Stock-Based Compensation

(a) Stock Plans

In 2007, the Company adopted the LDR Holding Corporation 2007 Stock Option/Stock Issuance Plan (the 2007 Plan). Concurrent with the IPO in October 2013, the Company adopted the LDR Holding Corporation 2013 Equity Incentive Plan (the 2013 Plan) and terminated the 2007 Plan. No further grants will be made under the 2007 Plan. Any shares of common stock that are subject to outstanding awards under the 2007 Plan which are forfeited or lapse for any reason prior to exercise or settlement and would otherwise have returned to the share reserve under the 2007 Plan, instead will be available for issuance under the 2013 Plan.

The purpose of the 2007 Plan and the 2013 Plan (collectively, the Plans) is to provide eligible persons employed by or providing services to the Company with the opportunity to acquire or increase their equity interest in the Company.

2007 Plan

Under the 2007 Plan, incentive stock options may only be granted to Company employees and shall be issued at an exercise price not less than 100% of the fair market value of the Company’s common stock at the grant date, as determined by the Company’s Board of Directors, except for incentive stock option grants to a stockholder that owns greater than 10% of the Company’s outstanding stock or 10% of the voting power of all classes of the outstanding stock of any of our subsidiaries, in which case the exercise price per share is not less than 110% of the fair market value of the Company’s common stock at the date of grant. Nonstatutory stock options may be granted to Company employees, members of the Board of Directors and consultants at an exercise price determined by the Board of Directors. Options granted under the Plans are vested no later than ten years from the date of grant. At the time of grant, the Company’s Board of Directors determines the exercise price and vesting schedule. Generally, 25% of each option was vested one year from the vesting commencement date, as defined in the option agreement, and then the option vested ratably over each of the next 36 months. Under the Plans, stock options may be exercised before they became fully vested. In the event of termination of service, shares issued from the exercise of unvested stock options are subject to repurchase by the Company at the original purchase price until they vest. The shares subject to each option outstanding shall automatically become vested shares upon a change in ownership or control of the Company. Each such option shall, immediately prior to the consummation of a change in control, become exercisable for all of the shares of common stock at that time subject to that option.

2013 Plan

Under the 2013 Plan, incentive stock options may only be granted to Company employees and shall be issued at an exercise price not less than 100% of the fair market value of the Company’s common stock at the grant date, except for incentive stock options grants to a stockholder that owns greater than 10% of the combined voting power of all classes of stock of the Company, in which case the exercise price per share is not less than 110% of the fair value of the Company’s common stock at the date of grant. Nonstatutory stock options, stock appreciation rights, restricted stock rights or bonuses, restricted stock units, performance shares, performance units and cash-based awards, or other stock-based awards may be granted to Company employees, officers, directors or consultants or those of any present or future parent or subsidiary corporation or other affiliated entity.

As of December 31, 2014 and 2013, the Company had 758,074 and 853,557 shares of common stock, respectively, reserved for issuance under the 2013 Plan. This share reserve automatically increased on January 1, 2014 and each subsequent anniversary through January 1, 2023, by an amount equal to the smaller of (i) 4% of the number of shares of the Company’s common stock issued and outstanding on the immediately preceding December 31; and (ii) an amount determined by the compensation committee of the Company’s board of directors. Shares subject to awards granted under the 2013 Plan which expire, are repurchased, or are canceled or forfeited will again become available for issuance under the 2013 Plan. The shares available will not be reduced by awards settled in cash or by shares withheld to satisfy minimum tax withholding obligations. Only the net number of shares issued upon the exercise of stock appreciation rights or options exercised by means of a net exercise will be deducted from the shares available under the 2013 Plan.

(b) Stock Option Activity

A summary of the stock option activity for the Company for the years ended December 31, 2014 and 2013 is as follows:



	Shares		Weighted - Average Exercise Price		Weighted - Average Remaining Contractual Term	Aggregate Intrinsic Value
					(Years)	($000's)
Outstanding - December 31, 2013	1,572,626		$	6.17	7.17	$	27,413
Options granted	984,159		30.39
Options exercised	(652,605	)	3.62
Options forfeited	(22,811	)	26.59
Outstanding - December 31, 2014	1,881,369		$	19.30	8.21	$	26,484
Options vested and expected to vest:
At December 31, 2013	1,519,889		$	6.17	7.17	$	26,716
At December 31, 2014	1,778,371		$	19.30	8.21	$	25,502
Options exercisable:
At December 31, 2013	1,223,533		$	3.65	7.17	$	24,306
At December 31, 2014	786,473		$	8.94	8.21	$	18,898

The aggregate intrinsic value in the table above represents the total pre-tax value of the options shown, calculated as the difference between the Company’s closing stock price on December 31, 2014 and the exercise prices of the options shown, multiplied by the number of in-the money options. This is the aggregate amount that would have been received by the option holders if they had all exercised their options on December 31, 2014 and sold the shares thereby received at the closing price of the Company’s stock on that date. This amount changes based on the closing price of the Company’s stock.

The Company uses the Black-Scholes option pricing model in valuing its stock awards. The Black-Scholes model requires estimates regarding dividend yield, volatility, risk-free rate of return, estimated forfeitures during the service period and the expected term of the award.

The expected dividend yield assumption is based on the Company’s expectation of zero future dividend payouts. The volatility assumption is based on the historical volatilities of comparable public companies. The risk free rate of return assumption is based upon observed interest rates appropriate for the expected term of stock awards. The expected term is derived using the simplified method and represents the weighted average period that the stock awards are expected to remain outstanding.

The fair value of stock option grants has been estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:



	Years Ended December 31,
	2014		2013		2012
Expected dividend yield	—	%	—	%	—	%
Volatility	48.41		52.02		54.77
Risk-free rate of return	0.19		0.17		0.44
Expected life	6 years		6 years		6 years

Additional information regarding options is as follows (in thousands except for per share amounts):



	Years Ended December 31,
	2014		2013
Weighted-average grant date fair value per share of options granted during the period	$	15.16	$	7.08
Aggregate intrinsic value of options exercised during the period	$	17,465	$	307

The total intrinsic value of options exercised represents the total pre-tax intrinsic value that was received by the option holders who exercised their options during the fiscal year and is calculated as the difference between the stock price at the time of exercise and the exercise price multiplied by the number of options exercised.

The unrecognized compensation expense related to unvested options was $12.1 million and $2.8 million at December 31, 2014 and 2013, respectively, and is expected to be recognized over a weighted-average period of approximately two years and one years, respectively.

Awards Granted to LDR Médical Employees

Included in the above table as of December 31, 2014 and 2013, are options to purchase 154,986 and 509,062 shares, respectively, of Holdings common stock, which relate to options held by Médical employees to purchase Médical Class A common stock. Prior to the IPO in October 2013, those options were subject to the Escrow Agreement (note 9). As such, when exercised, the Médical common stock become subject to the Escrow Agreement, under which the Médical shares were converted to Company common stock upon certain future events, as defined in the Escrow Agreement. As the shares subject to the Escrow Agreement were accounted for as if converted, these instruments were valued using the same assumptions as were other Company stock options and have been included within the roll forward of Company stock options above. After the IPO, upon exercise for Médical shares, the Médical shares are required to be converted to the Company’s common stock.

Awards Granted Outside the Plans

As of December 31, 2013, there were 19,531 shares of Holdings common stock issuable upon exercise of options issued outside the Plans at an exercise price of $1.69 per share. These options were exercised during 2014 and are no longer outstanding as of December 31, 2014.

Performance Share Awards

In March 2013, the Company awarded options to certain non-employees for the purchase of 81,841 shares of performance awards under the 2007 Plan. These awards vested or were cancelled on December 31, 2013 depending on whether certain performance goals were achieved. During the year ended December 31, 2013, the Company recognized $413,000 in compensation expense related to the performance share awards. In February 2014, the Company awarded additional options for the purchase of 22,169 shares of performance awards under the 2013 Plan. These awards vested immediately and were based on achievement of the achievement of certain performance goals. During year ended December 31, 2014, the Company recognized $365,000 related to the performance share awards.

A summary of the restricted stock unit activity for the Company for the year ended December 31, 2014 is as follows:



	Units	Weighted - Average Grant Date Fair Value Per Share		Weighted - Average Remaining Contractual Term	Aggregate Intrinsic Value
				(Years)	($000's)
Unvested - December 31, 2013	—	$	—	0.0	$	—
Restricted stock units granted	99,500	27.06
Restricted stock units vested	—	—
Restricted stock units forfeited	—	—
Unvested - December 31, 2014	99,500	$	27.06	2.94	$	3,000

The unrecognized compensation expense related to unvested restricted stock units was $1.7 million at December 31, 2014 and is expected to be recognized over a weighted-average period of approximately 3 years.

(d) Employee Stock Purchase Program

Concurrent with the IPO in October 2013, the Company established the LDR Holding Corporation 2013 Employee Stock Purchase Plan (ESPP), a qualified plan under Section 423 of the Code. The purpose of the ESPP is to advance the interests of the Company by providing an incentive to attract, retain and reward employees and to motivate employees to contribute to the growth and profitability of the Company. The compensation committee of the Company’s board of directors administers the ESPP.

As of December 31, 2014 and 2013, the Company had 118,633 and 111,111 shares of common stock, respectively, reserved for issuance under the ESPP. The ESPP provides for an automatic increase in the number of shares available for issuance under the plan on January 1 of each year beginning in 2014 and continuing through and including January 1, 2023 equal to the lesser of (i) 1% of the Company’s issued and outstanding shares of common stock on the immediately preceding December 31, or (ii) a number of shares as determined by the Company’s board of directors.

The ESPP is generally designed to comply with the provisions of Section 423 of the Internal Revenue Code and will be typically implemented through a series of sequential offering periods, generally of a six-month duration, as established by the compensation committee.

Under the ESPP, eligible employees can purchase shares of the Company’s common stock at 85% of the lower of the fair market value on (i) the first trading day of the offering period and (ii) the purchase date, which is typically the end of an offering period. Amounts accumulated for each participant, generally through payroll deductions, are credited toward the purchase of the Company common stock on the purchase date.

No participant may purchase under the ESPP in any calendar year shares having a value of more than $25,000 measured by the fair market value per share of the Company’s common stock on the first day of the applicable offering period. Any amounts withheld from participants’ compensation in excess of the amounts used to purchase shares will be refunded, without interest.

The Company uses the Black-Scholes option pricing model to value shares purchased under the ESPP. The same methodology is employed for the inputs used in the Black-Scholes model for valuing ESPP as for valuing stock options discussed above.

(e) Stock-Based Compensation

The Company’s stock-based compensation expense related to employee stock options, restricted stock units and ESPP awards for the years ended December 31, 2014, 2013 and 2012 was as follows (in thousands):



	Years Ended December 31,
	2014		2013		2012
Research and development	$	572	$	153	$	48
Sales and marketing	2,930		786		181
General and administrative	1,723		330		66
Total	$	5,225	$	1,269	$	295