuing the reclassification order. We cannot guarantee that the FDA will not reclassify any of our Class II devices into Class III and require us to submit a PMA for FDA review and approval of the safety and effectiveness of our products.
Any delay in, or failure to receive or maintain, clearance or approval for our products under development could prevent us from generating revenue from these products or achieving profitability. Additionally, the FDA and other regulatory authorities have broad enforcement powers. Regulatory enforcement or inquiries, or other increased scrutiny on us, could dissuade some surgeons from using our products and adversely affect our reputation and the perceived safety and efficacy of our products.
In addition, even after we have obtained the proper regulatory clearance or approval to market a product, the FDA has the power to require us to conduct postmarketing studies. For example, as a condition of approval, we are required to conduct a post-approval study of Mobi-C, as well as an enhanced surveillance study. The post-approval study will take the form of continued follow-up for the existing pivotal clinical trial subjects to evaluate overall success rate over a total of seven years. This study is expected to cost approximately $1.35 million annually and should be completed in the first half of 2015. The enhanced surveillance study will be a post-market surveillance system designed primarily to identify any adverse events, device malfunctions or complaints for patients implanted with the device during the first ten years of commercial use in the United States, with an expected cost of approximately $150,000 per year. Failure to conduct required studies in a timely manner could result in the revocation of the 510(k) clearance or PMA approval for the product that is subject to such a requirement and could also result in the recall or withdrawal of the product, which would prevent us from generating sales from that product in the United States.
In the EEA, our medical devices must comply with the Essential Requirements laid down in Annex I to the EU Medical Devices Directive (Council Directive 93/42/EEC). Compliance with these requirements is a prerequisite to be able to affix the CE mark of conformity to our medical devices, without which they cannot be marketed or sold in the EEA. To demonstrate compliance with the Essential Requirements laid down in Annex I to the Medical Devices Directive we must undergo a conformity assessment procedure, which varies according to the type of medical device and its classification. Except for low risk medical devices (Class I with no measuring function and which are not sterile), where the manufacturer can issue an EC Declaration of Conformity based on a self-assessment of the conformity of its products with the Essential Requirements laid down in Annex I to the Medical Devices Directive, a conformity assessment procedure requires the intervention of a third party organization designated by competent authorities of a EEA country to conduct conformity assessments, or a Notified Body. The Notified Body would typically audit and examine products Technical File and the quality system for the manufacture, design and final inspection of our devices before issuing a CE Certificate of Conformity demonstrating compliance with the relevant Essential Requirements laid down in Annex I to the Medical Devices Directive.
Medical device manufacturers must carry out a clinical evaluation of their medical devices to demonstrate conformity with the relevant Essential Requirements laid down in Annex I to the Medical Device Directive covering safety and performance. This clinical evaluation is part of the products Technical File. A clinical evaluation includes an assessment of whether a medical devices performance is in accordance with its intended use, that the known and foreseeable risks linked to the use of the device
under normal conditions are minimized and acceptable when weighed against the benefits of its intended purpose. The clinical evaluation conducted by the manufacturer must also address any clinical claims, the adequacy of the device labeling and information (particularly claims, contraindications, precautions/warnings) and the suitability of related Instructions for Use. This assessment must be based on clinical data, which can be obtained from (i) clinical studies conducted on the devices being assessed; (ii) scientific literature from similar devices whose equivalence with the assessed device can be demonstrated; or (iii) both clinical studies and scientific literature.
With respect to implantable devices or devices classified as Class III in the European Union, or EU, the manufacturer must conduct clinical studies to obtain the required clinical data, unless relying on existing clinical data from similar devices can be justified. As part of the conformity assessment process, depending on the type of devices, the Notified Body will review the manufacturers clinical evaluation process, assess the clinical evaluation data of a representative sample of the devices subcategory or generic group (for Class IIa and IIb devices), or assess all the clinical evaluation data, verify the manufacturers assessment of that data and assess the validity of the clinical evaluation report and the conclusions drawn by the manufacturer (for implantable and Class III devices). The conduct of clinical studies to obtain clinical data that might be required as part of the described clinical evaluation process can be expensive and time-consuming.
Even after we receive a CE Certificate of Conformity enabling us to affix the CE mark on our products and to sell these products in the EEA countries, a Notified Body or a competent authority may require postmarketing studies of our products. In fact, the French government recently requested us to start such studies on our products sold in France. Failure to comply with such requests in a timely manner could result in the withdrawal of our CE Certificate of Conformity and the recall or withdrawal of the subject product from the European market, which would prevent us from generating sales for that product in Europe. Moreover, each CE Certificate of Conformity is valid for a maximum of five years, more commonly three years. At the end of each period of validity we are required to apply to the Notified Body for a renewal of the CE Certificates of Conformity. There may be delays in the renewal of the CE Certificates of Conformity or the Notified Body may require modifications to our products or to the related Technical Files before it agrees to issue the new CE Certificates of Conformity.
On September 26, 2012, the European Commission adopted a package of legislative proposals designed to replace the existing regulatory framework for medical devices in the EEA. The European Commissions proposals may undergo significant amendments as they are reviewed by the European Council and European Parliament as part of the EU legislative process. If and when adopted the proposed new legislation may prevent or delay the EEA approval or clearance of our products under development or impact our ability to modify our currently EEA approved or cleared products on a timely basis.
To market and sell our products in other countries, we must seek and obtain regulatory approvals, certifications or registrations and comply with the laws and regulations of those countries. These laws and regulations, including the requirements for approvals, certifications or registrations and the time required for regulatory review, vary from country to country. Obtaining and maintaining foreign regulatory approvals, certifications or registrations are expensive, and we cannot be certain that we will receive regulatory approvals, certifications or registrations in any foreign country in which we plan to market our products. If we fail to obtain or maintain regulatory approvals, certifications or registrations in any foreign country in which we plan to market our products, our ability to generate revenue will be harmed.
Failure to comply with applicable laws and regulations could jeopardize our ability to sell our products and result in enforcement actions such as:
Any of these sanctions could result in higher than anticipated costs or lower than anticipated sales and have a material adverse effect on our reputation, business, results of operations and financial condition.
There is no guarantee that the FDA will grant 510(k) clearance or PMA approval of our future products, and failure to obtain necessary clearances or approvals for our future products would adversely affect our ability to grow our business.
Some of our new products will require FDA clearance of a 510(k) or FDA approval of a PMA. The FDA may not approve or clear these products for the indications that are necessary or desirable for successful commercialization. Indeed, the FDA may refuse our requests for 510(k) clearance or premarket approval of new products.
The FDA recently issued guidance documents intended to explain the procedures and criteria the FDA will use in assessing whether a 510(k) submission meets a minimum threshold of acceptability and should be accepted for substantive review. Under the Refuse to Accept guidance, the FDA conducts an early review against specific acceptance criteria to inform 510(k) and PMA submitters if the submission is administratively complete, or if not, to identify the missing element(s). Submitters are given the opportunity to provide the FDA with the identified information. If the information is not provided within a defined time, the submission will not be accepted for FDA review. Significant delays in receiving clearance or approval, or the failure to receive clearance or approval for our new products would have an adverse effect on our ability to expand our business.
Modifications to our products may require new 510(k) clearances or premarket approvals, or may require us to cease marketing or recall the modified products until clearances are obtained.
Any modification to a 510(k)-cleared device that could significantly affect its safety or effectiveness, including significant design and manufacturing changes, or that would constitute a major change in its intended use, design or manufacture, requires a new 510(k) clearance or, possibly, approval of a PMA. The FDA requires every manufacturer to make this determination in the first instance, but the FDA may review any manufacturers decision. The FDA may not agree with our decisions regarding whether new clearances or approvals are necessary. We have modified some of our 510(k) cleared products, and have determined based on our review of the applicable FDA guidance that in certain instances the changes did not require new 510(k) clearances or PMA approval. If the FDA disagrees with our determination and requires us to seek new 510(k) clearances or PMA approval for modifications to our previously cleared
products for which we have concluded that new clearances or approvals are unnecessary, we may be required to cease marketing or distribution of our products or to recall the modified product until we obtain clearance or approval, and we may be subject to significant regulatory fines or penalties.
Furthermore, potential changes to the 510(k) program may make it more difficult for us to make modifications to our previously cleared products, by either imposing more strict requirements on when a new 510(k) clearance for a modification to a previously cleared product must be submitted, or applying more onerous review criteria to such submissions. In July and December 2011, respectively, the FDA issued draft guidance documents addressing when to submit a new 510(k) clearance due to modifications to 510(k)-cleared products and the criteria for evaluating substantial equivalence. The July 2011 draft guidance document was ultimately withdrawn as the result of the FDASIA. As a result, the FDAs original guidance document regarding 510(k) modifications, which dates back to 1997, remains in place. It is uncertain when the FDA will seek to issue new guidance on product modifications. Any efforts to do so could result in a more rigorous review process and make it more difficult to obtain clearance for device modifications.
In the EEA, we must inform the Notified Body that carried out the conformity assessment of the medical devices we market or sell in the EEA of any planned substantial changes to our quality system or changes to our devices which could affect compliance with the Essential Requirements laid down in Annex I to the Medical Devices Directive or the devices intended purpose. The Notified Body will then assess the changes and verify whether they affect the products conformity with the Essential Requirements laid down in Annex I to the Medical Devices Directive or the conditions for the use of the device. If the assessment is favorable, the Notified Body will issue a new CE Certificate of Conformity or an addendum to the existing CE Certificate of Conformity attesting compliance with the Essential Requirements laid down in Annex I to the Medical Devices Directive. If it is not, we may not be able to continue to market and sell the product in the EEA.
We may fail to obtain or maintain foreign regulatory approvals to market our products in other countries.
We currently market our products internationally and intend to expand our international marketing. International jurisdictions require separate regulatory approvals and compliance with numerous and varying regulatory requirements. For example, outside of the United States and the EEA, we intend to continue to seek regulatory clearance to market our primary products in China, Brazil, Japan, South Korea and other key markets. The approval procedures vary among countries and may involve requirements for additional testing, and the time required to obtain approval may differ from country to country and from that required to obtain clearance or approval in the United States and the necessary CE Certificates of Conformity in the EEA countries.
Clearance or approval in the United States and/or a CE Certificate of Conformity in the EEA countries does not ensure approval or certification by regulatory authorities in other countries or jurisdictions, and approval or certification by one foreign regulatory authority does not ensure approval or certification by regulatory authorities in other foreign countries or by the FDA. The foreign regulatory approval or certification process may include all of the risks associated with obtaining FDA clearance or approval. In addition, some countries only approve or certify a product for a certain period of time, and we are required to re-approve or re-certify our products in a timely manner prior to the expiration of our prior approval or certification. We may not obtain foreign regulatory approvals on a timely basis, if at all. We may not be able to file for regulatory approvals or certifications and may not receive necessary approvals to commercialize our products in any market. If we fail to receive necessary approvals or certifications to commercialize our products in foreign jurisdictions on a timely basis, or at all, or if we fail to have our products re-approved or re-certified, our business, results of operations and financial condition could be adversely affected.
These and other factors may have a material adverse effect on our international operations or on our business, results of operations and financial condition generally.
If we or our suppliers fail to comply with ongoing EU and FDA or other foreign regulatory authority requirements, or if we experience unanticipated problems with our products, these products could be subject to restrictions or withdrawal from the market.
Any product for which we obtain clearance or approval, and the manufacturing processes, reporting requirements, post-approval clinical data and promotional activities for such product, will be subject to continued regulatory review, oversight and periodic inspections by the FDA and other domestic and foreign regulatory bodies. In particular, we and our third-party suppliers are required to comply with the FDAs Quality System Regulation, or QSR. In the EEA countries, compliance with harmonized standards is also recommended as this is interpreted as a presumption of conformity with the relevant Essential Requirements laid down in Annex I to the Medical Devices Directive. These FDA regulations and EU standards cover the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our products. Compliance with applicable regulatory requirements is subject to continual review and is monitored rigorously through periodic inspections by the FDA. Compliance with harmonized standards in the EEA is also subject to regular review through the conduct of inspection by Notified Bodies or other certification bodies. If we, or our manufacturers, fail to adhere to QSR requirements in the United States or other harmonized standards in the EEA, this could delay production of our products and lead to fines, difficulties in obtaining regulatory clearances, CE Certificate of Conformity, recalls, enforcement actions, including injunctive relief or consent decrees, or other consequences, which could, in turn, have a material adverse effect on our financial condition or results of operations.
In addition, the FDA audits compliance with the QSR through periodic announced and unannounced inspections of manufacturing and other facilities. The failure by us or one of our suppliers to comply with applicable statutes and regulations administered by the FDA, or the failure to timely and adequately respond to any adverse inspectional observations or product safety issues, could result in any of the following enforcement actions:
Any of these sanctions could have a material adverse effect on our reputation, business, results of operations and financial condition. Furthermore, our key component suppliers may not currently be or may not continue to be in compliance with all applicable regulatory requirements, which could result in our failure to produce our products on a timely basis and in the required quantities, if at all.
Outside the EEA and the United States our products and operations are also often required to comply with standards set by foreign regulatory bodies, and those standards, types of evaluation and scope of review differ among foreign regulatory bodies. We intend to comply with the standards enforced by such
foreign regulatory bodies as needed to commercialize our products. If we fail to comply with any of these standards adequately, a foreign regulatory body may take adverse actions similar to those within the power of a Notified Body or competent authority or the FDA. Any such action may harm our reputation and business, and could have an adverse effect on our business, results of operations and financial condition.
If our products, or malfunction of our products, cause or contribute to a death or a serious injury, we will be subject to medical device reporting regulations, which can result in voluntary corrective actions or agency enforcement actions.
Under the FDA medical device reporting regulations, medical device manufacturers are required to report to the FDA information that a device has or may have caused or contributed to a death or serious injury or has malfunctioned in a way that would likely cause or contribute to death or serious injury if the malfunction of the device or one of our similar devices were to recur. All manufacturers placing medical devices in the market in the EEA are legally bound to report any serious or potentially serious incidents involving devices they produce or sell to the competent authority in whose jurisdiction the incident occurred. Were this to happen to us, the relevant competent authority would file an initial report, and there would then be a further inspection or assessment if there were particular issues. Either this would be carried out either by the competent authority or it could require that the Notified Body carry out the inspection or assessment.
Any such adverse event involving our products could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection or enforcement action. Adverse events involving our products have been reported to us in the past, and we cannot guarantee that they will not occur in the future. Any corrective action, whether voluntary or involuntary, will require the dedication of our time and capital, distract management from operating our business and may harm our reputation and financial results.
In the EEA, we must comply with the EU Medical Device Vigilance System. Under this system, incidents must be reported to the relevant authorities of the EEA countries, and manufacturers are required to take Field Safety Corrective Actions, or FSCAs, to reduce a risk of death or serious deterioration in the state of health associated with the use of a medical device that is already placed on the market. An incident is defined as any malfunction or deterioration in the characteristics and/or performance of a device, as well as any inadequacy in the labeling or the instructions for use which, directly or indirectly, might lead to or might have led to the death of a patient or user or of other persons or to a serious deterioration in their state of health. An FSCA may include the recall, modification, exchange, destruction or retrofitting of the device. FSCAs must be communicated by the manufacturer or its European Authorized Representative to its customers and/or to the end users of the device through Field Safety Notices.
Our products may in the future be subject to product recalls. A recall of our products, either voluntarily or at the direction of the FDA or another governmental authority, or the discovery of serious safety issues with our products, could have a significant adverse impact on us.
The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture. In this case, the FDA, the authority to require a recall must be based on an FDA finding that there is reasonable probability that the device would cause serious injury or death. In addition, foreign governmental bodies have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacture. Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found. The FDA requires that certain classifications of recalls be reported to the FDA within 10 working days after the recall is initiated. A government-mandated or voluntary recall by us or one of our international distributors could occur as a result of an unacceptable risk to health,
component failures, malfunctions, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any of our products would divert managerial and financial resources and have an adverse effect on our reputation, results of operations and financial condition, which could impair our ability to produce our products in a cost-effective and timely manner in order to meet our customers demands. We may also be subject to liability claims, be required to bear other costs, or take other actions that may have a negative impact on our future sales and our ability to generate profits. Companies are required to maintain certain records of recalls, even if they are not reportable to the FDA. We may initiate voluntary recalls involving our products in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, they could require us to report those actions as recalls. A future recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the FDA could take enforcement action for failing to report the recalls when they were conducted.
Further, under the FDAs medical device reporting, or MDR, regulations, we are required to report to the FDA any incident in which our product may have caused or contributed to a death or serious injury or in which our product malfunctioned and, if the malfunction were to recur, would likely cause or contribute to death or serious injury. Repeated product malfunctions may result in a voluntary or involuntary product recall, which could divert managerial and financial resources, impair our ability to manufacture our products in a cost-effective and timely manner, and have an adverse effect on our reputation, results of operations and financial condition. We are also required to follow detailed recordkeeping requirements for all firm-initiated medical device corrections and removals, and to report such corrective and removal actions to FDA if they are carried out in response to a risk to health and have not otherwise been reported under the MDR regulations. In addition, in December of 2012, the FDA issued a draft guidance intended to assist the FDA and industry in distinguishing medical device recalls from product enhancements. Per the guidance, if any change or group of changes to a device addresses a violation of the FDCA, that change would generally constitute a medical device recall and require submission of a recall report to the FDA.
If the third parties on which we rely to conduct our clinical trials and to assist us with pre-clinical development do not perform as contractually required or expected, we may not be able to obtain regulatory clearance, approval or a CE Certificate of Conformity for or commercialize our products.
We often must rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories to conduct our clinical trials and prepare our PMA submissions. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if these third parties need to be replaced, or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our pre-clinical development activities or clinical trials may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval or a CE Certificate of Conformity for, or successfully commercialize, our products on a timely basis, if at all, and our business, operating results and prospects may be adversely affected. Furthermore, our third-party clinical trial investigators may be delayed in conducting our clinical trials for reasons outside of their control.
The results of our clinical trials may not support our product candidate claims or may result in the discovery of adverse side effects.
Our ongoing research and development, pre-clinical testing and clinical trial activities are subject to extensive regulation and review by numerous governmental authorities both in the United States and abroad. We are currently conducting pre-and post-market clinical studies of some of our products to gather information about these products safety, efficacy or optimal use. In the future we may conduct clinical trials to support approval of new products. Clinical studies must be conducted in compliance with FDA regulations or the FDA may take enforcement action. The data collected from these clinical studies may ultimately be used to support market clearance for these products. Even if our clinical trials
are completed as planned, we cannot be certain that their results will support our product candidate claims or that the FDA or foreign authorities and Notified Bodies will agree with our conclusions regarding them. Success in pre-clinical studies and early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that the later trials will replicate the results of prior trials and pre-clinical studies. The clinical trial process may fail to demonstrate that our product candidates are safe and effective for the proposed indicated uses, which could cause us to abandon a product candidate and may delay development of others. Any delay or termination of our clinical trials will delay the filing of our product submissions and, ultimately, our ability to commercialize our product candidates and generate revenues. It is also possible that patients enrolled in clinical trials will experience adverse side effects that are not currently part of the product candidates profile.
We may be subject to enforcement action if we engage in improper marketing or promotion of our products.
Our promotional materials and training methods must comply with FDA and other applicable laws and regulations, including the prohibition of the promotion of unapproved, or off-label, use. Surgeons may use our products off-label, as the FDA does not restrict or regulate a surgeons choice of treatment within the practice of medicine. However, if the FDA determines that our promotional materials or training constitutes promotion of an off-label use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine or criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our promotional or training materials to constitute promotion of an off-label use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement. In that event, our reputation could be damaged and adoption of the products could be impaired. Although our policy is to refrain from statements that could be considered off-label promotion of our products, the FDA or another regulatory agency could disagree and conclude that we have engaged in off-label promotion. In addition, the off-label use of our products may increase the risk of product liability claims. Product liability claims are expensive to defend and could divert our managements attention, result in substantial damage awards against us, and harm our reputation.
Further, the advertising and promotion of our products is subject to EEA Member States laws implementing Directive 93/42/EEC concerning Medical Devices, or the EU Medical Devices Directive, Directive 2006/114/EC concerning misleading and comparative advertising, and Directive 2005/29/EC on unfair commercial practices, as well as other EEA Member State legislation governing the advertising and promotion of medical devices. In addition, we are subject to EU and national Codes of Conduct. These laws and Codes of Conduct may limit or restrict the advertising and promotion of our products to the general public and may impose limitations on our promotional activities with healthcare professionals.
If we or our sales representatives fail to comply with U.S. federal and state fraud and abuse laws, we could be subject to civil and criminal penalties, which could adversely impact our reputation and business operations.
There are numerous U.S. federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws and physician self-referral laws. Our relationships with surgeons, hospitals, group purchasing organizations and our international distributors are subject to scrutiny under these laws. Violations of these laws are punishable by criminal and civil sanctions, including significant monetary penalties and, in some instances, imprisonment and exclusion from participation in federal and state healthcare programs, including the Medicare, Medicaid and Veterans Administration health programs.
Healthcare fraud and abuse regulations are complex, and even minor irregularities can potentially give rise to claims that a statute or prohibition has been violated. The laws that may affect our ability to operate include:
Further, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or, collectively, the PPACA, among other things, amends the intent requirements of the federal Anti-Kickback Statute and the criminal statute governing healthcare fraud. A person or entity can now be found guilty of violating the Anti-Kickback Statute and the federal criminal healthcare fraud statute without actual knowledge of the statute or specific intent to violate it. In addition, the PPACA provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act or federal civil money penalties statute. Possible sanctions for violation of laws include monetary fines, civil and criminal penalties, exclusion from Medicare and Medicaid programs and forfeiture of amounts collected in violation of such prohibitions. Moreover, while we do not submit claims and our customers make the ultimate decision on how to submit claims, from time-to-time, we may provide reimbursement guidance to our customers. If a government authority were to conclude that we provided improper advice to our customers and/or encouraged the submission of false claims for reimbursement, we could face action against us by government authorities. Any violations of these laws, or any action against us for violation of these laws, even if we successfully defend against it, could result in a material adverse effect on our reputation, business, results of operations and financial condition.
We have entered into consulting agreements and royalty agreements with surgeons, including some who order and use our products in procedures they perform. While these transactions were structured to comply with all applicable laws, including state and federal anti-kickback laws, to the extent applicable, regulatory agencies may view these transactions as prohibited arrangements that must be restructured, or discontinued, or for which we could be subject to other significant penalties, including debarment. We could be adversely affected if regulatory agencies interpret our financial relationships with spine surgeons who order our products to be in violation of applicable laws. This could subject us to civil and criminal penalties for non-compliance, the cost of which could be substantial.
Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available under the federal Anti-Kickback Statue, it is possible that some of our business activities, including our relationship with surgeons, hospitals, group purchasing organizations and our independent distributors, could be subject to challenge under one or more of such laws.
To enforce compliance with the federal laws, the U.S. Department of Justice, or DOJ, has recently increased its scrutiny of interactions between healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. Dealing with investigations can be time- and resource-consuming and can divert managements attention from the business. Additionally, settlements with the DOJ or other law enforcement agencies have forced healthcare providers to agree to additional onerous compliance and reporting requirements as part of a consent decree or corporate integrity agreement. Any such investigation or settlement could increase our costs or otherwise have an adverse effect on our business.
In certain cases, federal and state authorities pursue actions for false claims on the basis that manufacturers and distributors are promoting off-label uses of their products. Pursuant to FDA regulations, we can only market our products for cleared or approved uses. Although surgeons are permitted to use medical devices for indications other than those cleared or approved by the FDA, we are prohibited from promoting products for off-label uses. We market our products and provide promotional materials and training programs to surgeons regarding the use of our products. If it is determined that our marketing, promotional materials or training programs constitute promotion of unapproved uses, we could be subject to significant fines in addition to regulatory enforcement actions, including the issuance of a warning letter, injunction, seizure and criminal penalty.
On February 8, 2013, the Centers for Medicare & Medicaid Services, or CMS, released its final rule implementing certain provisions of the PPACA that impose new reporting requirements on device manufacturers for payments by them and in some cases their distributors to physicians and teaching hospitals, as well as ownership and investment interests held by physicians (commonly known as the Physician Payment Sunshine Act). Failure to submit required information may result in civil monetary penalties of up to an aggregate of $150,000 per year (or up to an aggregate of $1 million per year for knowing failures), for all payments, transfers of value or ownership or investment interests that are not timely, accurately and completely reported in an annual submission. Device manufacturers must begin collecting data on August 1, 2013 and submit reports to CMS by March 31, 2014 (and the 90th day of each subsequent calendar year). In addition, CMS estimates that approximately 1,000 device and medical supply companies will be required to comply with the disclosure requirements and that the average cost per entity will be approximately $170,000 in the first year. Due to the difficulty in complying with Physician Payment Sunshine Act and the nature of our U.S. sales force concentrated with independent sales agencies, we cannot assure you that we will successfully report all transfers of value by us and our independent sales agencies, and any failure to comply could result in significant fines and penalties.
In addition, there has been a recent trend of increased federal and state regulation of payments made to physicians. Some states, such as California, Massachusetts and Nevada, mandate implementation of commercial compliance programs, while other states, such as Massachusetts and Vermont, impose restrictions on device manufacturer marketing practices and tracking and reporting of gifts, compensation and other remuneration to physicians. A similar trend is observed in foreign jurisdictions such as France. In France, a recently adopted law and a decree require companies working in the health sector to publicly disclose direct or indirect benefits granted to, and agreements entered into with, physicians and other healthcare professionals. The shifting commercial compliance environment and the need to build and maintain robust and expandable systems to comply with different compliance and/or reporting requirements in multiple jurisdictions increase the possibility that a healthcare company may run afoul of one or more of the requirements.
Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be entirely eliminated. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our managements attention from the operation of our business.
Most of these laws apply to not only the actions taken by us, but also actions taken by our distributors. We have limited knowledge and control over the business practices of our distributors, and we may face regulatory action against us as a result of their actions which could have a material adverse effect on our reputation, business, results of operations and financial condition.
In addition, the scope and enforcement of these laws is uncertain and subject to rapid change in the current environment of healthcare reform, especially in light of the lack of applicable precedent and regulations. Federal or state regulatory authorities might challenge our current or future activities under these laws. Any such challenge could have a material adverse effect on our reputation, business, results of operations and financial condition. Any state or federal regulatory review of us, regardless of the outcome, would be costly and time-consuming. Additionally, we cannot predict the impact of any changes in these laws, whether or not retroactive.
Legislative or regulatory healthcare reforms may make it more difficult and costly for us to obtain regulatory clearance or approval of our products and to produce, market and distribute our products after clearance or approval is obtained.
Recent political, economic and regulatory influences are subjecting the healthcare industry to fundamental changes. The sales of our products depend in part on the availability of coverage and reimbursement from third-party payors such as government health programs, private health insurers, health maintenance organizations and other healthcare-related organizations. Both the federal and state governments in the United States and foreign governments continue to propose and pass new legislation and regulations designed to contain or reduce the cost of healthcare. Such legislation and regulations may result in decreased reimbursement for medical devices and/or the procedures in which they are used, which may further exacerbate industry-wide pressure to reduce the prices charged for medical devices. This could harm our ability to market our products and generate sales.
In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of our products. Delays in receipt of, or failure to receive, regulatory clearances or approvals for our new products would have a material adverse effect on our business, results of operations and financial condition.
Federal and state governments in the United States have recently enacted legislation to overhaul the nations healthcare system. While the goal of healthcare reform is to expand coverage to more individuals, it also involves increased government price controls, additional regulatory mandates and other measures designed to constrain medical costs. The PPACA significantly impacts the medical device industry. Among other things, the PPACA:
In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. On August 2, 2011, the President signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee did not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislations automatic reduction to several government programs. This includes reductions to Medicare payments to providers of 2% per fiscal year. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, or the ATRA, which delayed for another two months the budget cuts mandated by these sequestration provisions of the Budget Control Act of 2011. On March 1, 2013, the President signed an executive order implementing sequestration, and on April 1, 2013, the 2% Medicare payment reductions went into effect. The ATRA also, among other things, reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our products or additional pricing pressure.
Our financial performance may be adversely affected by medical device tax provisions in the healthcare reform laws.
The PPACA imposes, among other things, an excise tax of 2.3% on any entity that manufactures or imports medical devices offered for sale in the United States beginning in 2013. Under these provisions, the Congressional Research Service predicts that the total cost to the medical device industry may be up to $20 billion over the next decade. The Internal Revenue Service issued final regulations implementing the tax in December of 2012 which requires, among other things, bi-monthly payments and quarterly reporting. We are subject to this excise tax on our sales of certain medical devices we import into the United States. We anticipate that primarily all of our sales of medical devices in the United States will be subject to this 2.3% excise tax. During the six months ended June 30, 2013, we recognized $0.3 million in tax expense associated with the medical device tax in the United States, which is included in general and administrative expenses.
Risks Related to our Financial Results and Need for Financing
Our quarterly revenue and operating results are unpredictable and may fluctuate significantly from quarter to quarter due to factors outside our control, which could adversely affect our business, consolidated financial statements and the trading price of our common stock.
Our revenue and operating results may vary significantly from quarter to quarter and year to year due to a number of factors, many of which are outside of our control and any of which may cause our stock price to fluctuate. Our sales and results of operations will be affected by numerous factors, including:
Many of the products we may seek to develop and introduce in the future will require FDA approval or clearance before commercialization in the United States, and commercialization of such products outside of the United States would likely require additional regulatory approvals, CE Certificates of Conformity and import licenses. As a result, it will be difficult for us to forecast demand for these products with any degree of certainty. In addition, we will be increasing our operating expenses as we expand our commercial capabilities. Accordingly, we may experience significant, unanticipated quarterly losses. If our quarterly or annual operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Furthermore, any quarterly or annual fluctuations in our operating results may, in turn, cause the price of our common stock to fluctuate substantially. We believe that quarterly comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of our future performance.
We might require additional capital to support business growth, and this capital might not be available on terms favorable to us or at all.
We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new technologies or enhance our existing technologies and platform, upgrade our operating infrastructure and acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. 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, including shares of common stock sold in this offering. Any debt financing obtained by us in the future would likely be senior to our common stock, would likely cause us to incur interest expenses, and could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may increase our expenses and make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may also be required to secure any such debt obligations with some or all of our assets. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. It is also possible that we may allocate significant amounts of capital toward solutions or technologies for which market demand is lower than anticipated and, as a result, abandon such efforts. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, or if we expend capital on projects that are not successful, 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. Any of these negative
developments could have a material adverse effect on our business, operating results, financial condition and common stock price.
Continuing worldwide economic instability, including challenges faced by the Eurozone countries, could adversely affect our revenues, financial condition or results of operations.
Since fiscal year 2008, the global economy has been impacted by the sequential effects of an ongoing global financial crisis. This global financial crisis, including the European sovereign debt crisis, has caused extreme disruption in the financial markets, including severely diminished liquidity and credit availability. Substantially all of our suppliers are located in Europe, and many of our distribution agreements outside of the United States are denominated in Euros. There can be no assurance that there will not be further deterioration in the global economy and in Europe. Our customers and suppliers may experience financial difficulties or be unable to borrow money to fund their operations, which may adversely impact their ability to purchase our products or to pay for our products on a timely basis, if at all. As with our customers and suppliers, these economic conditions make it more difficult for us to accurately forecast and plan our future business activities. In light of the current economic state of many countries outside the United States, we continue to monitor their creditworthiness. Failure to receive payment of all or a significant portion of these receivables could adversely affect our results of operations. Further, there are concerns for the overall stability and suitability of the Euro as a single currency, given the economic and political challenges facing individual Eurozone countries. Continuing deterioration in the creditworthiness of the Eurozone countries, the withdrawal of one or more member countries from the EU, or the failure of the Euro as a common European currency could adversely affect the Companys revenues, financial condition or results of operations.
Our existing revolving credit facility contains restrictive covenants that may limit our operating flexibility.
Our existing revolving credit facility contains certain restrictive covenants that limit our ability to transfer or dispose of assets, merge with other companies or consummate certain changes of control, acquire other companies, pay dividends, incur additional indebtedness and liens, experience changes in management and enter into new businesses. We therefore may not be able to engage in any of the foregoing transactions unless we obtain the consent of the lender or terminate the revolving credit facility. There is no guarantee that we will be able to generate sufficient cash flow or sales to meet the financial covenants or pay the principal and interest on any such debt. Furthermore, there is no guarantee that future working capital, borrowings or equity financing will be available to repay or refinance any such debt.
Risks Related to our Intellectual Property and Potential Litigation
If we are unable to protect our intellectual property rights, our competitive position could be harmed or we could be required to incur significant expenses to enforce our rights.
We rely primarily on patent, copyright, trademark and trade secret laws, know-how and continuing technological innovation, as well as confidentiality and non-disclosure agreements and other methods, to protect our proprietary technologies and know-how. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. As of the date of this filing, we owned over 300 issued patents globally, of which 26 were issued U.S. patents. As of the date of this filing we had over 100 patent applications pending globally, of which 27 were patent applications pending in the United States. As of the date of this filing, 20 of our U.S. issued patents have pending continuations or divisionals which may provide additional intellectual property protection if those continuations and divisionals issue as U.S. patents. Our issued patents expire between 2019 and 2030, subject to payment of required maintenance fees, annuities and other charges. As of the date of this filing, we also owned 15 U.S. trademark registrations and 63 foreign trademark registrations, as well as two pending U.S. trademark registrations and ten pending foreign trademark registrations.
We have applied for patent protection relating to certain existing and proposed products and processes. While we generally apply for patents in those countries where we intend to make, have made, use or sell patented products, we may not accurately predict all of the countries where patent protection will ultimately be desirable. If we fail to timely file a patent application in any such country, we may be precluded from doing so at a later date. Furthermore, we cannot assure you that any of our patent applications will issue as patents. The rights granted to us under our patents, including prospective rights sought in our pending patent applications, may not be meaningful or provide us with any commercial advantage and they could be opposed, contested or circumvented by our competitors or be declared invalid or unenforceable in judicial or administrative proceedings. In addition, our pending patent applications include claims to material aspects of our products and procedures that are not currently protected by issued patents. The process of applying for patent protection itself is time consuming and expensive. The failure of our patents to protect our technology adequately might make it easier for our competitors to offer the same or similar products or technologies. Competitors may be able to design around our patents or develop products that provide outcomes that are comparable to ours without infringing on our intellectual property rights.
We have entered into confidentiality agreements and intellectual property assignment agreements with many of our officers, employees, consultants and advisors regarding our intellectual property and proprietary technology. In the event of unauthorized use or disclosure or other breaches of such agreements, we may not be provided with meaningful protection for our intellectual property and proprietary technology.
Due to differences between foreign and U.S. patent laws, our patented intellectual property rights may not receive the same degree of protection in foreign countries as they would in the United States. Even if patents are granted outside the United States, effective enforcement in those countries may not be available, and the scope of protection may vary significantly from country to country. We have filed patent applications only in the United States, some countries in Europe and less than a dozen other countries, and we therefore lack any patent protection in all other countries. In countries where we do not have significant patent protection, we may not be able to stop a competitor from marketing products in such countries that are the same as or similar to our products.
We rely on our trademarks, trade names and brand names to distinguish our products from the products of our competitors, and have registered or applied to register many of these trademarks. We cannot assure you that our trademark applications will be approved. Third parties may also oppose our trademark applications, or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition, and could require us to devote resources to advertising and marketing new brands. Further, we cannot assure you that competitors will not infringe upon our trademarks, or that we will have adequate resources to enforce our trademarks.
If a competitor infringes one of our patents, trademarks or other intellectual property rights, enforcing those patents, trademarks and other rights may be difficult, time consuming or unsuccessful. Even if successful, litigation to defend our patents and trademarks against challenges or enforce our intellectual property rights could be expensive and time consuming and could divert managements attention from managing our business. Litigation to defend our patents and trademarks against challenges or enforce our intellectual property rights could provoke significant retaliatory litigation, which could be costly, result in the diversion of managements time and efforts, require us to pay damages and other amounts or prevent us from marketing our existing or future products. Moreover, we may not have sufficient resources or desire to defend our patents or trademarks against challenges or to enforce our intellectual property rights.
The medical device industry is characterized by patent litigation and we could become subject to litigation that could be costly, result in the diversion of managements time and efforts, require us to pay damages or prevent us from marketing our existing or future products.
Our commercial success will depend in part on not infringing the patents or violating the other proprietary rights of others. Significant litigation regarding patent rights occurs in our industry. Our competitors in both the United States and abroad, many of which have substantially greater resources and have made substantial investments in patent portfolios and competing technologies, may have applied for or obtained or may in the future apply for and obtain, patents that will prevent, limit or otherwise interfere with our ability to make, use and sell our products. Generally, we do not conduct independent reviews of patents issued to third parties. In addition, patent applications in the United States and elsewhere can be pending for many years before issuance, so there may be applications of others now pending of which we are unaware that may later result in issued patents that will prevent, limit or otherwise interfere with our ability to make, use or sell our products. The large number of patents, the rapid rate of new patent applications and issuances, the complexities of the technology involved and the uncertainty of litigation increase the risk of business assets and managements attention being diverted to patent litigation. We have received in the past, and expect to receive in the future, particularly as a public company, communications from various industry participants alleging our infringement of their patents, trade secrets or other intellectual property rights and/or offering licenses to such intellectual property. Any lawsuits resulting from such allegations could subject us to significant liability for damages and invalidate our proprietary rights. Any potential intellectual property litigation also could force us to do one or more of the following:
Any litigation or claim against us, even those without merit, may cause us to incur substantial costs, and could place a significant strain on our financial resources, divert the attention of management from our core business and harm our reputation. Further, as the number of participants in the spine industry grows, the possibility of intellectual property infringement claims against us increases. If we are found to infringe the intellectual property rights of third parties, we could be required to pay substantial damages (which may be increased up to three times of awarded damages) and/or substantial royalties and could be prevented from selling our products unless we obtain a license or are able to redesign our products to avoid infringement. Any such license may not be available on reasonable terms, if at all, and there can be no assurance that we would be able to redesign our products in a way that would not infringe the intellectual property rights of others. If we fail to obtain any required licenses or make any necessary changes to our products or technologies, we may have to withdraw existing products from the market or may be unable to commercialize one or more of our products, all of which could have a material adverse effect on our business, results of operations and financial condition.
In addition, we generally indemnify our customers and international distributors with respect to infringement by our products of the proprietary rights of third parties. Third parties may assert infringement claims against our customers or distributors. These claims may require us to initiate or defend protracted and costly litigation on behalf of our customers or distributors, regardless of the merits of these claims. If any of these claims succeed, we may be forced to pay damages on behalf of our customers or distributors or may be required to obtain licenses for the products they use. If we cannot obtain all necessary licenses on commercially reasonable terms, our customers may be forced to stop using our products.
We may be subject to damages resulting from claims that we, our employees, our independent sales agencies or our international distributors have wrongfully used or disclosed alleged trade secrets of our competitors or are in breach of non-competition or non-solicitation agreements with our competitors.
Many of our employees were previously employed at other medical device companies, including our competitors or potential competitors, in some cases until recently. Many of our independent sales agencies and distributors sell, or in the past have sold, products of our competitors. We may be subject to claims that we, our employees or our independent sales agencies and distributors have inadvertently or otherwise used or disclosed alleged trade secrets or other proprietary information of these former employers or competitors. In addition, we have been and may in the future be subject to claims that we caused an employee to breach the terms of his or her non-competition or non-solicitation agreement. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and could be a distraction to management. If our defense to those claims fails, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Any litigation or the threat thereof may adversely affect our ability to hire employees or contract with independent sales representatives. A loss of key personnel or their work product could hamper or prevent our ability to commercialize product candidates, which could have an adverse effect on our business, results of operations and financial condition.
If product liability lawsuits are brought against us, our business may be harmed, and we may be required to pay damages that exceed our insurance coverage.
Our business exposes us to potential product liability claims that are inherent in the testing, manufacture and sale of medical devices for spine surgery procedures. Spine surgery involves significant risk of serious complications, including bleeding, nerve injury, paralysis and even death. Furthermore, if spine surgeons are not sufficiently trained in the use of our products, they may misuse or ineffectively use our products, which may result in unsatisfactory patient outcomes or patient injury. We could become the subject of product liability lawsuits alleging that component failures, malfunctions, manufacturing flaws, design defects or inadequate disclosure of product-related risks or product-related information resulted in an unsafe condition or injury to patients.
We have had, and continue to have, a small number of product liability claims relating to our products, none of which either individually, or in the aggregate, have resulted, or do we believe will result, in a material negative impact on our business. In the future, we may be subject to additional product liability claims, some of which may have a negative impact on our business.
Regardless of the merit or eventual outcome, product liability claims may result in:
Our existing product liability insurance coverage may be inadequate to protect us from any liabilities we might incur. If a product liability claim or series of claims is brought against us for uninsured liabilities or in excess of our insurance coverage, our business could suffer. Any product liability claim brought against us, with or without merit, could result in the increase of our product liability insurance rates or the inability to secure coverage in the future. In addition, a recall of some of our products, whether or not the result of a product liability claim, could result in significant costs and loss of customers.
In addition, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts or scope to protect us against losses. Any claims against us, regardless of their merit, could severely harm our financial condition, strain our management and other resources and adversely affect or eliminate the prospects for commercialization or sales of a product or product candidate that is the subject of any such claim.
We may be subject to various litigation claims and legal proceedings.
We, as well as certain of our officers and distributors, may be subject to other claims or lawsuits. These lawsuits may result in significant legal fees and expenses and could divert managements time and other resources. If the claims contained in these lawsuits are successfully asserted against us, we could be liable for damages and be required to alter or cease certain of our business practices or product lines. Any of these outcomes could cause our business, financial performance and cash position to be negatively impacted.
Risks Related to Our International Operations
We are exposed to risks related to our international operations and failure to manage these risks may adversely affect our operating results and financial condition.
We sell our products globally and have a number of offices around the world. During the years ended December 31, 2010, 2011 and 2012, approximately 34%, 33% and 29% of our revenue, respectively, was attributable to our international customers. As of December 31, 2012, approximately 55% of our employees were located abroad. In addition, substantially all of our manufacturing is conducted in France and a substantial portion of our suppliers are located in Europe. The sale and shipment of our products across international borders, as well as the purchase of components and products from international sources, subjects us to extensive U.S., French and European Union and foreign governmental trade, import and export and customs regulations and laws. Compliance with these regulations and laws is costly and exposes us to penalties for non-compliance. We expect that our international activities will be dynamic over the foreseeable future as we continue to pursue opportunities in international markets. Therefore, we are subject to risks associated with having worldwide operations. These international operations will require significant management attention and financial resources.
International operations are subject to inherent risks and our future results could be adversely affected by a number of factors, including:
Additionally, our international operations expose us to risks of fluctuations in foreign currency exchange rates. To date, a significant portion of our international sales have been denominated in Euros. In addition, a substantial portion of our manufacturing costs are also denominated in Euros. As a result, a decline in the value of the Euro against the U.S. dollar could have a material adverse effect on the gross margins and profitability of our international operations if it is not offset by a decline in manufacturing costs as a result of the decline in the Euro. In addition, sales to countries that do not utilize the Euro could decline as the cost of our products to our customers in those countries increases. In addition, because our financial statements are denominated in U.S. dollars, a decline in the Euro would negatively impact our overall revenue as reflected in our financial statements. To date, we have not used risk management techniques to hedge the risks associated with these fluctuations. Even if we were to implement hedging strategies, not every exposure can be hedged and, where hedges are put in place based on expected foreign currency exchange exposure, they are based on forecasts that may vary or that may later prove to have been inaccurate. As a result, fluctuations in foreign currency exchange rates or our failure to successfully hedge against these fluctuations could have a material adverse effect on our operating results and financial condition.
Failure to comply with the United States Foreign Corrupt Practices Act, or the FCPA, and similar laws associated with our activities outside the United States could subject us to penalties and other adverse consequences.
We are subject to the FCPA and other anti-bribery legislation around the world. The FCPA generally prohibits covered entities and their intermediaries from engaging in bribery or making other prohibited payments, offers or promises to foreign officials for the purpose of obtaining or retaining business or other advantages. In addition, the FCPA imposes recordkeeping and internal controls requirements on publicly traded corporations and their foreign affiliates, which are intended to, among other things, prevent the diversion of corporate funds to the payment of bribes and other improper payments, and to prevent the establishment of off books slush funds from which such improper payments can be made. As a substantial portion of our revenue is, and we expect will continue to be, from jurisdictions outside of the United States, we face significant risks if we fail to comply with the FCPA and other laws that prohibit improper payments, offers or promises of payment to foreign governments and their officials and political parties by us and other business entities for the purpose of obtaining or retaining business or other advantages. In many foreign countries, particularly in countries with developing economies, some of which represent significant markets for us, it may be a local custom that businesses operating in such countries engage in business practices that are prohibited by the FCPA or other laws and regulations. Although we have implemented a company policy requiring our employees and consultants to comply with the FCPA and similar laws, such policy may not be effective at preventing all potential FCPA or other violations. Although our agreements with our international distributors clearly state our expectations for our distributors compliance with U.S. laws, including the FCPA, and provide us with various remedies upon any non-compliance, including the ability to terminate the agreement, we also
cannot guarantee our distributors compliance with U.S. laws, including the FCPA. Therefore there can be no assurance that none of our employees and agents, or those companies to which we outsource certain of our business operations, have not and will not take actions that violate our policies or applicable laws, for which we may be ultimately held responsible. As a result of our focus on managing our growth, our development of infrastructure designed to identify FCPA matters and monitor compliance is at an early stage. Any violation of the FCPA and related policies could result in severe criminal or civil sanctions, which could have a material and adverse effect on our reputation, business, operating results and financial condition.
New regulations related to conflict minerals may force us to incur additional expenses, may make our supply chain more complex and may result in damage to our reputation with customers.
The Dodd-Frank Act requires the SEC to establish new disclosure and reporting requirements for those companies who use certain minerals and metals mined in the Democratic Republic of Congo and adjoining countries in their products, known as conflict minerals, whether or not these products are manufactured by third parties. The new rule could affect sourcing at competitive prices and availability in sufficient quantities of certain minerals used in the manufacture of our products, including tantalum. The number of suppliers who provide conflict-free minerals may be limited. In addition, there may be material costs associated with complying with the disclosure requirements, such as costs related to determining the source of certain minerals used in our products, as well as costs of possible changes to products, processes or sources of supply as a consequence of such verification activities. Since our supply chain is complex, we may not be able to verify the origins for these minerals used in our products sufficiently through the due diligence procedures that we implement, which may harm our reputation. In addition, we may encounter challenges to satisfy those customers who require that all of the components of our products be certified as conflict-free, which could place us at a competitive disadvantage if we are unable to do so.
Risks Related to Our Common Stock and this Offering
No public market for our common stock currently exists and an active trading market may not develop or be sustained following this offering.
Prior to this initial public offering, there has been no public market for our common stock. An active trading market may not develop following the completion of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value or the trading price of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.
Our stock price may be volatile, and you may not be able to resell shares of our common stock at or above the price you paid.
The initial public offering price for our common stock has been determined through our negotiations with the underwriters and may not be representative of the price that will prevail in the open market following the offering. Our stock price after the completion of this offering may be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. These factors include those discussed in this Risk Factors section of this prospectus and others such as:
In recent years, the stock markets generally have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may significantly affect the market price of our common stock, regardless of our actual operating performance. These fluctuations may be even more pronounced in the trading market for our common stock shortly following this offering. If the market price of shares of our common stock after this offering does not ever exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment.
In addition, in the past, class action litigation has often been instituted against companies whose securities have experienced periods of volatility in market price. Securities litigation brought against us following volatility in our stock price, regardless of the merit or ultimate results of such litigation, could result in substantial costs, which would hurt our financial condition and operating results and divert managements attention and resources from our business.
Securities analysts may not publish favorable research or reports about our business or may publish no information at all, which could cause our stock price or trading volume to decline.
If a trading market for our common stock develops, the trading market will be influenced to some extent by the research and reports that industry or financial analysts publish about us and our business. We do not control these analysts. As a newly public company, we may be slow to attract research coverage and the analysts who publish information about our common stock will have had relatively little experience with our company, which could affect their ability to accurately forecast our results and could make it more likely that we fail to meet their estimates. In the event we obtain securities or industry analyst coverage, if any of the analysts who cover us provide inaccurate or unfavorable research or issue an
adverse opinion regarding our stock price, our stock price could decline. If one or more of these analysts cease coverage of our company or fail to publish reports covering us regularly, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline.
The concentration of our capital stock ownership with insiders upon the completion of this offering will likely limit your ability to influence corporate matters.
We anticipate that our executive officers, directors, current five percent or greater stockholders and affiliated entities will together beneficially own approximately % of our common stock outstanding after this offering (assuming conversion of all amounts outstanding under our convertible notes, other than approximately $1.7 million of principal plus accrued interest on that amount that will be repaid, at an offering price of $ , the midpoint of this offering), or % if the underwriters exercise their over-allotment option in full. These stockholders may in some instances exercise their influence in ways that you do not believe are in your best interests as a stockholder. In particular, these stockholders, acting together, may be able to control our management and affairs and matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. Consequently, this concentration of ownership could limit your ability to influence corporate matters and may have the effect of delaying or preventing a change in control, including a merger, consolidation or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if such a change in control would benefit our other stockholders. This significant concentration of share ownership may adversely affect the trading price for our common stock because some investors perceive disadvantages in owning stock in companies with concentrated equity ownership.
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 Jumpstart Our Business Startups Act of 2012, or 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 auditors 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.
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. We may remain an emerging growth company until as late as December 31, 2018 (the fiscal year-end following the fifth anniversary of the completion of this initial public offering), though we may cease to be an emerging growth company earlier under certain circumstances, including (i) if the market value of our common stock that is held by nonaffiliates exceeds $700 million as of any June 30, in which case we would cease to be an emerging growth company as of the following December 31, or (ii) if our gross revenue exceeds $1 billion in any fiscal year.
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. In addition, investors may find our common stock less attractive if we rely on the exemptions and relief granted by the JOBS Act. 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 decline and/or become more volatile.
Our management might apply the proceeds of this offering in ways that do not increase the value of your investment.
Our management will have broad discretion as to the use of the net proceeds of this offering and you will be relying on the judgment of our management regarding the application of these proceeds. We might apply the net proceeds of this offering in ways with which you do not agree, or in ways that do not yield a favorable return. If our management applies these proceeds in a manner that does not yield a significant return, if any, on our investment of these net proceeds, it would adversely affect the market price of our common stock. For more information on our managements planned use of proceeds, please read Use of Proceeds elsewhere in this prospectus. Pending their use, we may also invest the net proceeds from this offering in a manner that does not produce income or that loses value.
Because our initial public offering price is substantially higher than the pro forma net tangible book value per share of our outstanding common stock, new investors will incur immediate and substantial dilution.
The initial public offering price is substantially higher than the pro forma net tangible book value per share of common stock based on our total tangible assets reduced by the amount of our total liabilities immediately following this offering. Therefore, if you purchase common stock in this offering, you will experience immediate and substantial dilution of approximately $ per share in pro forma as adjusted net tangible book value, based upon an offering price of $ , the midpoint of the range listed on the cover of this prospectus, the difference between the price you pay for our common stock and its pro forma as adjusted net tangible book value per share after completion of this offering. Please read Dilution for more information on this calculation. Furthermore, any issuance of shares in connection with acquisitions by us, the exercise of stock options or warrants or otherwise would dilute the percentage ownership held by the investors who purchase our shares in this offering.
A significant portion of our total outstanding shares of common stock is restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.
Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares of common stock intend to sell shares, could reduce the market price of our common stock. As of June 30, 2013, entities affiliated with Austin Ventures, Paris Orléans, Telegraph Hill Partners and PTV Sciences and our founders, Christophe Lavigne, Hervé Dinville and Patrick Richard, beneficially owned, collectively, and assuming conversion of all amounts outstanding under our convertible notes, other than approximately $1.7 million of principal plus accrued interest on that amount that will be repaid, at an offering price of $ , the midpoint of the range listed on the cover of this prospectus, approximately % of our outstanding common stock. If one or more of them were to sell a substantial portion of the shares they hold, it could cause our stock price to decline. Based on shares outstanding as of June 30, 2013, upon completion of this offering, we will have approximately million outstanding shares of common stock, assuming no exercise of the underwriters over-allotment option to purchase additional shares. As of the date of this prospectus, approximately million shares of common stock will be subject to a 180-day contractual lock-up with the underwriters. The underwriters may, in their sole discretion and without notice, release all or any portion of the shares from these lock-up arrangements, and the lock-up agreements are subject to certain exceptions. See Underwriting for more information. Of the shares subject to a contractual lock-up with the underwriters, approximately million shares
of common stock also will be subject to a 180-day contractual lock-up with us.
After this offering, holders of an aggregate of approximately million shares of our common stock will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders.
In addition, as of June 30, 2013, there were 6,968,741 shares subject to outstanding options granted under the LDR Holding Corporation 2004 and 2007 Stock Option/Stock Issuance Plans and 131,835 shares subject to outstanding options granted outside our existing equity incentive plans that will become eligible for sale in the public market to the extent permitted by any applicable vesting requirements, the lock-up agreements described above and Rules 144 and 701 under the Securities Act of 1933. We intend to register the shares of common stock issuable upon exercise of these options. We also intend to register all shares of common stock that we may issue under the LDR Holding Corporation 2013 Equity Incentive Plan that we intend to adopt concurrently with the completion of this offering. Once we register these shares, they can be freely sold in the public market upon issuance and once vested, subject to the 180-day lock-up periods under the lock-up agreements described above and in the Underwriting section of this prospectus.
We do not anticipate paying any cash dividends in the foreseeable future, and accordingly, stockholders must rely on stock appreciation for any return on their investment.
After the completion of this offering, we do not anticipate declaring any cash dividends to holders of our common stock in the foreseeable future. In addition, our ability to pay cash dividends is currently prohibited by the terms of our existing loan agreement and may be prohibited by future loan agreements. Consequently, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment.
Anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover attempt.
Our amended and restated certificate of incorporation and our amended and restated bylaws to be effective upon the completion of this offering will contain provisions that could delay or prevent a change in control of our company. These provisions could also make it more difficult for stockholders to elect directors and take other corporate actions. These provisions include:
We are subject to Section 203 of the Delaware General Corporation Law, which, subject to some exceptions, prohibits business combinations between a Delaware corporation and an interested stockholder, which is generally defined as a stockholder who becomes a beneficial owner of 15% or more of a Delaware corporations voting stock, for a three-year period following the date that the stockholder became an interested stockholder.
These and other provisions in our amended and restated certificate of incorporation and our amended and restated bylaws to be effective upon the completion of this offering could discourage potential takeover attempts, reduce the price that investors might be willing to pay in the future for shares of our common stock and result in the market price of our common stock being lower than it would be without these provisions. Please read Description of Capital Stock Anti-Takeover Effects of Delaware Law and Certain Provisions of our Certificate of Incorporation Amended and Restated Bylaws.
Challenges to our tax structure by tax authorities may adversely affect our financial position.
We have and will continue to have subsidiaries organized under the laws of various jurisdictions. Such subsidiaries are and will be subject to the tax laws of such jurisdictions. If the tax authorities of any or all of these jurisdictions were to successfully challenge our tax position with respect to income tax treaties and transfer prices affecting transactions between our subsidiaries or between our subsidiaries and us, we could be subject to increased taxes and possibly penalties, which could have a material adverse effect on our financial position.
Each of our non-U.S. subsidiaries intends to structure its operations with the goal that each such entity would not be subject to U.S. corporate income tax on the basis that it is not engaged in a trade or business in the United States. Nevertheless, there is a risk that the U.S. Internal Revenue Service, or IRS, may successfully assert that one or more of such entities is engaged in a trade or business in the United States, in which case these entities would be subject to U.S. tax at regular corporate rates on income that is effectively connected with the conduct of a U.S. trade or business, plus an additional 30% (or a lower applicable treaty rate, if any) branch profits tax on the dividend equivalent amount, which is generally effectively connected income with certain adjustments, deemed withdrawn from the United States. Any such tax would result in an effective tax rate that is higher than anticipated.
This prospectus contains forward-looking statements. The forward-looking statements are contained principally in the sections entitled Prospectus Summary, Risk Factors, Use of Proceeds, Managements Discussion and Analysis of Financial Condition and Results of Operations and Business. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as believe, will, may, estimate, continue, anticipate, intend, should, plan, expect, predict, could, potentially or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs.
Forward-looking statements include, but are not limited to, statements about:
These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results of operation, financial condition, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements contained in this prospectus are reasonable, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. Moreover, we operate in a competitive and rapidly changing industry in which new risks may emerge from time to time, and it is not possible for management to predict all risks.
You should refer to the section of this prospectus entitled Risk Factors for a discussion of important risks that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors and new risks that may emerge in the future, we cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material.
In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We do not undertake to update any of the forward-looking statements after the date of this prospectus, except to the extent required by law.
This prospectus contains estimates, information and data concerning the spine industry, including estimates and forecasts of market sizes and growth rates, that are based on industry publications and reports, including those generated by GlobalData and iData Research, Inc., as described further below. Although we have not independently verified the data contained in these industry publications and reports, we believe based on our industry experience that these publications are reliable and that the conclusions they contain are reasonable. However, you should not give undue weight to the information contained in these reports because such information involves a number of assumptions and limitations and if any of these assumptions turn out to be incorrect, actual results may differ from the projections based on these assumptions. The markets described in these reports may not grow at the rates projected or at all, which could have a material adverse effect on our business and on the market price of our common stock.
The GlobalData report described herein, Cervical Total Disc Replacement - Global Analysis and Market Forecasts, January 2013, analyzes the global cervical disc replacement industry, including projected market and financial performance in major global markets, such as the United States, the European Union, Brazil, India and China, as well as a strengths, weaknesses, opportunities and threats for selected spine implant companies. We believe that the information in this prospectus attributable to the Global Data report to be reliable as of the date of this prospectus.
The iData Research report described herein, U.S. Market for Spinal Implants & VCF, May 2013, analyzes specific spine industry segments in the United States and provides a trend analysis for such industry segments. We believe that the information in this prospectus attributable to the iData Research report to be reliable as of the date of this prospectus.
The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the Risk Factors section of this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the publishers of these industry publications and reports by us.
We estimate that our net proceeds from the sale of shares of our common stock in this offering will be approximately $ million, or approximately $ million if the underwriters exercise in full their over-allotment option, assuming an initial public offering price of $ per share, the midpoint of the range listed on the cover page of this prospectus, and after deducting underwriting discounts and estimated offering expenses payable by us. Each $1.00 increase or decrease in the assumed initial public offering price would increase or decrease, as applicable, our net proceeds by approximately $ million, assuming that the number of shares offered by us, as listed on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase or decrease of 1.0 million in the number of shares we are offering would increase or decrease, as applicable, the net proceeds to us from this offering by approximately $ million, after deducting the estimated underwriting discounts and estimated offering expenses payable by us, assuming the assumed initial public offering price stays the same.
We intend to use the net proceeds of this offering as follows:
In addition, we may use up to $17.5 million of the net proceeds from this offering to satisfy obligations to the holders of our Series C preferred stock in exchange for their agreeing to vote in favor of the conversion of the preferred stock to common stock in connection with this offering. However, rather than use proceeds of this offering to satisfy this obligation, we may enter into a credit agreement with our existing lender to borrow this amount. We will determine whether we will utilize proceeds from this offering or incur indebtedness to pay this amount prior to the consummation of this offering. We intend to use the balance for working capital and general corporate purposes, including our continued investment in research and development.
We may also use a portion of our net proceeds to acquire and invest in complementary products, technologies or businesses; however, we currently have no agreements or commitments to complete any such transaction and are not involved in negotiations to do so.
As of June 30, 2013, we had borrowings of $10.0 million under a loan facility with Escalate Capital Partners that bear interest at an effective rate of 13.2%. Under the terms of the loan facility, all amounts under this facility will be due upon the closing of this offering.
As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to be received upon the completion of this offering. The amount and timing of our expenditures will depend on several factors, including cash flows from our operations and the anticipated growth of our business. Accordingly, our management will have broad discretion in the application of the net proceeds and investors will be relying on the judgment of our management regarding the application of the proceeds from this offering. We reserve the right to change the use of these proceeds as a result of certain contingencies such as the results of our commercialization efforts, competitive developments, opportunities to acquire products, technologies or businesses and other factors. Until we use the net proceeds of this offering, we intend to invest the net proceeds in short-term, interest-bearing, investment-grade securities.
We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings to fund the development and expansion of our business, and therefore we do not anticipate paying cash dividends on our common stock in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our results of operations, financial condition, capital requirements and other factors deemed relevant by our board of directors. In addition, our credit agreement with Comerica Bank includes limitations on our ability to pay dividends.
The following table sets forth our capitalization as of June 30, 2013:
The following table also reflects a for reverse stock split of our common stock to be effected immediately prior to the consummation of this offering.
You should read the information below in conjunction with the financial statements and the related notes thereto, Unaudited Pro Forma Financial Information and Managements Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this prospectus.
The table above excludes each of the following as of June 30, 2013:
If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock after this offering. As of June 30, 2013, our historical net tangible book value was $(45.0) million, or $(1.40) per share. Our historical net tangible book value represents total tangible assets less total liabilities and redeemable convertible preferred stock, all divided by the number of shares of common stock outstanding on June 30, 2013.
Our pro forma net tangible book value as of June 30, 2013 was $ million, or $ per share, after giving effect to the conversion of all outstanding shares of our preferred stock into 74,099,253 shares of our common stock upon the completion of this offering and the conversion of all amounts outstanding under our convertible notes, other than approximately $1.7 million of principal plus accrued interest on that amount that will be repaid, into an aggregate shares of common stock upon the consummation of this offering (based on an assumed closing date for this offering of , 2013 and an assumed initial public offering price of $ per share, the midpoint of the range listed on the cover page of this prospectus). After giving effect to the sale of shares of common stock offered in this offering at an assumed initial public offering price of $ per share, the midpoint of the range listed on the cover page of this prospectus, and after deducting underwriting discounts and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of June 30, 2013 would have been $ million, or $ per share. This represents an immediate increase in pro forma net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new investors, or approximately % of the assumed initial public offering price of $ per share. The following table illustrates this dilution on a per share basis after giving effect to a for reverse stock split of our common stock to be effected immediately prior to the consummation of this offering:
A $1.00 increase or decrease in the assumed initial public offering price of $ per share, the midpoint of the range listed on the cover of this prospectus, would increase or decrease, respectively, our pro forma as adjusted net tangible book value per share after this offering by $ per share and the dilution in pro forma as adjusted net tangible book value to new investors by $ per share, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting underwriting discounts and estimated offering expenses payable by us. An increase or decrease of 1.0 million in the number of shares offered by us would increase or decrease, respectively, our pro forma as adjusted net tangible book value after this offering by approximately $ million, or $ per share, assuming the initial public offering price of $ per share remains the same and after deducting estimated underwriting discounts and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual initial public offering price and terms of this offering determined at pricing.
The following table summarizes, on a pro forma as adjusted basis as of June 30, 2013, the differences between existing stockholders and new investors in this offering with respect to the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid. The calculation below is based on the assumed initial public offering price of $ per share, the midpoint of the range listed on the cover page of this prospectus, before deducting the estimated underwriting discounts and estimated offering expenses payable by us.
A $1.00 increase or decrease in the assumed initial public offering price of $ per share, the midpoint of the range listed on the cover of this prospectus, would increase or decrease, respectively, total consideration paid by new investors and total consideration paid by all stockholders by approximately $ million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.
If the underwriters exercise their option to purchase additional shares of our common stock in full, our existing stockholders would own % and our new investors would own % of the total number of shares of our common stock outstanding after this offering.
The foregoing tables and calculations exclude, as of June 30, 2013:
To the extent any of these options or warrants are exercised, there will be further dilution to new investors.
We derived the unaudited pro forma financial data set forth below by applying pro forma adjustments to the audited and unaudited consolidated financial statements included elsewhere in this prospectus.
The unaudited pro forma consolidated balance sheet at June 30, 2013 and pro forma consolidated statements of comprehensive loss for the year ended December 31, 2012 and for the six months ended June 30, 2013 have been presented:
The pro forma consolidated balance sheet gives effect to the pro forma adjustments as if they occurred on June 30, 2013 and the pro forma consolidated statements of comprehensive loss gives effect to the pro forma adjustments as if they occurred on January 1, 2012.
The pro forma adjustments set forth below were based on available information and certain assumptions made by our management and may be revised as additional information becomes available. Assumptions made by management in the pro forma adjustments include the number of convertible note holders who will elect to convert their notes into shares of common stock upon the consummation of this offering and the use of a portion of the proceeds of this offering to satisfy obligations to the holders of our Series C preferred stock in exchange for their agreeing to vote in favor of the conversion of the preferred stock to common stock. The unaudited pro forma financial information is presented for informational purposes only, and does not purport to represent what our balance sheet and results of operations would actually have been if the transactions had occurred on the dates indicated, nor does it purport to project our results of operations or financial condition that we may achieve in the future.
The following table also reflects a for reverse stock split of our common stock to be effected immediately prior to the consummation of this offering.
You should read our unaudited pro forma financial information and the accompanying notes in conjunction with all of the historical financial statements and related notes included elsewhere in this prospectus and the financial and other information appearing elsewhere in this prospectus, including information contained in Risk Factors, Use of Proceeds, Capitalization, Selected Consolidated Financial Information and Managements Discussion and Analysis of Financial Condition and Results of Operations.
LDR HOLDING CORPORATION AND SUBSIDIARIES
Unaudited Pro Forma Consolidated Balance Sheet
As of June 30, 2013
See accompanying notes to unaudited pro forma condensed consolidated financial statements.
LDR HOLDING CORPORATION AND SUBSIDIARIES
Unaudited Pro Forma Consolidated Statements of Comprehensive Loss
Year Ended December 31, 2012
(In thousands, except share and per share data)
See accompanying notes to unaudited pro forma condensed consolidated financial statements.
LDR HOLDING CORPORATION AND SUBSIDIARIES
Unaudited Pro Forma Consolidated Statements of Comprehensive Loss
Six Months Ended June 30, 2013
(In thousands, except share and per share data)
See accompanying notes to unaudited pro forma condensed consolidated financial statements.
LDR HOLDING CORPORATION AND SUBSIDIARIES
Notes to the Unaudited Pro Forma Financial Information
Statement of Comprehensive Loss for the Year Ended December 31, 2012
Statement of Comprehensive Loss for the Six Months Ended June 30, 2013
The following tables present our selected consolidated financial and operating data for the periods indicated. The summary consolidated statement of comprehensive income (loss) data for the years ended December 31, 2012 and 2011 and the summary consolidated balance sheet data as of December 31, 2012 and 2011 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated statement of comprehensive income (loss) data for the year ended December 31, 2010 and the selected consolidated balance sheet data as of December 31, 2010 have been derived from our audited consolidated financial statements, which are not included in this prospectus. The consolidated statement of comprehensive income (loss) data for the six months ended June 30, 2013 and 2012 and the summary consolidated balance sheet data as of June 30, 2013 have been derived from our unaudited interim consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future, and our results for the six months ended June 30, 2013 are not necessarily indicative of our full year results. The consolidated financial information reflects a for reverse stock split of our common stock to be effected immediately prior to the consummation of this offering. The summary financial information below should be read in conjunction with the information contained in Managements Discussion and Analysis of Financial Condition and Results of Operations, the consolidated financial statements and notes thereto, and other financial information included elsewhere in this prospectus.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in Risk Factors.
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 highly differentiated VerteBRIDGE fusion platform targets the cervical and lumbar spine fusion markets. While these products only address a specific segment of the overall spine implant market, which segment represented $3.9 billion of sales in 2012, our VerteBRIDGE products have been used in more than 30,000 device implantations since the introduction of the VerteBRIDGE platform in 2007. Our Mobi non-fusion platform is highlighted by Mobi-C, a cervical disc replacement device with a patented mobile bearing core facilitating a range of motion similar to a healthy disc. We estimate that 30% of U.S. patients indicated for surgery with symptomatic cervical disc disease may be candidates for two-level cervical disc replacement procedures. The cervical disc replacement market had sales of $147 million in 2012 and is estimated by industry sources to grow to $601 million by 2018. To support our launch of Mobi-C in the United States, we intend to leverage our extensive international experience with Mobi-C, including clinical and commercial knowledge accumulated from more than 17,000 Mobi-C implantations outside the United States.
We market and sell our products globally through a highly adaptable worldwide sales organization that allows us to continually expand our sales channels and rapidly penetrate new geographic markets. Our U.S. sales organization consists of sales managers that recruit, develop and lead direct sales representatives employed by us and a broad network of independent sales agencies who distribute our products on our behalf for a commission that is generally based on a percentage of sales. We also sell to stocking distributors in certain international markets that purchase our products directly from us and independently sell them. We estimate that non-captive independent sales agencies drive 35% of total U.S. spine market revenue, and Mobi-C is the only cervical disc replacement device currently available to this large independent sales agency network. In order to take advantage of this large independent sales agency network, we expect to increase our U.S. sales organization by hiring additional sales managers, expanding our independent sales agency network, and recruiting and hiring lead direct sales representatives. We currently generate revenue in more than 25 countries globally, and revenue from outside of the United States represented approximately 29% of our total revenue in 2012. Our international sales organization includes sales managers and direct sales representatives in various countries, including France, Germany, Spain, South Korea, China and Brazil. A majority of our U.S. and international independent sales agencies and distributors have agreed to offer one or more of our products on an exclusive basis. We expect to continue to make investments in our sales organization by broadening our relationships with independent sales agencies, expanding exclusivity commitments among our independent sales agencies and international distributors and increasing our number of direct sales representatives.
We rely on a network of over 20 third parties, primarily located in Europe, to manufacture, package and sterilize all of our products. In most cases, we have redundant manufacturing capabilities for each of our products to ensure our inventory needs are met while maintaining high quality. However, we currently rely on a small number of limited source and sole source suppliers and we have not experienced any difficulty in locating and obtaining the materials necessary to meet demand for our products.
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 fusion and Mobi non-fusion platform products for both cervical and lumbar applications are characterized by patented technologies and innovative design features that we believe offer distinct advantages compared to other available products. We refer to these products in our financial reporting as our exclusive technology products. We also offer fusion technologies that are not significantly differentiated from competitive devices from a feature or clinical benefit perspective but that augment our VerteBRIDGE and Mobi technologies and allow us to offer our customers comprehensive surgical solutions. We refer to these products in our financial reporting as our traditional fusion products.
For the three years ended December 31, 2010, 2011 and 2012, and the six months ended June 30, 2013, our total revenues were $58.9 million, $78.0 million, $90.9 million and $52.4 million, respectively. Sales of our exclusive technology products represented approximately 80% and 81% of our total revenues in 2012 and the six months ended June 30, 2013, respectively, and we expect they will continue to be a significant contributor to our future success. We earned net income of $1.9 million in 2010, and incurred net losses of $1.8 million, $9.7 million and $4.8 million in 2011, 2012 and the six months ended June 30, 2013, respectively. We expect to continue to incur losses in the near term. As of June 30, 2013, we had cash and cash equivalents of $14.8 million and an accumulated deficit of $60.7 million. To date, we have funded our operations primarily with proceeds from the sale of preferred stock, various credit facilities, a convertible debt issuance and cash flow from operations.
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. We expect sales of Mobi-C in the United States to account for a significant portion of our expected increase in total revenue, primarily in 2014 and beyond. We expect that sales of Mobi-C in the United States will result in increases to our sales and marketing expenses as we increase our manufacturing and sales capabilities to handle the expected increase in demand for Mobi-C. In the event that demand for Mobi-C in the United States is not at the levels we anticipate, this would delay the anticipated increase in our total revenue and would cause us to defer related increases in sales and marketing expenses, although certain sales and marketing expenses related to training surgeons, seeking hospital approvals and pursuing third-party payor coverage and reimbursement would still be incurred. In addition, we anticipate that sales of our VerteBRIDGE products will continue to increase due to continued market penetration in key global markets.
Components of our Results of Operations
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.
Research and Development Expenses
Our research and development expenses primarily consist of engineering, product development, clinical and regulatory expenses, consulting services, outside prototyping services, outside research activities, materials, depreciation and other costs associated with development of our products. Research and development expenses also include related personnel and consultants compensation and stock-based compensation expense. We expense research and development costs as they are incurred. We expect research and development expense to continue to increase in absolute dollars as we develop new products to expand our product pipeline, add research and development personnel and undergo clinical activities, including clinical studies to gain additional regulatory clearances.
Sales and Marketing Expenses
Sales and marketing expenses primarily consist of salaries, benefits and other related costs, including stock-based compensation, for personnel employed in sales, marketing, medical education and training departments. 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 pipeline 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 finance, legal, compliance, administrative, information technology and human resource departments. General and administrative expenses include facility costs and the 2.3% excise tax on the sale of medical devices in the United States that came into effect on January 1, 2013. 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 incur increased expenses as a result of being a public company.
Income Tax Expense
We are taxed at the rates applicable within each jurisdiction in which we operate, primarily in the United States, France and Brazil. The composite income tax rate, tax provisions, deferred tax assets and deferred tax liabilities will vary according to the jurisdiction in which profits arise. Tax laws are complex and subject to different interpretations by management and the respective governmental taxing authorities, and require us to exercise judgment in determining our income tax provision, our deferred tax assets and liabilities and the valuation allowance recorded against our net deferred tax assets. Deferred tax assets and liabilities are determined using the enacted tax rates in effect for the years in which those tax assets are expected to be realized. A valuation allowance is established when it is more likely than not that the future realization of all or some of the deferred tax assets will not be achieved. We have recorded a full valuation allowance on our net deferred tax assets in the United States as of December 31, 2011 and 2012 and June 30, 2013, respectively, due to uncertainties related to our ability to utilize our deferred tax assets in the foreseeable future.
Results of Operations
The following table sets forth, for the periods indicated, our results of operations:
Six Months Ended June 30, 2013 Compared to the Six Months Ended June 30, 2012
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 and as percentages: