Table of Contents
Selling,
General and Administrative.
Selling, general and administrative expense was $7.4 million for
the three months ended June 30, 2009, compared to $5.1 million for the
three months ended June 30, 2008. The increase of $2.3 million, or 45%,
was primarily due to an increase in sales, marketing and operations costs
associated with the production and commercialization of our products and an
increase in general and administrative costs to support growth and costs
associated with operating as a public company. Selling, general and
administrative expense for the three months ended June 30, 2009 also included
$860,000 of stock-based compensation expense compared with $484,000 for the
three months ended June 30, 2008. The increase in stock-based compensation
expense was primarily due to additional option and restricted stock grants made
in 2009. We expect our selling, general and
administrative expenses to continue to increase substantially due to our
planned increase in the number of employees necessary to support the sales and
marketing efforts associated with the growing commercialization of MAKOplasty,
continued growth in operations and the costs associated with operating as a
public company.
Research
and Development.
Research and development expense was $3.1 million for the three months
ended June 30, 2009, compared to $2.5 million for the three months ended
June 30, 2008. The increase of $605,000, or 24%, was primarily due to an
increase in research and development activities associated with on-going
development of our RIO system and our MAKO implant systems. We expect our
research and development expense to increase as we continue to expand our
research and development activities, including the support of existing products
and the research of potential future products.
Depreciation
and Amortization.
Depreciation and amortization expense was $589,000 for the three months ended
June 30, 2009, compared to $425,000 for the three months ended June 30, 2008.
The increase of $164,000, or 39%, was primarily due to an increase in
depreciation of property and equipment as a result of purchases made during
2009 and 2008.
Interest
and Other Income.
Interest and other income was $67,000 for the three months ended June 30, 2009,
compared to $241,000 for the three months ended June 30, 2008. The decrease of
$174,000, or 72%, was primarily due to lower yields realized on our cash, cash
equivalents and investments for the three months ended June 30, 2009
compared with the same period of 2008.
Income
Taxes.
No income
taxes were recognized for the three months ended June 30, 2009 and 2008, due to
net operating losses in each period. In addition, no current or deferred income
taxes were recorded for the three months ended June 30, 2009 and 2008, as all
income tax benefits were fully offset by a valuation allowance against our net
deferred income tax assets.
Comparison of the
Six Months Ended June 30, 2009 to the Six Months Ended June 30, 2008
Revenue.
Revenue was $18.6 million for the six
months
ended June 30, 2009, compared to $1.2 million for the six months ended June 30,
2008. The increase in revenue of $17.4 million was primarily due to the
recognition of approximately $11.3 million of revenue from seventeen previously
deferred unit sales of our TGS and $4.3 million of revenue from six unit sales
of our RIO system. In accordance with our revenue recognition policy,
recognition of revenue on unit sales of our TGS was deferred until delivery of
the RIO system, which we commercially released in the first quarter of 2009.
Prior to 2009, recognized revenue was primarily generated from the sale of
implants and disposable products utilized in knee MAKOplasty procedures. Total
revenue was also positively impacted by a $1.8 million increase in product
revenue attributable to an increase in knee MAKOplasty procedures performed
during the six months ended June 30, 2009 as compared with the six months ended
June 30, 2008. There were 623 knee MAKOplasty procedures performed during the
six months ended June 30, 2009 compared to 242 knee MAKOplasty procedures
performed during six months ended June 30, 2008.
Cost
of Revenue.
Cost of
revenue was $13.4 million for the six months ended June 30, 2009, compared to
$851,000 for the six months ended June 30, 2008. The increase in cost of
revenue of $12.5 million was primarily due to the recognition of the direct
cost of revenue from seventeen previously deferred unit sales of our TGS,
including the cost of providing the RIO system upgrades, as described in the
“Factors Which May Influence Future Results of Operations” section above, to
the cost of revenue from six unit sales of our RIO system and to an increase in
knee MAKOplasty procedures performed.
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Table of Contents
Selling,
General and Administrative.
Selling, general and administrative expense was $14.2 million for
the six months ended June 30, 2009, compared to $9.8 million for the six
months ended June 30, 2008. The increase of $4.4 million, or 45%, was
primarily due to an increase in sales, marketing and operations costs associated
with the production and commercialization of our products and an increase in
general and administrative costs to support growth and costs associated with
operating as a public company. Selling, general and administrative expense for
the six months ended June 30, 2009 also included $1.5 million of stock-based
compensation expense compared with $908,000 for the six months ended June 30,
2008. The increase in stock-based compensation expense was primarily due to
additional option and restricted stock grants made in 2009.
Research
and Development
.
Research and development expense was $5.6 million for the six months ended
June 30, 2009, compared to $6.1 million for the six months ended June 30,
2008. The decrease of $491,000, or 8%, was primarily due to a nonrecurring
charge of $949,000 incurred in the first quarter of 2008 associated with the
vesting in full, upon completion of our IPO in February 2008, of restricted
common stock issued pursuant to business consultation agreements entered into
in December 2004. This was partially offset by an increase in research and
development activities associated with on-going development of our RIO system
and our MAKO implant systems for the six months ended June 30, 2009
compared with the same period of 2008.
Depreciation
and Amortization.
Depreciation and amortization expense was $1.1 million for the six months ended
June 30, 2009, compared to $847,000 for the six months ended June 30, 2008. The
increase of $220,000, or 26%, was primarily due to an increase in depreciation
of property and equipment as a result of purchases made during 2009 and 2008.
Interest
and Other Income.
Interest and other income was $289,000 for the six months ended June 30, 2009,
compared to $401,000 for the six months ended June 30, 2008. The decrease of
$112,000, or 28%, was primarily due to lower yields realized on our cash, cash
equivalents and investments for the six months ended June 30, 2009
compared with the same period of 2008.
Interest
and Other Expense.
Interest and other expense was $0 for the six months ended June 30, 2009,
compared to $109,000 for the six months ended June 30, 2008. Through February
2008, interest and other expense consisted primarily of the amortization of a
$590,000 discount associated with a deferred payment to IBM of $4.0 million
which had been fully amortized and paid upon the completion of our IPO in
February 2008.
Income
Taxes.
No income
taxes were recognized for the six months ended June 30, 2009 and 2008, due to
net operating losses in each period. In addition, no current or deferred income
taxes were recorded for the six months ended June 30, 2009 and 2008, as all
income tax benefits were fully offset by a valuation allowance against our net
deferred income tax assets.
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Six
Months Ended June 30,
|
|
|
|
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2009
|
|
2008
|
|
|
Cash used in operating
activities
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$
|
(26,962
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)
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$
|
(14,485
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)
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|
Cash used in investing
activities
|
|
|
(14,431
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)
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|
(3,542
|
)
|
|
Net cash provided by (used
in) financing activities
|
|
|
(164
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)
|
|
46,487
|
|
|
Net increase (decrease) in
cash and cash equivalents
|
|
$
|
(41,557
|
)
|
$
|
28,460
|
|
We
have incurred net losses and negative cash flow from operating activities for
each period since our inception in November 2004. As of June 30, 2009, we had
an accumulated deficit of $95.5 million and have financed our operations
principally through the sale of Series A, B and C redeemable convertible
preferred stock, the sale of common stock in our IPO in February 2008, and our
equity financing in October 2008. We received net proceeds of
$52.2 million from the issuance of Series A, B and C redeemable
convertible preferred stock. In February 2008, we completed our IPO of common
stock, issuing a total of 5.1 million shares at an issue price of $10.00 per
share, resulting in net proceeds to us, after expenses, of approximately $43.8
million. In conjunction with the closing of the IPO in February 2008, all of
our outstanding Series A, Series B and Series C redeemable
convertible preferred stock was converted into 10,945,080 shares of common
stock, as adjusted for a one-for-3.03 reverse stock split, which has been
retroactively reflected in the accompanying financial statements.
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Table of Contents
In
October 2008, we entered into a Securities Purchase Agreement for an equity
financing of up to approximately $60 million, with initial gross proceeds of
approximately $40.2 million, which we closed on October 31, 2008, and
conditional access to an additional $20 million, which we refer to as the
Second Closing. In connection with the financing, we issued and sold to the
participating investors 6,451,613 shares of our common stock at a purchase
price of $6.20 per share and issued warrants to the participating investors to
purchase 1,290,323 shares of common stock at a purchase price of $0.125 per
warrant and an exercise price of $7.44 per share. In addition, we issued
warrants to purchase 322,581 shares of common stock at a purchase price of
$0.125 per warrant and an exercise price of $6.20 per share to investors that
agreed to purchase an additional $20 million of common stock in the Second
Closing. The financing resulted in net proceeds of approximately $39.7 million,
after expenses of approximately $525,000.
Although
the Second Closing is conditioned upon our achievement of certain
business-related milestones before December 31, 2009, we received the necessary
stockholder approval in January 2009 for the potential future issuance of $20
million of common stock along with related warrants as contemplated by the
Securities Purchase Agreement.
In
May 2009, we filed a shelf registration statement on Form S-3 with the
Securities and Exchange Commission under which we may issue up to $50 million
of equity, debt or other securities. As of July 30, 2009, no securities had
been issued under this shelf registration statement.
As
of June 30, 2009, we had approximately $35.7 million in cash, cash
equivalents and investments. Our cash and investment balances are held in a
variety of interest bearing instruments, including notes and bonds from U.S.
government agencies and AAA rated U.S. corporate debt.
Net Cash Used in
Operating Activities
Net
cash used in operating activities primarily reflects the net loss for those
periods, which was reduced in part by depreciation and amortization,
stock-based compensation and inventory write-downs. Net cash used in operating
activities was also affected by changes in operating assets and liabilities.
Included in changes in operating assets and liabilities for the six months
ended June 30, 2009 are approximately $11.4 million and $3.6 million of
decreases to the deferred revenue balance and deferred cost of revenue balance,
respectively, due to the recognition of seventeen previously deferred unit
sales of our TGS, and $6.2 million of increases in inventory necessitated by
the commercial release of the RIO system, the commercial release of the
RESTORIS MCK implant system and increased sales of implants and disposable products.
Included in changes in operating assets and liabilities for the six months
ended June 30, 2008 are approximately $3.2 million and $1.2 million of
increases to the deferred revenue balance and deferred cost of revenue balance,
respectively, due primarily to unit sales of our TGS. In accordance with our
revenue recognition policy, recognition of revenue and direct cost of revenue
associated with the unit sales of our TGS was deferred until delivery of the
RIO system, which we commercially released in the first quarter of 2009
Net Cash Used in
Investing Activities
Net
cash used in investing activities for the six months ended June 30, 2009 was
primarily attributable to the purchase of investments of $14.7 million, which
was partially offset by proceeds of $1.0 million from sales and maturities of
investments. Net cash used in investing activities for the six months ended
June 30, 2008 was primarily attributable to the payment of a $4.0 million
deferred license fee due to IBM upon completion of our IPO and to $2.0 million
of purchases of investments, which was partially offset by proceeds of
$3.1 million from sales and maturities of investments.
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Table of Contents
Net Cash Provided
by Financing Activities
Net
cash used by our financing activities for the six months ended June 30, 2009
was primarily attributable to the payment of $350,000 for payroll taxes
associated with the taxable income from the vesting of restricted stock granted
to the Company’s Chief Executive Officer, for which 40,211 shares of common
stock were surrendered by the Chief Executive Officer to cover the payment of
the payroll taxes. This was partially offset by proceeds received under our
employee stock purchase plan. Net cash provided by our financing activities for
the six months ended June 30, 2008 was primarily attributable to net proceeds
received in connection with our IPO in February 2008.
Operating Capital
and Capital Expenditure Requirements
To
date, we have not achieved profitability. We anticipate that we will continue
to incur substantial net losses for at least the next two or three years as we
expand our sales and marketing capabilities in the orthopedic products market,
commercialize our RIO system and RESTORIS implant systems, continue research
and development of existing and future products and continue development of the
corporate infrastructure required to sell and market our products and operate
as a public company. We also expect to experience increased cash requirements
for inventory and property and equipment in conjunction with the continued
commercialization of our RIO system and RESTORIS implant systems.
In
executing our current business plan, we believe our existing cash, cash
equivalents and investment balances, and interest income we earn on these
balances will be sufficient to meet our anticipated cash requirements through
at least the first quarter of 2010. To the extent our available cash, cash
equivalents and investment balances are insufficient to satisfy our operating
requirements after that period, we will need to seek additional sources of
funds, including selling additional equity, debt or other securities or
entering into a credit facility, or modify our current business plan. The sale
of additional equity and convertible debt securities may result in dilution to
our current stockholders. If we raise additional funds through the issuance of
debt securities, these securities may have rights senior to those of our common
stock and could contain covenants that could restrict our operations and
issuance of dividends. We may also require additional capital beyond our
currently forecasted amounts. Any required additional capital, whether
forecasted or not, may not be available on reasonable terms, or at all. In
connection with the October 2008 equity financing with initial gross proceeds
of approximately $40.2 million, we obtained a call right, subject to our
satisfaction of certain business milestones, to an additional $20 million from
certain investors in exchange for additional warrants to purchase shares of our
common stock. There is no guarantee that we will satisfy the milestones, or, if
we do satisfy them and choose to exercise our call right, the investors will be
able to comply with their obligations. If we are unable to obtain additional
financing, we may be required to reduce the scope of, delay or eliminate some
or all of our planned research, development and commercialization activities,
which could materially harm our business and results of operations.
Because
of the numerous risks and uncertainties associated with the development of
medical devices and the current economic situation, we are unable to estimate
the exact amounts of capital outlays and operating expenditures necessary to
complete the development of our products and successfully deliver commercial
products to the market. Our future capital requirements will depend on many
factors, including but not limited to the following:
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•
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the revenue generated by
sales of our current and future products;
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•
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the expenses we incur in
selling and marketing our products;
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•
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the costs and timing of
regulatory clearance or approvals for upgrades or changes to our products;
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•
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the rate of progress, cost
and success of on-going development activities;
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•
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the emergence of competing
or complementary technological developments;
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•
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the costs of filing,
prosecuting, defending and enforcing any patent or license claims and other
intellectual property rights, or participating in litigation related
activities;
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•
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the acquisition of
businesses, products and technologies, although we currently have no
understandings, commitments or agreements relating to any material
transaction of this type; and
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•
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the current downturn in
general economic conditions and interest rates.
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Contractual
Obligations
At
June 30, 2009, we were committed to make future purchases for inventory related
items under various purchase arrangements with fixed purchase provisions
aggregating approximately $3.3 million.
In
May 2009, we entered into a license agreement for patents relating to our
robotic arm system, which we refer to as the robotic arm license. The robotic
arm license requires minimum running royalties on sales our robotic arm
systems. The minimum running royalties are estimated to be approximately
$200,000 for year ended December 31, 2009, and increase annually thereafter
through 2013. The minimum running royalties for the year ended December 31,
2013 and for each subsequent year through the term of the agreement are
estimated to be approximately $1.0 million annually.
In
June 2009, we entered into a Research and Development License and Supply
Agreement, or the R&D Agreement, associated with a potential future product
for RIO enabled hip procedures. The R&D Agreement requires an up-front
payment of $450,000, and requires future milestone payments based on
development progress. The aggregate future milestone payments under the R&D
Agreement are $1.6 million assuming the achievement of all development
milestones. As of June 30, 2009, we had paid the $450,000 up-front payment. No
milestone payments were paid or have become due as of June 30, 2009. The
aggregate up-front payment and milestone payments of $2.0 million we are
required to pay under the R&D Agreement will be recognized as research and
development expense on a straight-line basis over the period development
services are performed based on our current expectation that all development
milestones will be achieved.
Other
than as described above and scheduled payments through June 30, 2009, there
have been no significant changes in our contractual obligations during the six
months ended June 30, 2009 as compared to the contractual obligations described
in our Form 10-K for the year ended December 31, 2008.
Recent Accounting Pronouncements
Adopted Accounting Pronouncements
Effective
January 1, 2009, we adopted Emerging Issues Task Force (“EITF”) Issue No.
07-05,
Determining
Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock
(“EITF 07-05”). EITF 07-05 addresses the determination of whether an instrument
(or an embedded feature) is indexed to an entity’s own stock, if an instrument
(or an embedded feature) that has the characteristics of a derivative
instrument is indexed to an entity’s own stock, it is still necessary to
evaluate whether it is classified in stockholders’ equity (or would be
classified in stockholders’ equity if it were a freestanding instrument). In
addition, for some instruments that are potentially subject to the guidance in
EITF Issue No. 00-19,
Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company’s Own Stock
, but
do not have all the characteristics of a derivative instrument under paragraphs
6 through 9, it is still necessary to evaluate whether it is classified in
stockholders’ equity. The adoption of EITF 07-05 did not have a material impact
on our results of operations and financial position.
Effective
January 1, 2009, we adopted SFAS No. 141 (revised 2007),
Business
Combinations
(“SFAS 141(R)”). SFAS 141(R) retains the
fundamental requirements of the original pronouncement requiring that the
purchase method be used for all business combinations. SFAS 141(R) defines
the acquirer as the entity that obtains control of one or more businesses in
the business combination, establishes the acquisition date as the date that the
acquirer achieves control and requires the acquirer to recognize the assets
acquired, liabilities assumed and any noncontrolling interest at their fair
values as of the acquisition date. SFAS 141(R) also requires that
acquisition related costs be recognized separately from the acquisition. The
adoption of SFAS 141(R) did not have a material impact on our results of
operations and financial position.
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Table of Contents
Effective
January 1, 2009, we adopted SFAS No. 160,
Noncontrolling Interests in
Consolidated Financial Statements
(“SFAS 160”). SFAS 160
establishes accounting and reporting standards for ownership interests in
subsidiaries held by parties other than the parent, the amount of consolidated
net income attributable to the parent and to the noncontrolling interest,
changes in a parent’s ownership interest and the valuation of retained
noncontrolling equity investments when a subsidiary is deconsolidated.
SFAS 160 also establishes reporting requirements that provide sufficient
disclosures that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. The adoption of
SFAS 160 did not have a material impact on our results of operations and
financial position.
In
April 2009, the Financial Accounting Standards Board (“FASB”) issued Staff
Position No. 157-4,
Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly
(“FSP 157-4”), which
provides additional guidance for estimating fair value in accordance with FASB
Statement No. 157,
Fair Value Measurements
, when the volume
and level of activity for the asset or liability have significantly decreased.
This FSP also includes guidance on identifying circumstances that indicate a
transaction is not orderly. This pronouncement is effective for periods ending
after June 15, 2009. The adoption of FSP 157-4 did not have a
material impact on our results of operations and financial position.
In
April 2009, the FASB issued Staff Position No. FAS 115-2 and FAS 124-2,
Recognition
and Presentation of Other-Than-Temporary Impairments
(“FSP 115-2 and
FAS 124-2”), to amend the other-than-temporary impairment guidance in debt
securities to be based on intent to sell instead of ability to hold the
security and to improve the presentation and disclosure of other-than-temporary
impairments on debt and equity securities in the financial statements. This
pronouncement is effective for periods ending after June 15,
2009. The adoption of FSP 115-2 and FAS 124-2 did not have a material
impact on our results of operations and financial position.
In
May 2009, the FASB issued SFAS No. 165,
Subsequent Events
(“SFAS 165”), which
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date, but before the financial statements are
issued or available to be issued (“subsequent events”). SFAS 165 is effective
for interim or annual periods ending after June 15, 2009. In accordance with
SFAS No. 165, we have evaluated subsequent events through the time of filing
this Form 10-Q with the SEC on August 5, 2009. No material subsequent events
have occurred since June 30, 2009 that required recognition or disclosure
in this Form 10-Q.
Recent Accounting Pronouncements
In
June 2009, the FASB issued SFAS No. 168,
The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB
Statement No. 162
(“SFAS 168”). SFAS 168 establishes the FASB
Accounting Standards Codification as the source of authoritative accounting
principles recognized by the FASB to be applied in the preparation of financial
statements in conformity with generally accepted accounting principles. SFAS
168 explicitly recognizes rules and interpretive releases of the Securities and
Exchange Commission (“SEC”) under federal securities laws as authoritative GAAP
for SEC registrants. SFAS 168 is effective for interim and annual periods
ending after September 15, 2009. The adoption of SFAS 168 will not have a
material impact on our results of operations and financial position.
Other
than as described above, there have been no significant changes in Recent
Accounting Pronouncements during the six months ended June 30, 2009 as compared
to the Recent Accounting Pronouncements described in our Form 10-K for the year
ended December 31, 2008.
Off-Balance Sheet Arrangements
We
do not have any off-balance sheet arrangements.
26
Table of Contents
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
Our
exposure to market risk is confined to our cash, cash equivalents and
investments. The goals of our cash investment policy are the security of the
principal invested and fulfillment of liquidity needs, with the need to
maximize value being an important consideration. To achieve our goals, we
maintain a portfolio of cash equivalents and investments in a variety of
securities including notes and bonds from U.S. government agencies and AAA
rated U.S. corporate debt. The securities in our investment portfolio are not
leveraged and are classified as available for sale. We currently do not hedge
interest rate exposure. We do not believe that a variation in market rates of
interest would significantly impact the value of our investment portfolio.
ITEM 4T. CONTROLS AND PROCEDURES.
In
accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934, or the
Exchange Act, our management evaluated, with the participation of our chief
executive officer and chief financial officer, or the Certifying Officers, the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of June 30,
2009. Based upon their evaluation of these disclosure controls and procedures,
our Certifying Officers concluded that the disclosure controls and procedures
were effective as of June 30, 2009 to provide reasonable assurance that
information required to be disclosed by us in the reports we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time period specified in the SEC rules and forms, and to provide reasonable
assurance that information required to be disclosed by us in the reports we
file or submit under the Exchange Act is accumulated and communicated to our
management, including our principal executive and principal financial officers,
as appropriate, to allow timely decisions regarding required disclosure.
We
believe that a controls system, no matter how well designed and operated, is
based in part upon certain assumptions about the likelihood of future events,
and therefore can only provide reasonable, not absolute, assurance that the
objectives of the controls system are met, and no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within a company have been detected.
27
Table of Contents
P
ART II
OTHER INFORMATION
I
TEM 1A. RISK FACTORS.
The
following risk factors and other information related to our business and
operations should be carefully considered. The risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties not presently known to us or that we currently treat as
immaterial also may impair our business operations. If any of the following
risks occur, our business, financial condition, operating results and cash
flows could be materially adversely affected.
Risks Related to Our Business
Adverse
changes in economic conditions and reduced spending on innovative medical
technology may adversely impact our business.
The
purchase of a robotic arm system is discretionary and requires our customers to
make significant initial commitments of capital and other resources. In
addition, purchase of a robotic arm system requires a commitment to purchase
exclusively from us other products and services, including our proprietary RESTORIS
family of knee implant systems. Continuing weak economic conditions, or a
reduction in healthcare technology spending even if economic conditions
improve, could adversely impact our business, operating results and financial
condition in a number of ways, including longer sales cycles, lower prices for
our products and services and reduced unit sales.
Current
credit and financial market conditions could delay or prevent our customers
from obtaining financing to purchase a robotic arm system, which would adversely
affect our business, financial condition and results of operations.
Due
to the tightening of credit markets in the past year and concerns regarding the
availability of credit, particularly in the United States, our customers may be
delayed in obtaining, or may not be able to obtain, necessary financing for
their purchases of the robotic arm system. These delays may in some instances
lead to our customers postponing the shipment and installation of previously
ordered systems, cancelling their system orders, postponing their system
installation or cancelling their agreements with us. An increase in delays and
order cancellations of this nature could adversely affect our product sales and
revenues and, therefore, harm our business and results of operations.
Negative
worldwide economic conditions and the long lead times required by certain
suppliers could prevent us from accurately forecasting demand for our products,
which could adversely affect our operating results.
The
current negative worldwide economic conditions and market instability makes it
increasingly difficult for us, our customers and our suppliers to accurately
forecast future product demand trends, which could cause us to order and/or
produce excess products that can increase our inventory carrying costs and
result in obsolete inventory. Alternatively, this forecasting difficulty could
cause a shortage of products, or materials used in our products, that could
result in an inability to satisfy demand for our products and a resulting
material loss of revenue.
In
addition, certain of our suppliers may require extensive advance notice of our
requirements in order to produce products in the quantities we desire. This
long lead time may require us to place orders far in advance of the time when
certain products will be offered for sale, thereby also making it difficult for
us to accurately forecast demand for our products, exposing us to risks
relating to shifts in consumer demand and trends and adversely affecting our
operating results.
28
Table of Contents
We
may not have sufficient funding to complete the development and
commercialization of our existing products and the weak worldwide economic
conditions may hamper our efforts to raise additional capital to run our
business.
To
date, we have not achieved profitability. We anticipate that we will continue
to incur substantial net losses for at least the next two or three years as we
expand our sales and marketing capabilities in the orthopedic products market,
continued commercialization of the RIO system and the RESTORIS MCK
multicompartmental knee implant system and continue to develop the corporate
infrastructure required to sell and market our products and operate as a public
company. We also expect to experience increased cash requirements for inventory
and property and equipment in conjunction with the current commercial launch of
the RIO system and the RESTORIS MCK multicompartmental knee implant system.
Given the current weak economic conditions, we may be unable to obtain
additional financing. As a result, we may be required to reduce the scope of,
delay or eliminate some or all of our planned research, development and
commercialization activities. We also may have to reduce marketing, customer
support or other resources devoted to our products. Any of these factors could
materially harm our business and results of operations.
We
believe our existing cash, cash equivalents, short-term investment balances,
and interest income we earn on these balances, if any, will be sufficient to
meet our anticipated cash requirements through at least the first quarter of
2010. To the extent our available cash, cash equivalents and short-term
investment balances are insufficient to satisfy our operating requirements after
that period, we will need to seek additional sources of funds, including
selling additional equity or debt securities or entering into a credit
facility, or modify our current business plan. In connection with the October
2008 equity financing , we obtained a call right, subject to our satisfaction
of certain business milestones, to an additional $20 million from certain
investors in exchange for additional warrants to purchase shares of our common
stock. There is no guarantee that we will satisfy the milestones or, if we do
satisfy them and choose to exercise our call right with respect to the $20
million, the investors will be able to comply with their obligations. For more
information regarding the equity financing, see Part I, Financial Statements,
Note 6 to the Financial Statements above. The sale of additional equity and
debt securities may result in dilution to our current stockholders or may
require us to grant a security interest in our assets. If we raise additional
funds through the issuance of debt securities, these securities may have rights
senior to those of our common stock and could contain covenants that could
restrict our operations. We may require additional capital beyond our currently
forecasted amounts. Any such required additional capital may not be available
on reasonable terms, or at all.
Because
of the numerous risks and uncertainties associated with the development of
medical devices, such as future versions of the RIO system and the RESTORIS
family of knee systems, we are unable to estimate the exact amounts of capital
outlays and operating expenditures necessary to complete the development of the
products and successfully deliver commercial products to the market. Our future
capital requirements will depend on many factors, including but not limited to
the following:
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the revenue
generated by sales of our current and future products;
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the expenses
we incur in selling and marketing our products;
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the costs
and timing of regulatory clearance or approvals for upgrades or changes to
our products;
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the rate of
progress, cost, and success or failure of on-going development activities;
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the
emergence of competing or complementary technological developments;
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the costs of
filing, prosecuting, defending and enforcing any patent or license claims and
other intellectual property rights, or participating in litigation related
activities;
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the terms
and timing of any collaborative, licensing, or other arrangements that we may
establish;
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the
acquisition of businesses, products and technologies, although we currently
have no understandings, commitments or agreements relating to any material
transaction of this type; and
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general
economic conditions and interest rates, including the current downturn.
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Our
reliance on third-party suppliers, including single source suppliers, for our
implants and nearly all components of our robotic arm systems could harm our
ability to meet demand for our products in a timely and cost effective manner.
We
rely on third-party suppliers to manufacture and supply our implants and nearly
all components used in our robotic arm systems, other than software. We
currently rely on a number of single source suppliers, such as The Anspach Effort,
Inc., for our bone cutting instrument, Northern Digital Inc., or NDI, for the
stereo tracking camera used in MAKOplasty and Millstone Medical Outsourcing,
LLC, for sterile packaging of our RESTORIS family of knee implant systems. We
currently do not have long-term contracts with any of our suppliers. As a
result, our suppliers generally are not required to provide us with any
guaranteed minimum production levels, and we cannot assure you that we will be
able to obtain sufficient quantities of key components in the future. In
addition, our reliance on third-party suppliers involves a number of risks,
including, among other things:
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Our
suppliers may encounter financial hardships as a result of unfavorable
economic and market conditions unrelated to our demand for components, which
could inhibit their ability to fulfill our orders and meet our requirements.
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Suppliers
may fail to comply with regulatory requirements, be subject to lengthy
compliance, validation or qualification periods, or make errors in
manufacturing components that could negatively affect the efficacy or safety
of our products or cause delays in supplying of our products to our
customers;
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Newly
identified suppliers may not qualify under the stringent regulatory standards
to which our business is subject;
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We or our
suppliers may not be able to respond to unanticipated changes in customer
orders, and if orders do not match forecasts, we or our suppliers may have
excess or inadequate inventory of materials and components;
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We may be
subject to price fluctuations due to a lack of long-term supply arrangements
for key components;
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We may
experience delays in delivery by our suppliers due to changes in demand from
us or their other customers;
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We or our
suppliers may lose access to critical services and components, resulting in
an interruption in the manufacture, assembly and shipment of our systems;
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Our
suppliers may be subject to allegations by third parties of misappropriation
of proprietary information in connection with their supply of products to us,
which could inhibit their ability to fulfill our orders and meet our
requirements
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Fluctuations
in demand for products that our suppliers manufacture for others may affect
their ability or willingness to deliver components to us in a timely manner;
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Our
suppliers may wish to discontinue supplying components or services to us for
risk management reasons; and
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We may not
be able to find new or alternative components or reconfigure our system and
manufacturing processes in a timely manner if the necessary components become
unavailable;
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If
any of these risks materialize, it could significantly increase our costs and
impact our ability to meet demand for our products. If we are unable to satisfy
commercial demand for the RIO system or the RESTORIS family of knee systems 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 such as motors, encoders, brakes and certain robotic arm system
components that are manufactured in accordance with our custom specifications.
The introduction of new or alternative components may require design changes to
our system that are subject to FDA and other regulatory clearances or
approvals. We may also be required to assess the new manufacturer’s 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.
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We
are an early-stage medical device company with a limited operating history and
our business may not become profitable.
We
are an early-stage medical device company with a limited operating history. Our
current or planned products with 510(k) marketing clearance from the FDA are
versions 1.0, 1.2 and 1.3 of our Tactile Guidance System, or TGS, the first
version of our RIO Robotic Arm Interactive Orthopedic system, or RIO system,
and inlay and onlay implant systems for use in unicompartmental and
bicompartmental knee resurfacing procedures. The future success of our business
depends on our ability to continue to develop and obtain regulatory clearances
or approvals for innovative and commercially successful products in our field,
which we may be unable to do in a timely manner, or at all. Our success and
ability to generate revenue or be profitable also depends on our ability to
establish our sales and marketing force, generate product sales and control
costs, all of which we may be unable to do. We have a limited history of
operations upon which you can evaluate our business and our operating expenses
are increasing. Our lack of any significant operating history also limits your
ability to make a comparative evaluation of us, our products and our prospects.
We
have incurred significant losses since our inception and anticipate that we
will continue to incur significant losses for at least the next two or three
years.
We
have sustained net losses in every fiscal year since our inception in 2004,
including a net loss attributable to common stockholders of $6.4 million for
the quarter ended June 30, 2009. As of June 30, 2009, we had total
stockholders’ equity of $52.9 million. We expect to continue to incur
significant operating losses as we increase our sales and marketing activities
and otherwise continue to invest capital in the development of our products and
our business generally. We also expect that our general and administrative
expenses will increase due to additional operational and regulatory burdens
associated with operating as a public company. Our losses have had and will
continue to have an adverse effect on our stockholders’ equity and working
capital. Any failure to achieve and maintain profitability would continue to
have an adverse effect on our stockholders’ equity and working capital and
could result in a decline in our stock price or cause us to cease operations.
We
rely heavily on intellectual property that we license from others, and if we
are unable to maintain these licenses or obtain additional licenses that we may
need, our ability to compete will be harmed.
We
rely heavily on intellectual property that we license or sublicense from
others, including patented technology that is integral to our RIO system and
RESTORIS family of knee systems. As of July 30, 2009, we had licensed rights to
126 U.S. and 51 foreign third-party granted patents, and we had licensed rights
to 22 U.S. and 29 foreign third-party pending patent applications. The majority
of these patents and applications are either used in our current products or
relate to core technologies used in our products, such as computer assisted
surgery, or CAS, robotics, haptics and implants. Three of the licensed U.S.
patents will expire by the end of 2009, one of which relates to robotic
technology. This patent is considered material to our intellectual property
portfolio because it potentially enables us to exclude others from practicing
the claimed technology. Our portfolio also includes 36 wholly owned pending
U.S. patent applications, 56 pending foreign applications and other
intellectual property that is wholly owned by us. We are particularly dependent
on our licensing arrangements with Z-Kat, Inc., or Z-Kat, from whom we license
or sublicense, among other things, core technologies in CAS, and haptics and robotics.
Third parties may terminate a license in the event that we fail to make
required payments or for other causes. In the event a third party terminates a
license agreement, we cannot assure you that we could acquire another license
to adequately replace the product, technology or method covered by the
terminated license. If we fail to maintain our current licenses, our ability to
compete in the knee implant market will be harmed.
In
addition, as we enhance our current product offerings and develop new ones,
including the RIO system and the RESTORIS family of knee implant systems, we
may find it advisable or necessary to seek additional licenses from third
parties who hold patents covering technology or methods used in these products.
If we cannot obtain these additional licenses, we could be forced to design
around those patents at additional cost or abandon the product altogether. As a
result, our ability to grow our business and compete in the knee implant market
may be harmed.
We
are currently required by the FDA to refrain from using certain terms to label
and market our products, which could harm our ability to market and
commercialize our current or future products.
On
September 28, 2007, we submitted a Special 510(k) application to the FDA for
version 1.2 of our TGS which the FDA converted to a Traditional 510(k)
application. On November 1, 2007, the FDA provided us with a letter requesting
additional information in which the FDA, among other things, asked us to
justify our proposed use of the terms “haptic” and “robot” in the labeling of
version 1.2 of our TGS. Through subsequent correspondence and communications,
the FDA indicated that we needed to use the term “tactile” in lieu of “haptic”
and the term “robotic arm” in lieu of “robotic,” as appropriate, when these
terms are used to market our products. The FDA granted 510(k) clearance in
January 2008 for version 1.2 of our TGS with those terms. Because the FDA
currently requires us to use the terms “tactile” or “robotic arm,” we revised
the promotional and labeling materials for our existing products, including the
RIO system, for which we received 510(k) clearance from the FDA in the fourth
quarter of 2008, and may need to consider the use of modified language for our
future products. As a result, our ability to market and commercialize our
products and our growth may be harmed.
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Modifications
to our currently FDA cleared products or the introduction of new products may
require new regulatory clearances or approvals or require us to recall or cease
marketing our current products until clearances or approvals are obtained.
In
November 2005, we obtained 510(k) marketing clearance from the FDA for version
1.0 of our TGS for use with our FDA cleared tibial knee inlay implant system.
We were not required to obtain premarket approval, or PMA. We were also not
required to conduct any clinical trials in support of our application for
510(k) marketing clearance. Modifications to our products, however, may require
new regulatory approvals or clearances or require us to recall or cease
marketing the modified products until these clearances or approvals are
obtained. Any modification to one of our 510(k) cleared products that would
constitute a major change in its intended use, or any change that could
significantly affect the safety or effectiveness of the device would require us
to obtain a new 510(k) clearance and may even, in some circumstances, require
the submission of a PMA, if the change raises complex or novel scientific issues
or the product has a new intended use. The FDA requires every manufacturer to
make the determination regarding the need for a new 510(k) submission in the
first instance, but the FDA may review any manufacturer’s decision. Since
obtaining 510(k) marketing clearance for version 1.0 of our TGS, we developed
and commercially introduced several upgrades to our TGS that we believe did not
require additional clearances or approvals. Our Special 510(k) application for
version 1.2, which the FDA converted to a Traditional 510(k) application and
cleared in January 2008, incorporated these upgrades. Since this 510(k)
marketing clearance, we have made additional upgrades to the system (namely,
version 1.3) that we believe were cleared under our most recent 510(k) clearance
and therefore did not require additional filings for clearance or approval. In
the fourth quarter of 2008 we received 510(k) marketing clearance from the FDA
for the RIO system and for the RESTORIS MCK multicompartmental knee implant
system, which the RIO system is designed to support. We may continue to make
additional modifications in the future to the RIO system without seeking
additional clearances or approvals if we believe such clearances or approvals
are not necessary. If the FDA disagrees and requires new clearances or
approvals for the modifications, we may be required to recall and stop
marketing our products as modified, which could cause us to redesign our
products, conduct clinical trials to support any modifications, and pay
significant regulatory fines or penalties. Any of these actions would harm our
operating results.
Obtaining
clearances and approvals can be a difficult and time consuming process, and we
may not be able to obtain any of these or other clearances or approvals in a
timely manner, or at all. In addition, the FDA may not approve or clear these
products for the indications that are necessary or desirable for successful
commercialization or could require clinical trials to support any
modifications. Any delay or failure in obtaining required clearances or
approvals would adversely affect our ability to introduce new or enhanced
products in a timely manner, which in turn would harm our future growth.
Moreover,
clearances and approvals are subject to continual review, and the later
discovery of previously unknown problems can result in product labeling
restrictions or withdrawal of the product from the market. The loss of
previously received approvals or clearances, or the failure to comply with
existing or future regulatory requirements could reduce our sales,
profitability and future growth prospects.
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We
depend on the success of a single line of products for our revenue, which could
impair our ability to achieve profitability.
We
expect to derive most of our revenue from capital sales of our RIO system,
recurring sales of implants and disposable products required for each knee
MAKOplasty procedure, and service plans that are sold with the RIO system.
Currently, the only line of products that has been commercially introduced and
received 510(k) marketing clearance is versions 1.0 and 1.2 of our TGS, the
off-the-shelf inlay and onlay knee implant systems for use in unicompartmental
knee resurfacing procedures, the RIO system and our RESTORIS family of knee
implant systems. Our future growth and success is dependent on the successful
commercialization of the RIO system and the RESTORIS family of knee implant
systems. If we are unable to achieve commercial acceptance of MAKOplasty for
bicompartmental knee resurfacing procedures or obtain regulatory clearances or
approvals for future products, including products to treat other joints of the human body besides the knee, our revenue would be adversely affected and we
would not become profitable.
If
our knee MAKOplasty solution does not gain market acceptance, we will not be
able to generate the revenue necessary to develop a sustainable, profitable
business.
Achieving
patient, surgeon and hospital acceptance of MAKOplasty as the preferred method
of treating early to mid-stage osteoarthritis of the knee is crucial to our
success. We believe MAKOplasty represents a fundamentally new way of performing
arthroplasty of the knee, employing computer assisted robotic arm technology
and a patient specific visualization system to resurface only the diseased
areas of the knee joint. The orthopedic market has been traditionally slow to
adopt new products and treatment practices. We believe that if surgeons and
hospitals do not broadly adopt the concept of computer assisted robotics
enabled technology and do not perceive such technology as having significant
advantages over conventional arthroplasty procedures, patients will be less
likely to accept or be offered knee MAKOplasty and we will fail to meet our
business objectives. Surgeons’ and hospitals’ perceptions of such technology having
significant advantages are likely to be based on a determination that, among
other factors, our products are safe, reliable, cost-effective and represent
acceptable methods of treatment. Even if we can prove the clinical value of
MAKOplasty through clinical use, surgeons may elect not to use our products for
any number of other reasons. For example, surgeons may continue to recommend
total knee replacement surgery simply because such surgery is already widely
accepted. In addition, surgeons may be slow to adopt our products because of
the perceived liability risks arising from the use of new products. Hospitals
may not accept MAKOplasty because the RIO system is a piece of capital
equipment, representing a significant portion of a hospital’s budget. The RIO
system may not be cost-efficient if hospitals are not able to perform a
significant volume of knee MAKOplasty procedures. If MAKOplasty fails to
achieve market acceptance for any of these or other reasons, we will not be
able to generate the revenue necessary to develop a sustainable, profitable
business.
We
have only limited clinical data to support the value of knee MAKOplasty, which
may make patients, surgeons and hospitals reluctant to purchase our products.
We
believe that patients, surgeons and hospitals will only accept MAKOplasty or
purchase our products if they believe that MAKOplasty is a safe and effective
procedure with advantages over competing products and conventional knee
arthroplasty procedures. To date, we have collected only limited, short-term
clinical data with which to assess MAKOplasty’s clinical value. As of June 30,
2009, 1,405 MAKOplasty procedures had been performed since commercial
introduction in 2006. As of July 30, 2009, pursuant to the FDA guidelines on
medical device reporting, or MDRs, we have filed thirty-six incident reports
with the FDA. See “Risks Related to Regulatory Compliance.” We have not
collected, and are not aware that others have collected, any long-term clinical
data regarding the clinical value of knee MAKOplasty. The results of short-term
studies, such as our post-market studies, do not necessarily predict long-term
clinical results. As of July 30, 2009, we have two published MAKOplasty
surgical technique book chapters, thirteen peer-reviewed manuscripts,
thirty-four peer-reviewed abstracts at conferences, and eight completed
whitepapers. We also have twenty-nine studies either recently completed or in
progress, which range from cadaveric biomechanics studies to retrospective
chart and radiographic reviews to prospective functional comparison slides to
basic science histology studies. If longer-term or more extensive clinical
studies that may be performed by us or others indicate that MAKOplasty is a
less safe or less effective procedure than our current data suggest, patients
may choose not to undergo, and surgeons may choose not to perform, knee
MAKOplasty. Furthermore, unsatisfactory patient outcomes or patient injury
could cause negative publicity for our products, particularly in the early phases
of product introduction. The FDA could also rescind our marketing clearances if
future results and experience indicate that our products cause unexpected or
serious complications or other unforeseen negative effects. See “Risks Related
to Regulatory Compliance.” Surgeons may be slow to adopt our products if they
perceive liability risks arising from the use of these new products. As a
result, patients, surgeons and hospitals may not accept knee MAKOplasty or our
products and we may fail to become profitable and may be subject to significant
legal liability.
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We
have limited sales and marketing experience and capabilities, which could
impair our ability to achieve profitability.
We
have limited experience as a company in the sales and marketing of our
products. We may not be successful in marketing and selling our products in the
U.S. through our direct sales force with assistance from independent orthopedic
product agents and distributors. Our sales and marketing organization is
supported by clinical and technical representatives who provide training,
clinical and technical support and other services to our customers before and
during the surgery. As of July 30, 2009, we have forty-two employees in our
sales and marketing organization, which includes all clinical and technical
representatives. To reach our revenue targets, we need to expand and strengthen
our U.S. direct sales force. Developing a sales and marketing organization is
expensive and time consuming and an inability to develop such an organization
in a timely manner could delay the successful adoption of our products.
Additionally, any sales and marketing organization that we develop may be
competing against the experienced and well funded sales and marketing
organizations of some of our competitors. We will face significant challenges
and risks in developing our sales and marketing organization, including, among
others:
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to recruit, train and retain adequate numbers of qualified sales and
marketing personnel;
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the ability
of sales personnel to obtain access to leading surgeons and persuade adequate
numbers of hospitals to purchase our products;
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costs
associated with hiring, maintaining and expanding a sales and marketing
organization; and
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government
scrutiny with respect to promotional activities in the healthcare industry.
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If
we are unable to develop and maintain these sales and marketing capabilities,
we may be unable to generate revenue and may not become profitable.
Surgeons,
hospitals and orthopedic product agents and distributors may have existing
relationships with other medical device companies that make it difficult for us
to establish new relationships with them, and as a result, we may not be able
to sell and market our products effectively.
We
believe that to sell and market our products effectively, we must establish
relationships with key surgeons and hospitals in the field of orthopedic knee
surgery. Many of these key surgeons and hospitals already have long-standing
relationships with large, better known companies that dominate the medical
devices industry through collaborative research programs and other
relationships. Because of these existing relationships, some of which may be
contractually enforced, surgeons and hospitals may be reluctant to adopt knee
MAKOplasty, particularly if MAKOplasty competes with or has the potential to
compete with products supported through their own collaborative research
program or by these existing relationships. Even if these surgeons and
hospitals purchase our RIO system, they may be unwilling to enter into
collaborative relationships with us to promote joint marketing programs such as
the MAKOplasty Center of Excellence or to provide us with clinical and
financial data.
In
addition to our direct sales force, we work with distributors that primarily
generate sales leads for us. If these distributors believe that their
relationship with us is less beneficial than other relationships they may have
with more established or well known medical device companies, they may be
unwilling to continue their relationships with us, making it more difficult for
us to sell and market our products effectively.
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Because
the markets for our products are highly competitive, customers may choose to
purchase our competitors’ products, resulting in reduced revenue and harm to
our financial results.
MAKOplasty
requires the use of new robotics technology, and we face competition from
large, well known companies, principally Zimmer Holdings, Inc., DePuy
Orthopedics, Inc., a Johnson & Johnson company, Stryker Corporation, and
Biomet, Inc., that dominate the market for orthopedic products. Each of these
companies, as well as other companies like Smith & Nephew, Inc., which introduced
the Journey Deuce Bi-Compartmental Knee System in July 2007, offers
conventional instruments and implants for use in conventional total and partial
knee replacement surgeries as well as unicompartmental resurfacing procedures,
which may compete with our MAKOplasty solution and negatively impact sales of
our robotic arm technology. A number of these and other companies also offer
CAS systems for use in arthroplasty procedures that provide a minimally
invasive means of viewing the anatomical site. In addition, Biomet has a
license from Z-Kat to intellectual property rights in CAS intellectual property
for use in the field of orthopedics. The license is non-exclusive with respect
to use of CAS intellectual property in combination with robotics technology and
exclusive with respect to all other uses within the field of orthopedics, which
could enable them to compete with us.
Currently,
we are not aware of any well known orthopedic company that broadly offers
robotics technology in combination with CAS. All of these companies, however,
have the ability to acquire and develop robotics technology that may compete
with our products. We are aware of certain early stage companies developing CAS
and robotic applications in orthopedics and others commercializing customized
implants and instruments for early and mid-stage arthroplasty solutions. For
example, CUREXO Technology Corporation has engaged in marketing in the United
States of its ROBODOC® Surgical System, which received 510(k) clearance from
the FDA in August 2008 for total hip arthroplasty procedures.
We
also may face competition from other medical device companies that may seek to
extend robotics technology and minimally invasive approaches and products that
they have developed for use in other parts of the human anatomy to minimally
invasive arthroplasty of the knee. Even if these other companies currently do
not have an established presence in the field of minimally invasive surgery for
the knee, they may attempt to apply their robotics technology to the field of
knee replacement and resurfacing procedures to compete directly with us. Many
of these medical device competitors enjoy competitive advantages over us,
including:
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significantly
greater name recognition;
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longer
operating histories;
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established
exclusive relations with healthcare professionals, customers and third-party
payors;
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established
distribution networks;
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additional
lines of products and the ability to offer rebates or bundle products to offer
higher discounts or incentives to gain a competitive advantage;
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greater
experience in conducting research and development, manufacturing, clinical
trials, obtaining regulatory clearance for products and marketing approved
products; and
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greater
financial and human resources for product development, sales and marketing
and patent litigation.
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Moreover,
our competitors in the medical device industry make significant investments in
research and development, and innovation is rapid and continuous. If new
products or technologies emerge that provide the same or superior benefits as
our products at equal or lesser cost, they could render our products obsolete
or unmarketable. Because our products can have long development and regulatory
clearance or approval cycles, we must anticipate changes in the marketplace and
the direction of technological innovation and customer demands. In addition, we
face increasing competition from well financed orthopedic companies in our
attempts to acquire such new technologies, products and businesses. As a
result, we cannot be certain that surgeons will use our products to replace or
supplement established surgical procedures or that our products will be
competitive with current or future products and technologies resulting in
reduced revenue and harm to our financial results.
If
we do not timely achieve our development goals for new products, the
commercialization of these products will be delayed and our business and
financial results may be adversely affected.
The
success of our business is dependent on our ability to develop new products, to
introduce enhancements to our existing products and to develop these new
products and enhancements within targeted time frames and budgets. The actual
timing of these product releases can vary dramatically compared to our
estimates for reasons that may or may not be within our control, including
clearance or approval by the FDA to market future products. Customers may
forego purchases of our existing products and purchase our competitors’
products as a result of delays in the introduction of our new products and
enhancements or failure by us to offer innovative products or enhancements at
competitive prices and in a timely manner. Announcements of new products by us
or by competitors may also result in a delay in or cancellation of purchasing
decisions in anticipation of such new products. Any such losses of new
customers would harm our business and financial results.
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We
have limited experience in assembling and testing our products and may
encounter problems or delays in the assembly of our products or fail to meet
certain regulatory requirements that could result in a material adverse effect
on our business and financial results.
We
have limited experience in assembling and testing our products, including the
RIO system, and no experience in doing so on a large commercial scale. The
current and intended future versions of our robotic arm systems are complex and
require the integration of a number of separate components and processes. To
become profitable, we must assemble and test the RIO system in commercial
quantities in compliance with regulatory requirements and at an acceptable
cost. Increasing our capacity to assemble and test our products on a commercial
scale will require us to improve internal efficiencies. We may encounter a
number of difficulties in increasing our assembly and testing capacity,
including:
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managing
production yields;
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maintaining
quality control and assurance;
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providing
component and service availability;
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maintaining
adequate control policies and procedures;
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hiring and
retaining qualified personnel; and
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complying
with state, federal and foreign regulations.
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If
we are unable to satisfy commercial demand for our RIO system due to our
inability to assemble and test the system, our business and financial results,
including our ability to generate revenue, would be impaired, market acceptance
of our products could be materially adversely affected and customers may
instead purchase or use, our competitors’ products.
Any
failure in our efforts to train surgeons or hospital staff could result in
lower than expected product sales and potential liabilities.
A
critical component of our sales and marketing efforts is the training of a
sufficient number of surgeons and hospital staff to properly use the knee
MAKOplasty system. As of June 30, 2009, we had trained seventy-eight surgeons
on the MAKOplasty system. We rely on surgeons and hospital staff to devote
adequate time to learn to use our products. Convincing surgeons and hospital
staff to dedicate the time and energy necessary for adequate training in the
use of our system is challenging, and we cannot assure you we will be
successful in these efforts. If surgeons or hospital staff are not properly
trained, they may misuse or ineffectively use our products. If nurses or other
members of the hospital staff are not adequately trained to assist in using our
robotic arm systems, surgeons may be unable to use our products. Insufficient
training may result in reduced system use, unsatisfactory patient outcomes,
patient injury and related liability or negative publicity, which could have an
adverse effect on our product sales or create substantial potential
liabilities.
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We
will likely continue to experience extended and variable sales cycles, which
together with the unit price of the RIO system, could cause significant
variability in our results of operations for any given quarter.
Our
robotic arm system has a lengthy sales cycle because it involves a major piece
of capital equipment, the purchase of which will generally require the approval
of senior management at hospitals, inclusion in the hospitals’ budget process
for capital expenditures and, in some instances, a certificate of need from the
state or other regulatory clearance. As a result, a relatively small number of
units are installed each quarter. Based on our limited experience, we estimate
that the sales cycle of the RIO system will continue to take between seven and
eighteen months from the point of initial identification and contact with a
qualified surgeon until closing of the purchase with the hospital. Certain
sales of RIO systems may also be subject to a customer acceptance period,
during which the customer may return the RIO system to us subject to a penalty.
Although we believe that training can be accomplished in a relatively short
period of time, there may be situations where training of physicians and staff
may last an additional month or more after installation. In addition, the
introduction of new products could adversely impact our sales cycle as
customers take additional time to assess the capital products. Because of the
lengthy sales cycle, the unit price of the RIO system and the relatively small
number of systems installed each quarter, each installation of a RIO system can
represent a significant component of our revenue for a particular quarter,
particularly in the near term and during any other periods in which our sales
volume is relatively low.
Certain
factors that may contribute to variability in our operating results may
include:
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timing and
level of expenditures associated with new product development activities;
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delays in
shipment due, for example, to cancellations by customers, natural disasters
or labor disturbances;
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delays or
unexpected difficulties in the manufacturing processes of our suppliers or in
our assembly process;
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timing of
the announcement, introduction and delivery of new products or product
upgrades by us and by our competitors;
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timing and
level of expenditures associated with expansion of sales and marketing
activities and our overall operations;
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disruptions
in the supply or changes in the costs of raw materials, labor, product
components or transportation services; and
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changes in
third-party coverage and reimbursement, changes in government regulation, or
a change in a customer’s financial condition or ability to obtain financing.
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These
factors are difficult to forecast and may contribute to substantial
fluctuations in our quarterly revenue and substantial variation from our
projections, particularly during the periods in which our sales volume is low.
Moreover, many of our expenses, such as office leases and certain personnel
costs, are relatively fixed. We may be unable to adjust spending quickly enough
to offset any unexpected revenue shortfall. Accordingly, any shortfall in
revenue may cause significant variation in operating results in any quarter.
Based on the above factors, we believe that quarter-to-quarter comparisons of
our operating results are not a good indication of our future performance.
These and other potential fluctuations also mean that you will not be able to
rely upon our operating results in any particular period as an indication of
future performance.
If
we receive a significant number of warranty claims or our robotic arm system
units require significant amounts of service after sale, our costs will
increase and our business and financial results will be adversely affected.
We
currently warrant each robotic arm system against defects in materials and
workmanship for a period of approximately 12 months from the installation of
the initial system at a customer’s facility. We also provide technical and
other services to customers beyond the warranty period pursuant to a
supplemental service plan sold with each system. We have a limited history of
commercial placements from which to judge our rate of warranty claims. If
product returns or warranty claims are significant or exceed our expectations,
we could incur unanticipated reductions in sales or additional expenditures for
parts and service. In addition, our reputation could be damaged and our
products may not achieve market acceptance. While we have established accruals
for liability associated with product warranties, unforeseen warranty exposure
in excess of those accruals could negatively impact our business and financial
results.
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We
could become subject to product liability claims, product actions, including
product recalls, and other field or regulatory actions that could be expensive,
divert management’s attention and harm our business.
Our
business exposes us to potential liability risks, product actions and other
field or regulatory actions that are inherent in the manufacturing, marketing
and sale of medical device products. We may be held liable if our TGS or the
RIO system or implants cause injury or death or is found otherwise unsuitable
or defective during usage. These robotic arm systems incorporate mechanical,
electrical and optical parts, complex computer software and other sophisticated
components, any of which can contain errors or failures. Complex computer
software is particularly vulnerable to errors and failures, especially when
first introduced. In addition, new products or enhancements to our existing
products may contain undetected errors or performance problems that, despite
testing, are discovered only after installation.
We
may, from time to time, elect to initiate a product action concerning one or
more of our products for the purpose of improving device performance. If any of
our products are defective, whether due to design or manufacturing defects,
improper use of the product or other reasons, we may voluntarily or
involuntarily undertake a product action to remove, repair, or replace the
product at our expense and, in some circumstances, to notify regulatory authorities
of such product action pursuant to a product recall. Through July 30, 2009, we
had initiated nine voluntary product actions, two of which were a product
recall reportable to the FDA pursuant to the correction / removal guidelines.
We are required to submit an MDR report to the FDA for 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. Through July 30, 2009,
pursuant to the FDA guidelines on MDRs, we had filed thirty-six incident
reports with the FDA.
In
the future, we may experience additional events that may require reporting to
the FDA pursuant to the MDR regulations. See “Risks Related to Regulatory
Compliance.” A required notification to a regulatory authority could result in
an investigation by regulatory authorities of our products, which could in turn
result in product actions, restrictions on the sale of the products, civil or
criminal penalties and other field corrective action. In addition, because our
products are designed to be used to perform complex surgical procedures,
defects could result in a number of complications, some of which could be serious
and could harm or kill patients. The adverse publicity resulting from any of
these events could cause surgeons or hospitals to review and potentially
terminate their relationships with us. Regulatory investigations or product
actions could also result in our incurring substantial costs, losing revenue,
and implementing a change in the design, manufacturing process or the
indications for which our products may be used, each of which would harm our
business. It is also possible that defects in the design, manufacture or
labeling of our products could result in a product liability claim. The medical
device industry has historically been subject to extensive litigation over
product liability claims. A product liability claim, regardless of its merit or
eventual outcome, could result in significant legal defense costs. Although we
maintain product liability insurance, the coverage is subject to deductibles
and limitations, and may not be adequate to cover future claims. Additionally,
we may be unable to maintain our existing product liability insurance in the
future at satisfactory rates or adequate amounts. A product liability claim,
regardless of its merit or eventual outcome could result in:
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decreased
demand for our products;
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injury to
our reputation;
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diversion of
management’s attention;
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significant
costs of related litigation;
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payment of
substantial monetary awards by us;
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product
actions;
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a change in
the design, manufacturing process or the indications for which our products
may be used;
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loss of
revenue; and
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an inability
to commercialize our products under development.
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If
hospitals, surgeons and other healthcare providers are unable to obtain
coverage or reimbursement from third-party payors for MAKOplasty procedures,
hospitals may not purchase the RIO system and surgeons may not perform knee
MAKOplasty, which would harm our business and financial results.
Our
ability to successfully commercialize MAKOplasty depends significantly on the
availability of coverage and reimbursement from third-party payors, including
governmental programs such as Medicare and Medicaid as well as private
insurance and private health plans. Reimbursement is a significant factor
considered by hospitals in determining whether to acquire new capital equipment
such as our technology. Although our customers have been successful in
obtaining coverage and reimbursement, we cannot assure you that procedures
using our technology will be covered or reimbursed by third-party payors in the
future or that such reimbursements will not be reduced to the extent that they
will adversely affect capital allocations for purchase of our robotic arm
systems. We
anticipate that in the U.S. our products will be purchased primarily by
hospitals, which bill various third-party payors, including governmental
healthcare programs, such as Medicare, and private insurance plans for
procedures using our technology. Ensuring adequate Medicare reimbursement can
be a lengthy and expensive endeavor and we cannot provide assurance that we
will be successful. In addition, the U.S. Congress may pass legislation
impacting coverage and reimbursement for healthcare services, including
Medicare reimbursement to physicians and hospitals. Many private payors look to
Medicare’s coverage and reimbursement policies in setting their coverage
policies and reimbursement amounts. If the Centers for Medicare and Medicaid
Services, or CMS, the federal agency that administers the Medicare program, or
Medicare contractors limit payments to hospitals or surgeons for knee
MAKOplasty procedures, private payors may similarly limit payments. In
addition, state legislatures may enact laws limiting or otherwise affecting the
level of Medicaid reimbursements. As a result, hospitals may not purchase the
RIO system and surgeons may choose not to perform knee MAKOplasty, and, as a
result, our business and financial results would be adversely affected.
Medicare
pays acute care hospitals a prospectively determined amount for inpatient
operating costs under the Medicare hospital inpatient prospective payment
system, or PPS. Under the Medicare hospital inpatient PPS, the prospective
payment for a patient’s stay in an acute care hospital is determined by the
patient’s condition and other patient data and procedures performed during the
inpatient stay using a classification system known as diagnosis related groups,
or DRGs. As of October 1, 2007, CMS, implemented a revised version of the DRG
system that uses 745 Medicare Severity DRGs, or MS-DRGs, instead of the
approximately 540 DRGs Medicare previously used. The MS-DRGs are intended to
account more accurately for the patient’s severity of illness when assigning
each patient’s stay to a payment classification. Medicare pays a fixed amount
to the hospital based on the MS-DRG into which the patient’s stay is assigned,
regardless of the actual cost to the hospital of furnishing the procedures,
items and services provided. Accordingly, acute care hospitals generally do not
receive direct Medicare reimbursement under PPS for the specific costs incurred
in purchasing medical devices. Rather, reimbursement for these costs is deemed
to be included within the MS-DRG based payments made to hospitals for the services
furnished to Medicare eligible inpatients in which the devices are utilized.
Accordingly, a hospital must absorb the cost of our products as part of the
payment it receives for the procedure in which the device is used. In addition,
physicians that perform procedures in hospitals are paid a set amount by
Medicare for performing such services under the Medicare physician fee
schedule. Medicare payment rates for both systems are established annually.
At
this time, we do not know the extent to which hospitals and physicians would
consider third-party reimbursement levels adequate to cover the cost of our
products. Failure by hospitals and surgeons to receive an amount that they
consider to be adequate reimbursement for procedures in which our products are
used could deter them from purchasing or using our products and limit our sales
growth. In addition, pre-determined MS-DRG payments or Medicare physician fee
schedule payments may decline over time, which could deter hospitals from
purchasing our products or physicians from using them. If hospitals are unable
to justify the costs of our products or physicians are not adequately
compensated for procedures in which our products are utilized, they may refuse
to purchase or use them, which would significantly harm our business.
Notwithstanding
current or future FDA clearances, if granted, third-party payors may deny
reimbursement if the payor determines that a therapeutic medical device is
unnecessary, inappropriate, not cost-effective or experimental, or is used for
a non-approved indication. Although we are not aware of any potential customer
that has declined to purchase our robotic arm system based upon third-party
payors’ reimbursement policies, cost control measures adopted by third-party payors
may have a significant effect on surgeries performed using MAKOplasty or as to
the levels of reimbursement. All third-party payors, whether governmental or
private, whether inside the U.S. or outside, are developing increasingly
sophisticated methods of controlling healthcare costs. These cost control
methods include prospective payment systems, capitated rates, benefit
redesigns, pre-authorization or second opinion requirements prior to major
surgery, an emphasis on wellness and healthier lifestyle interventions and an
exploration of other cost-effective methods of delivering healthcare. These
cost control
methods also potentially limit the amount which healthcare providers may be
willing to pay for medical technology which could, as a result, adversely
affect our business and financial results. In addition, in the U.S., no uniform
policy of coverage and reimbursement for medical technology exists among all
these payors. Therefore, coverage and reimbursement for medical technology can
differ significantly from payor to payor.
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There
also can be no assurance that current levels of reimbursement will not be
decreased or eliminated in the future, or that future legislation, regulation,
or reimbursement policies of third-party payors will not otherwise adversely
affect the demand for our products or our ability to sell products on a
profitable basis. Our customers are currently using existing reimbursement
codes for knee arthroplasty. Knee arthroplasty performed in the hospital
inpatient setting is currently assigned to MS-DRG 469 (“Major Joint Replacement
or Reattachment of Lower Extremity with Major Complication or Comorbidity”) and
MS-DRG 470 (“Major Joint Replacement or Reattachment of Lower Extremity without
Major Complication of Comorbidity”), and surgeons currently bill Current
Procedural Terminology, or CPT, code 27446 (“Arthroplasty, knee, condyle and
plateau; medial OR lateral compartment”) for services performed in connection
with procedures using our technology. Our customers also have available CPT
codes 27446 and 73700 (“CT lower extremity without contrast”) for out-patient
procedures and procedures performed in an ambulatory surgery center. If
unicompartmental and bicompartmental knee resurfacing procedures gain market
acceptance and the number of such procedures increases, CMS and other payors
may establish billing codes for unicompartmental and bicompartmental knee
resurfacing procedures that provide for a smaller reimbursement amount than
knee arthroplasty, which could adversely affect our financial results and
business.
In
international markets, market acceptance of our products will likely depend in
large part on the availability of reimbursement within prevailing healthcare
payment systems. Reimbursement and healthcare payment systems in international
markets vary significantly by country, and by region in some countries, and
include both government sponsored healthcare and private insurance. We may not
obtain international reimbursement approvals in a timely manner, if at all. In
addition, even if we do obtain international reimbursement approvals, the level
of reimbursement may not be enough to commercially justify expansion of our
business into the approving jurisdiction. To the extent we or our customers are
unable to obtain coverage or reimbursement for procedures using our technology
in major international markets in which we seek to market and sell our
technology, our international revenue growth would be harmed, and our business
and results of operations would be adversely affected.
Healthcare reforms,
changes in healthcare policies and changes to third-party coverage and
reimbursements may affect demand for our systems and products.
The
U. S. government, state and local governments, and a number of foreign
governments, are currently considering or may in the future consider healthcare
policies and proposals intended to curb rising healthcare costs, including
those that could significantly affect both coverage and reimbursement for
healthcare services. Future significant changes in the healthcare systems in
the United States or elsewhere, and current uncertainty about whether and how
changes may be implemented, could have a negative impact on the demand for our
products and services and our business. These changes may include basing
coverage and reimbursement policies and rates on clinical outcomes, the
comparative effectiveness and costs of different treatment technologies and
modalities; imposing price controls on medical products and services providers;
reducing reimbursement rates; and other measures. It is unclear which, if any,
of the various U.S. healthcare reforms currently being discussed and/or
proposed might be enacted by the U.S. Congress and signed into law by the
President of the United States. We are unable to predict what healthcare reform
legislation or regulations, if any, will be enacted in the United States or
elsewhere; whether other healthcare legislation or regulations affecting our
business may be proposed or enacted in the future; what effect any legislation
or regulation would have on our business; or the effect ongoing uncertainty
about these matters will have on the purchasing decisions of our customers.
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We
may attempt to acquire new products or technologies, and if we are unable to
successfully complete these acquisitions or to integrate acquired businesses,
products, technologies or employees, we may fail to realize expected benefits
or harm our existing business.
Our
success will depend, in part, on our ability to expand our product offerings
and grow our business in response to changing technologies, customer demands
and competitive pressures. In some circumstances, we may determine to do so
through the acquisition of complementary businesses, products or technologies
rather than through internal development. The identification of suitable
acquisition candidates can be difficult, time consuming and costly, and we may
not be able to successfully complete identified acquisitions. Furthermore, even
if we successfully complete an acquisition, we may not be able to successfully
integrate newly acquired organizations, products or technologies into our
operations, and the process of integration could be expensive, time consuming
and may strain our resources. Consequently, we may not achieve anticipated
benefits of the acquisitions, which could harm our existing business. In
addition, future acquisitions could result in potentially dilutive issuances of
equity securities or the incurrence of debt, contingent liabilities or expenses,
or other charges such as in-process research and development, any of which
could harm our business and materially adversely affect our financial results
or cause a reduction in the price of our common stock.
We
depend on key employees, and if we fail to attract and retain employees with
the expertise required for our business, we cannot grow or achieve
profitability.
We
are highly dependent on members of our senior management, in particular Maurice
R. Ferré, M.D., our President, Chief Executive Officer and Chairman of the
Board. Our future success will depend in part on our ability to retain these
key employees and to identify, hire and retain additional qualified personnel
with expertise in research and development and sales and marketing. Competition
for qualified personnel in the medical device industry is intense, and finding
and retaining qualified personnel with experience in our industry is very
difficult. We believe that there are only a limited number of individuals with
the requisite skills to serve in many of our key positions, and we compete for
key personnel with other medical equipment and software manufacturers and
technology companies, as well as universities and research institutions. It is
often difficult to hire and retain these persons, and we may be unable to
replace key persons if they leave or fill new positions requiring key persons
with appropriate experience. A significant portion of our compensation to our
key employees is in the form of stock option grants. A prolonged depression in
our stock price could make it difficult for us to retain our employees and
recruit additional qualified personnel.
We
do not maintain, and do not currently intend to obtain, key employee life
insurance on any of our personnel other than Dr. Ferré. Although we have
obtained key man insurance covering Dr. Ferré in the amount of $2,000,000, this
would not fully compensate us for the loss of Dr. Ferré’s services. Dr Ferré
may terminate his employment at will at any time with 30 days notice. Each of
our other officers and key employees may terminate his or her employment at
will at any time with 60 days’ notice. The loss of key employees, the failure
of any key employee to perform or our inability to attract and retain skilled
employees, as needed, could harm our business.
If
we do not effectively manage our growth, we may be unable to successfully
develop, market and sell our products.
Our
future revenue and operating results will depend on our ability to manage the
anticipated growth of our business. We have experienced significant growth in
the scope of our operations and the number of our employees since our
inception. This growth has placed significant demands on our management, as
well as our financial and operations resources. In order to achieve our
business objectives, we must continue to grow. However, continued growth
presents numerous challenges, including:
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implementing
appropriate operational and financial systems and controls;
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expanding
manufacturing and assembly capacity and increasing production;
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developing
our sales and marketing infrastructure and capabilities;
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improving
our information systems;
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identifying,
attracting and retaining qualified personnel in our areas of activity; and
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hiring,
training, managing and supervising our personnel.
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We
cannot be certain that our systems, controls, infrastructure and personnel will
be adequate to support our future operations. Any failure to effectively manage
our growth could impede our ability to successfully develop, market and sell
our products and our business will be harmed.
If we are successful
in our efforts to market and sell knee MAKOplasty internationally, we will be
subject to various risks relating to our international activities, which could
adversely affect our business and financial results.
We
have begun to pursue international markets for the sale of our products and we
anticipate being exposed to risks separate and distinct from those we face in
our U.S. operations. Our international business may be adversely affected by
changing economic conditions in foreign countries. In addition, because
international sales would most likely be denominated in the functional currency
of the country where the product is being shipped, increases or decreases in
the value of the U.S. dollar relative to foreign currencies could affect our
results of operations. Engaging in international business inherently involves a
number of other difficulties and risks, including:
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approval of
product submissions with healthcare systems outside the United States;
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gathering
the clinical data that may be required for product submissions with
healthcare systems outside the United States;
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export
restrictions and controls and other government regulation relating to
technology;
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the
availability and level of reimbursement within prevailing foreign healthcare
payment systems;
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pricing
pressures that we may experience internationally;
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compliance
with existing and changing foreign regulatory laws and requirements;
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foreign laws
and business practices favoring local companies;
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longer
payment cycles;
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shipping
delays;
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difficulties
in enforcing agreements and collecting receivables through certain foreign
legal systems;
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political and
economic instability;
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potentially
adverse tax consequences, tariffs and other trade barriers;
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international
terrorism and anti-American sentiment;
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difficulties
and costs of staffing and managing foreign operations; and
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difficulties
in enforcing intellectual property rights.
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Our
exposure to each of these risks may increase our costs, impair our ability to
market and sell our products and require significant management attention,
resulting in harm to our business and financial results.
Our operations are
currently conducted primarily at a single location in Florida, which may be at
risk from hurricanes, storm, fire, terrorist attacks or other disasters.
We
currently conduct all of our management activities, most of our research and
development activities and assemble all of our products at a single location in
Fort Lauderdale, Florida. We have taken various precautions to safeguard our
facilities, such as obtaining insurance, establishing health and safety
protocols and securing off-site storage of computer data. However, a casualty
due to a hurricane, storm or other natural disasters, a fire, terrorist attack,
or other unanticipated problems at this location could cause substantial delays
in our operations, delay or prevent assembly of our RIO systems and shipment of
our implants, damage or destroy our equipment and inventory, and cause us to
incur substantial expenses. Our insurance does not cover losses caused by
certain events such as floods or other activities and may not be adequate to
cover our losses in any particular case. Any damage, loss or delay could
seriously harm our business and have an adverse affect on our financial
results.
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Certain of our
directors, executive officers and key employees have an interest in Z-Kat that
could pose potential conflicts of interest, which could harm our business.
We
believe that certain of our directors, executive officers and key employees
hold equity interests in Z-Kat, Inc., or Z-Kat. We are dependent on
intellectual property that we license or sublicense from Z-Kat and have entered
into various licensing and related arrangements with Z-Kat. Each of these
individuals may face potential conflicts of interest regarding these licensing
transactions as a result of their interests in Z-Kat. Dr. Ferré may face
additional conflicts of interest regarding these licensing and related
arrangements if he serves on the board of directors of Z-Kat. To address these
potential conflicts of interest, we have adopted a Related Person Transaction
Policy. In addition, the audit committee of our board of directors, under the
terms of its charter, must review and approve all related person transactions.
We cannot, however, assure you that any conflicts will be resolved in our
favor, and as a result, our business could be harmed.
Risks Related to Our
Intellectual Property
If we, or the third
parties from whom we license intellectual property, are unable to secure and
maintain patent or other intellectual property protection for the intellectual
property contained in our products, our ability to compete will be harmed.
Our
commercial success depends, in part, on obtaining patent and other intellectual
property protection for the technologies contained in our products. The patent
positions of medical device companies, including ours, can be highly uncertain
and involve complex and evolving legal and factual questions. Our patent
position is uncertain and complex, in part, because of our dependence on
intellectual property that we license from others. If we, or the third parties
from whom we license intellectual property, fail to obtain adequate patent or
other intellectual property protection for intellectual property contained in
our products, or if any protection is reduced or eliminated, others could use
the intellectual property contained in our products, resulting in harm to our
competitive business position. In addition, patent and other intellectual
property protection may not provide us with a competitive advantage against
competitors that devise ways of making competitive products without infringing
any patents that we own or have rights to.
U.S.
patents and patent applications may be subject to interference proceedings and
U.S. patents may be subject to reexamination proceedings in the U.S. Patent and
Trademark Office. Foreign patents may be subject to opposition or comparable
proceedings in the corresponding foreign patent offices. Any of these
proceedings could result in either loss of the patent or denial of the patent
application, or loss or reduction in the scope of one or more of the claims of
the patent or patent application. Changes in either patent laws or in
interpretations of patent laws may also diminish the value of our intellectual
property or narrow the scope of our protection. Interference, reexamination and
opposition proceedings may be costly and time consuming, and we, or the third
parties from whom we license intellectual property, may be unsuccessful in
defending against such proceedings. Thus, any patents that we own or license
may provide limited or no protection against competitors. In addition, our
pending patent applications and those we may file in the future may have claims
narrowed during prosecution or may not result in patents being issued. Even if
any of our pending or future applications are issued, they may not provide us
with adequate protection or any competitive advantages. Our ability to develop
additional patentable technology is also uncertain.
Non-payment
or delay in payment of patent fees or annuities, whether intentional or
unintentional, may also result in the loss of patents or patent rights
important to our business. Many countries, including certain countries in
Europe, have compulsory licensing laws under which a patent owner may be
compelled to grant licenses to third parties. In addition, many countries limit
the enforceability of patents against third parties, including government
agencies or government contractors. In these countries, the patent owner may
have limited remedies, which could materially diminish the value of the patent.
In addition, the laws of some foreign countries do not protect intellectual
property rights to the same extent as do the laws of the U.S., particularly in
the field of medical products and procedures.
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If we are unable to
prevent unauthorized use or disclosure of our proprietary trade secrets and
unpatented know-how, our ability to compete will be harmed.
Proprietary
trade secrets, copyrights, trademarks and unpatented know-how are also very
important to our business. We rely on a combination of trade secrets,
copyrights, trademarks, confidentiality agreements and other contractual
provisions and technical security measures to protect certain aspects of our
technology, especially where we do not believe that patent protection is
appropriate or obtainable. We require our employees and consultants to execute
confidentiality agreements in connection with their employment or consulting
relationships with us. We also require our employees and consultants to
disclose and assign to us all inventions conceived during the term of their
employment or engagement while using our property or which relate to our
business. We also have taken precautions to initiate reasonable safeguards to
protect our information technology systems. However, these measures may not be
adequate to safeguard our proprietary intellectual property and conflicts may,
nonetheless, arise regarding ownership of inventions. Such conflicts may lead to
the loss or impairment of our intellectual property or to expensive litigation
to defend our rights against competitors who may be better funded and have
superior resources. Our employees, consultants, contractors, outside clinical
collaborators and other advisors may unintentionally or willfully disclose our
confidential information to competitors. In addition, confidentiality
agreements may be unenforceable or may not provide an adequate remedy in the
event of unauthorized disclosure. Enforcing a claim that a third party
illegally obtained and is using our trade secrets is expensive and time
consuming, and the outcome is unpredictable. Moreover, our competitors may
independently develop equivalent knowledge, methods and know-how. Unauthorized
parties may also attempt to copy or reverse engineer certain aspects of our
products that we consider proprietary. As a result, third parties may be able
to use our proprietary technology or information, and our ability to compete in
the market would be harmed.
We could become
subject to patent and other intellectual property litigation that could be
costly, result in the diversion of management’s attention, require us to pay
damages and force us to discontinue selling our products.
The
medical device industry is characterized by competing intellectual property and
a substantial amount of litigation over patent and other intellectual property
rights. In particular, the fields of orthopedic implants, CAS, haptics and
robotics are well established and crowded with the intellectual property of
competitors and others. A number of companies in our market, as well as
universities and research institutions, have issued patents and have filed
patent applications which relate to the use of CAS.
Determining
whether a product infringes a patent involves complex legal and factual issues,
and the outcome of a patent litigation action is often uncertain. We have not
conducted an extensive search of patents issued to third parties, and no
assurance can be given that third-party patents containing claims covering our
products, parts of our products, technology or methods do not exist, have not
been filed or could not be filed or issued. Because of the number of patents
issued and patent applications filed in our technical areas, our competitors or
other third parties, including third parties from whom we license intellectual
property, may assert that our products and the methods we employ in the use of
our products are covered by U.S. or foreign patents held by them. In addition,
because patent applications can take many years to issue and because
publication schedules for pending applications vary by jurisdiction, there may
be applications now pending of which we are unaware and which may result in
issued patents which our current or future products infringe. Also, because the
claims of published patent applications can change between publication and
patent grant, there may be published patent applications that may ultimately
issue with claims that we infringe. There could also be existing patents that
one or more of our products or parts may infringe and of which we are unaware.
As the number of competitors in the market for CAS and robotics assisted knee
implant systems grows, and as the number of patents issued in this area grows,
the possibility of patent infringement claims against us increases. In certain
situations, we or third parties, such as Z-Kat from whom we license
intellectual property, may determine that it is in our best interests or their
best interests to voluntarily challenge a third party’s products or patents in
litigation or other proceedings, including patent interferences or
reexaminations. Pursuant to our licensing arrangement with Z-Kat, we have the
right to prosecute, control and maintain all Z-Kat patents and intellectual
property rights that are licensed to us within the field of orthopedic surgery.
Z-Kat retains the right to prosecute, control and maintain its patent and
intellectual property rights outside the field of orthopedic surgery, subject
to certain conditions. For example, Z-Kat must notify us prior to taking any
action to enforce their patent or intellectual property rights. To help ensure
that Z-Kat has the resources necessary for proper prosecution and defense of
any litigation arising from such enforcement action, our agreement with Z-Kat
also requires that it enter into an engagement letter with competent counsel
and deposit funds into an escrow account, for use by us to take over the
litigation or action in the event Z-Kat is unable or unwilling to conduct
proper prosecution and defense of such litigation or action. Despite these
arrangements, we may have no control over Z-Kat’s decisions regarding
enforcement actions outside the field of orthopedic surgery. As a result, we
may become involved in unwanted litigation that could be costly, result in
diversion of management’s attention, require us to pay damages and force us to
discontinue selling our products.
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Infringement
actions and other intellectual property claims and proceedings, whether with or
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 business and harm our reputation. Some of our competitors may
be able to sustain the costs of complex patent or intellectual property
litigation more effectively than we can because they have substantially greater
resources.
We
cannot be certain that we will successfully defend against allegations of infringement
of third-party patents and intellectual property rights. In the event that we
become subject to a patent infringement or other intellectual property lawsuit
and if the other party’s patents or other intellectual property were upheld as
valid and enforceable and we were found to infringe the other party’s patents
or violate the terms of a license to which we are a party, we could be required
to pay damages. We could also be prevented from selling our products unless we
could obtain a license to use technology or processes covered by such patents
or were able to redesign the product to avoid infringement. A license may not
be available at all or on commercially reasonable terms or we may not be able
to redesign our products to avoid infringement. Modification of our products or
development of new products could require us to conduct clinical trials and to
revise our filings with the FDA and other regulatory bodies, which would be
time consuming and expensive. In these circumstances, we may be unable to sell
our products at competitive prices or at all, our business and operating
results could be harmed and our stock price may decline. In addition, any
uncertainties resulting from the initiation and continuation of any litigation
could have a material adverse effect on our ability to raise the funds
necessary to continue our operations.
We may be subject to
damages resulting from claims that our employees, our consultants or we have
wrongfully used or disclosed alleged trade secrets of their former employers.
Many
of our employees and consultants were previously employed at universities or
other medical device companies, including our competitors or potential
competitors. We could in the future be subject to claims that these employees
or consultants, or we, have inadvertently or otherwise used or disclosed trade
secrets or other proprietary information of their former employers. Litigation
may be necessary to defend against these claims. If we fail in defending
against such claims, a court could order us to pay substantial damages and
prohibit us from using technologies or features that are essential to our
products and processes, if such technologies or features are found to
incorporate or be derived from the trade secrets or other proprietary information
of the former employers. In addition, we may lose valuable intellectual
property rights or personnel. A loss of key research personnel or their work
product could hamper or prevent our ability to commercialize certain potential
products, which could severely harm our business. Even if we are successful in
defending against these claims, such litigation could result in substantial
costs and be a distraction to management.
Risks Related to
Regulatory Compliance
If we fail to comply
with the extensive government regulations relating to our business, we may be
subject to fines, injunctions and other penalties that could harm our business.
Our
medical device products and operations are subject to extensive regulation by
the FDA, pursuant to the Federal Food, Drug, and Cosmetic Act, or FDCA, and
various other federal, state and foreign governmental authorities. Government
regulations and foreign requirements specific to medical devices are wide
ranging and govern, among other things:
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design,
development and manufacturing;
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testing,
labeling and storage;
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clinical
trials;
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product
safety;
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marketing,
sales and distribution;
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premarket
clearance or approval;
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record
keeping procedures;
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advertising
and promotions;
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recalls and
field corrective actions;
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post-market
surveillance, including reporting of deaths or serious injuries and
malfunctions that, if they were to recur, could lead to death or serious
injury; and
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product
export.
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In
the U.S., before we can market a new medical device, or a new use of, or claim
for, or significant modification to, an existing product, we must first receive
either premarket clearance under Section 510(k) of the FDCA, or approval of a
PMA from the FDA, unless an exemption applies. 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. The PMA approval pathway requires an applicant to
demonstrate the safety and effectiveness of the device based, in part, on data
obtained in clinical trials. Both of these processes can be expensive and
lengthy and entail significant user fees, unless exempt. The FDA’s 510(k)
clearance process usually takes from three to 12 months, but it can last
longer. The process of obtaining PMA approval is much more costly and uncertain
than the 510(k) clearance process. It generally takes from one to three years,
or even longer, from the time the PMA application is submitted to the FDA until
an approval is obtained. There is no assurance that we will be able to obtain
FDA clearance or approval for any of our new products on a timely basis, or at
all.
The
FDA, state, foreign and other governmental authorities have broad enforcement
powers. Our failure to comply with applicable regulatory requirements could
result in governmental agencies or a court taking action, including any of the
following sanctions:
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letters, warning letters, fines, injunctions, consent decrees and civil
penalties;
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customer
notifications or repair, replacement, refunds, detention or seizure of our
products;
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operating
restrictions or partial suspension or total shutdown of production;
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refusing or
delaying requests for 510(k) clearance or PMA approvals of new products or
modified products;
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withdrawing
510(k) clearances or PMA approvals that have already been granted;
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refusing to
provide Certificates for Foreign Government (CFG);
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refusing to
grant export approval for our products; or
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pursuing
criminal prosecution.
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Failure to obtain
regulatory approval in additional foreign jurisdictions will prevent us from
expanding the commercialization of our products abroad.
To
be able to market and sell our products in other countries, we must obtain
regulatory approvals and comply with the regulations of those countries. These
regulations, including the requirements for approvals and the time required for
regulatory review, vary from country to country. Obtaining and maintaining
foreign regulatory approvals are expensive, and we cannot be certain that we
will receive regulatory approvals in any foreign country in which we plan to
market our products. If we fail to obtain or maintain regulatory approval in
any foreign country in which we plan to market our products, our ability to
generate revenue will be harmed.
As
we modify existing products or develop new products in the future, including
new instruments, we apply for permission to affix a European Union CE mark,
which is a legal requirement for medical devices intended for sale in Europe,
to such products. In addition, we will be subject to annual regulatory audits
in order to maintain those CE mark permissions. We do not know whether we will
be able to obtain permission to affix the CE mark for new or modified products
or that we will continue to meet the quality and safety standards required to
maintain the permissions we have already received. If we are unable to maintain
permission to affix the CE mark to our products, we will no longer be able to
sell our products in member countries of the European Union or other areas of
the world that require CE approval of medical devices.
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If we or our third-party manufacturers or suppliers fail to comply with the FDA’s
Quality System Regulation, our manufacturing operations could be interrupted
and our product sales and operating results could suffer.
We
and some of our third-party manufacturers and suppliers are required to comply
with the FDA’s Quality System Regulation, or QSR, which covers the methods and
documentation of the design, testing, production, control, quality assurance,
labeling, packaging, sterilization, storage and shipping of our products. We
and our manufacturers and suppliers are also subject to the regulations of
foreign jurisdictions regarding the manufacturing process if we market our
products overseas. The FDA enforces the QSR through periodic and unannounced
inspections of manufacturing facilities. In January 2009, the FDA conducted its
first audit of our facility, during which we received certain inspectional
observations. We are addressing the observations and intend to submit responses
to them to the FDA on a voluntary basis. The FDA inspection report relating to
the audit has not yet been issued. To date, our facilities have not been
inspected by any other regulatory authorities. In November 2008, BSi, an
independent global certification body, conducted an annual assessment of our
quality management system, which concluded that our quality management system
complied with the requirements of ISO13485:2003 in all material respects. We
have completed the necessary audits in order to update our ISO certifications
to include class III devices, such as orthopedic implants. In connection with
achieving CE marking, which is a legal requirement for medical devices intended
for sale in Europe, we have also submitted design dossiers to BSi for the
purpose of review and approval. BSi will continue to conduct annual audits to
assess our compliance with BSi certification standards. We anticipate that we
and certain of our third-party manufacturers and suppliers will be subject to
inspections by regulatory authorities in the future. If our facilities or those
of our manufacturers or suppliers fail to take satisfactory corrective action
in response to an adverse QSR inspection, the FDA could take enforcement
action, including any of the following sanctions:
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penalties;
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customer
notifications or repair, replacement, refunds, detention or seizure of our
products;
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operating
restrictions or partial suspension or total shutdown of production;
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refusing or
delaying requests for 510(k) clearance or PMA approvals of new products or
modified products;
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withdrawing
510(k) clearances or PMA approvals that have already been granted;
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refusing to
provide Certificates for Foreign Government (CFG)
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refusing to
grant export approval for our products; or
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pursuing
criminal prosecution.
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Any
of these sanctions 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 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.
Our products may in
the future be subject to product actions that could harm our reputation,
business operations and financial results.
Manufacturers
may, on their own initiative, initiate a product action, including a
non-reportable market withdrawal or a reportable product recall, for the
purpose of correcting a material deficiency, improving device performance, or
other reasons. Additionally, the FDA and similar foreign governmental
authorities have the authority to require an involuntary recall of
commercialized products in the event of material deficiencies or defects in
design, or manufacture or labeling. In the case of the FDA, the authority to
require a recall must be based on an FDA finding that there is a 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. Product actions involving any of our products would divert
managerial and financial resources and have an adverse effect on our financial
condition and results of operations. Through July 30, 2009, we had initiated
nine product actions, two of which were reportable to the FDA pursuant to the
correction / removal guidelines. The first reportable recall was associated
with two tracking array instruments for the patient specific visualization of
the TGS and was communicated to the FDA in May 2008. We internally closed the
action in January 2009 and requested that the FDA do the same. The second
reportable recall was associated with a fiber optic cable used in communication
between components of the RIO system. The action is currently ongoing, all RIO
sites have been notified of the action, and we anticipate internal closure in
the third quarter of 2009. The FDA has been notified of this reportable action.
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Companies
are required to maintain certain records of product actions, even if they are
not reportable to the FDA. If we determine that certain of those product
actions do not require notification of the FDA, the FDA may disagree with our
determinations and 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, including
any of the following sanctions for failing to report the recalls when they were
conducted:
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letters, warning letters, fines, injunctions, consent decrees and civil
penalties;
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customer
notifications or repair, replacement, refunds, recall, detention or seizure
of our products;
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operating
restrictions or partial suspension or total shutdown of production;
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refusing or
delaying our requests for 510(k) clearance or PMA approvals of new products
or modified products;
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withdrawing
510(k) clearances or PMA approvals that have already been granted;
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refusing to
provide Certificates for Foreign Government (CFG);
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refusing to
grant export approval for our products; or
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pursuing
criminal prosecution.
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Any
of these sanctions 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 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.
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 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. In addition, all
manufacturers placing medical devices in European Union markets are legally
bound to report any serious or potentially serious incidents involving devices
they produce or sell to the relevant authority in whose jurisdiction the
incident occurred. Through July 30, 2009, pursuant to the FDA guidelines on
MDRs, we had filed thirty-six incident reports with the FDA. In the future, we
may experience additional events that may require reporting to the FDA pursuant
to the MDR regulations. Any adverse event involving our products could result
in future voluntary corrective actions, such as product actions or customer
notifications, or agency action, such as inspection, mandatory recall or other
enforcement action. Through July 30, 2009, we had initiated nine product
actions, two of which were reportable to the FDA pursuant to the correction /
removal guidelines. Any corrective action, whether voluntary or involuntary, as
well as defending ourselves in a lawsuit, will require the dedication of our
time and capital, distract management from operating our business, and may harm
our reputation and financial results. In addition, failure to report such
adverse events to appropriate government authorities on a timely basis, or at
all, could result in an enforcement action against us.
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We may be subject to
fines, penalties or injunctions if we are determined to be promoting the use of
our products for unapproved or “off-label” uses, resulting in damage to our
reputation and business.
Our
promotional materials and training methods must comply with FDA and other
applicable laws and regulations, including the prohibition of the promotion of
a medical device for a use that has not been cleared or approved by FDA. Use of
a device outside its cleared or approved indications is known as “off-label”
use. We believe that the specific surgical procedures for which our products
are marketed fall within the scope of the surgical applications that have been
cleared by the FDA. However, physicians may use our products off-label, as the
FDA does not restrict or regulate a physician’s 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 and 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 unapproved 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 would 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 injury to patients, and, in turn, the risk of
product liability claims. Product liability claims are expensive to defend and
could divert our management’s attention and result in substantial damage awards
against us.
Federal regulatory
reforms may adversely affect our ability to sell our products profitably.
From
time to time, legislation is drafted and introduced in Congress that could
significantly change the statutory provisions governing the clearance or
approval, manufacture and marketing of a medical device. In addition, FDA
regulations and guidance are often revised or reinterpreted by the agency in
ways that may significantly affect our business and our products. It is
impossible to predict whether legislative changes will be enacted or FDA
regulations, guidance or interpretations changed, and what the impact of such
changes, if any, may be.
Without
limiting the generality of the foregoing, Congress has recently enacted, and
the President has signed into law, the Food and Drug Administration Amendments
Act of 2007, or the Amendments. This law requires, among other things, that the
FDA propose, and ultimately implement, regulations that will require
manufacturers to label medical devices with unique identifiers unless a waiver
is received from the FDA. Once implemented, compliance with those regulations
may require us to take additional steps in the manufacture of our products and
labeling. These steps may require additional resources and could be costly. In
addition, the Amendments will require us to, among other things, pay annual
establishment registration fees to the FDA for each of our FDA registered
facilities.
We may be subject,
directly or indirectly, to federal and state healthcare fraud and abuse laws
and regulations and could face substantial penalties if we are unable to fully
comply with such laws.
While
we do not control referrals of healthcare services or bill directly to
Medicare, Medicaid or other third-party payors, many healthcare laws and regulations
apply to our business. For example, we could be subject to healthcare fraud and
abuse and patient privacy regulation and enforcement by both the federal
government and the states in which we conduct our business. The healthcare laws
and regulations that may affect our ability to operate include:
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the federal
healthcare programs’ Anti-Kickback Statute, which prohibits, among other
things, persons or entities from soliciting, receiving, offering or providing
remuneration, directly or indirectly, in return for or to induce either the
referral of an individual for, or the purchase order or recommendation of,
any item or service for which payment may be made under a federal healthcare
program such as the Medicare and Medicaid programs;
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federal
false claims laws which prohibit, among other things, individuals or entities
from knowingly presenting, or causing to be presented, claims for payment
from Medicare, Medicaid, or other third-party payors that are false or
fraudulent, or are for items or services not provided as claimed, and which
may apply to entities like us to the extent that our interactions with
customers may affect their billing or coding practices;
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the federal
Health Insurance Portability and Accountability Act of 1996, or HIPAA, which
established new federal crimes for knowingly and willfully executing a scheme
to defraud any healthcare benefit program or making false statements in
connection with the delivery of or payment for healthcare benefits, items or
services, as well as leading to regulations imposing certain requirements
relating to the privacy, security and transmission of individually
identifiable health information; and
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state law
equivalents of each of the above federal laws, such as anti-kickback and
false claims laws which may apply to items or services reimbursed by any
third-party payor, including commercial insurers, and state laws governing
the privacy of health information in certain circumstances, many of which
differ from each other in significant ways and often are not preempted by
HIPAA, thus complicating compliance efforts.
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The
orthopedic medical device industry is, and in recent years has been, under
heightened scrutiny as the subject of government investigations and enforcement
actions involving manufacturers who allegedly offered unlawful inducements to
potential or existing customers in an attempt to procure their business,
specifically including arrangements with physician consultants. We have
arrangements with surgeons, hospitals and other entities which may be subject
to scrutiny. For example, we have consulting agreements with orthopedic
surgeons using or considering the use of our present and future robotic arm
systems and MAKOplasty implants and disposable products, for assistance in
product development, and professional training and education, among other
things. Payment for some of these consulting services has been in the form of
stock options or royalties rather than per hour or per diem amounts that would
require verification of time worked. We may continue in the future to make
payment for these consulting services in the form of royalties or also possibly
in the form of part time employment. In addition, we sometimes allow hospitals
a period of evaluation of our products at no charge. If our operations are
found to be in violation of any of the laws described above or any other
governmental regulations that apply to us, we may be subject to penalties,
including civil and criminal penalties, damages, fines, exclusion from the
Medicare and Medicaid programs and the curtailment or restructuring of our
operations. Any penalties, damages, fines, exclusions, curtailment or
restructuring of our operations could adversely affect our ability to operate
our business and our financial results. The risk of our being found in
violation of these laws is increased by the fact that many of these laws are
broad and their provisions are open to a variety of interpretations. 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
management’s attention from the operation of our business. If the surgeons or
other providers or entities with whom we do business are found to be non-compliant
with applicable laws, they may be subject to sanctions, which could also have a
negative impact on our business.
Risks Related to
Ownership of our Common Stock
We expect that the
price of our common stock will fluctuate substantially, which could lead to
losses for stockholders, possibly resulting in class action securities
litigation.
Prior
to our IPO in February 2008, there was no public market for shares of our
common stock. Since the IPO, our common stock has experienced significant price
fluctuations and low trading volumes. An active public trading market may not
develop or, if developed, may not be sustained. The market price for our common
stock will be affected by a number of factors, including:
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the receipt,
denial or timing of regulatory clearances or approvals of our products or
competing products;
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changes in
policies affecting third-party coverage and reimbursement in the U.S. and
other countries;
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ability of
our products, if they receive regulatory clearance, to achieve market
success;
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the
performance of third-party contract manufacturers and component suppliers;
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our ability
to develop sales and marketing capabilities;
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our ability
to manufacture our products to commercial standards;
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the success
of any collaborations we may undertake with other companies;
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our ability
to develop, introduce and market new or enhanced versions of our products on
a timely basis;
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actual or
anticipated variations in our results of operations or those of our
competitors;
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announcements
of new products, technological innovations or product advancements by us or
our competitors;
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developments
with respect to patents and other intellectual property rights;
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sales of
common stock or other securities by us or our stockholders in the future;
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additions or
departures of key scientific or management personnel;
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50
Table of Contents
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disputes or
other developments relating to proprietary rights, including patents,
litigation matters and our ability to obtain patent protection for our
technologies;
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trading
volume of our common stock;
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changes in
earnings estimates or recommendations by securities analysts, failure to
obtain analyst coverage of our common stock or our failure to achieve analyst
earnings estimates;
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developments
in our industry; and
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general
market conditions and other factors unrelated to our operating performance or
the operating performance of our competitors.
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In
addition, the stock prices of many companies in the medical device industry
have experienced wide fluctuations that have often been unrelated to the
operating performance of these companies. We expect our stock price to be
similarly volatile. These broad market fluctuations may continue and could harm
our stock price. Following periods of volatility in the market price of a
company’s securities, stockholders have often instituted class action
securities litigation against those companies. Class action securities litigation,
if instituted against us, could result in substantial costs and a diversion of
our management resources, which could significantly harm our business.
Securities analysts
may issue negative reports or cease to cover our common stock, which may have a
negative impact on the market price of our common stock.
The
trading market for our common stock may be affected in part by the research and
reports that industry or financial analysts publish about us or our business.
As a result of our smaller market capitalization, it may be difficult for our
company to continue to attract securities analysts that will cover our common
stock. If one or more of the analysts who elects to cover us downgrades our
stock, our stock price would likely decline rapidly. If one or more of these
analysts ceases coverage of our company, we could lose visibility in the
market, which in turn could cause our stock price to decline. This could have a
negative effect on the market price of our stock.
Our principal
stockholders, directors and executive officers own a large percentage of our
voting stock, which allows them to exercise significant influence over matters
subject to stockholder approval.
As
of July 30, 2009, our executive officers, directors and principal stockholders
holding 5% or more of our outstanding common stock beneficially owned or
controlled approximately 60% of the outstanding shares of our common stock.
Accordingly, these executive officers, directors and principal stockholders,
acting as a group, have substantial influence over the outcome of corporate
actions requiring stockholder approval, including the election of directors,
any merger, consolidation or sale of all or substantially all of our assets or
any other significant corporate transaction. These stockholders may also delay
or prevent a change of control or otherwise discourage a potential acquirer
from attempting to obtain control of us, even if such a change of control would
benefit our other stockholders. This significant concentration of stock
ownership may adversely affect the trading price of our common stock due to
investors’ perception that conflicts of interest may exist or arise.
We have not paid
dividends in the past and do not expect to pay dividends in the foreseeable
future.
We
have never declared or paid cash dividends on our capital stock. We currently
intend to retain all future earnings for the operation and expansion of our
business and, therefore, do not anticipate declaring or paying cash dividends
in the foreseeable future. The payment of dividends will be at the discretion
of our board of directors and will depend on our results of operations, capital
requirements, financial condition, prospects, contractual arrangements, any
limitations on payments of dividends present in any of our future debt
agreements, and other factors our board of directors may deem relevant. If we
do not pay dividends, a return on your investment will only occur if our stock
price appreciates.
51
Table of Contents
Sales of a
substantial number of shares of our common stock in the public market, or the
perception that they may occur, may depress the market price of our common
stock.
We
cannot predict the effect, if any, that market sales of shares of our common
stock or the availability of such shares upon the effectiveness of a
registration statement, or upon the expiration of any holding period under Rule
144, will have on the market price prevailing from time to time. The
effectiveness of our registration statement on Form S-3, declared effective by
the SEC on May 7, 2009, under which we registered for resale approximately 13.0
million shares of our common stock sold in the October 2008 equity financing,
issued upon conversion of our previously outstanding convertible preferred
stock, or that may be acquired upon exercise of warrants sold in the equity
financing, and the expiration of the holding periods under Rule 144 create a
circumstance commonly referred to as an “overhang” and could depress the market
price of our common stock. We also have filed with the SEC a shelf registration
statement on Form S-3, declared effective by the SEC on May 26, 2009, under
which we may offer and sell at any time or from time to time common stock,
preferred stock, debt securities and other securities at any time in an amount
not to exceed $50 million. The effectiveness of this shelf registration
statement also may create an overhang. The existence of an overhang, whether or
not sales have occurred or are occurring, also could make more difficult our
ability to raise additional financing through the sale of equity or equity
related securities in the future at a time and price that we deem reasonable or
appropriate.
Approximately
all of the 25.1 million shares of our common stock currently outstanding are
freely tradable without registration pursuant to Rule 144 under the Securities
Act or have been registered for resale with the U.S. Securities and Exchange
Commission, or SEC, and the sale of such shares could have a negative impact on
the price of our common stock.
Our recent capital
raising transaction, and our need to raise additional capital in the future,
could have a negative effect on your investment.
We
will need to raise additional capital in the future in order for us to continue
to operate our business as currently contemplated. In October 2008, we raised
approximately $40.2 million in gross proceeds through the sale in a private
placement of our common stock and warrants to purchase shares of our common
stock. Under the terms of the private placement, we granted the investors in
the private placement additional warrants to purchase 322,581 shares of our
common stock at an exercise price of $6.20 per share in exchange for a right to
require, under certain circumstances, the investors to purchase an additional
$20 million in shares of our common stock and warrants to purchase shares of
our common stock. We may, in the future, also raise additional capital through
the public or private sale of common stock or securities convertible into or
exercisable for our common stock. We also have filed with the SEC a shelf
registration statement under which we may offer and sell common stock,
preferred stock, debt securities and other securities at any time or from time
to time in an amount not to exceed $50 million. Such sales could be consummated
at a significant discount to the trading price of our stock.
If
we sell additional shares of our common stock, such sales will further dilute
the percentage of our equity that our existing stockholders own. In addition,
private placement financings could involve the issuance of securities at a
price per share that represents a discount to the trading prices of our common
stock. Further, debt and equity financings may involve the issuance of dilutive
warrants. No assurance can be given that previous or future investors, finders
or placement agents will not claim that they are entitled to additional
anti-dilution adjustments or dispute the calculation of any such adjustments.
Any such claim or dispute could require us to incur material costs and expenses
regardless of the resolution and, if resolved unfavorably to us, to effect
dilutive securities issuances or adjustment to previously issued securities.
The
private placement in October 2008 included, and future financings may include,
provisions requiring us to make additional payments to the investors if we fail
to obtain or maintain the effectiveness of SEC registration statements by
specified dates or take other specified action. Our ability to meet these
requirements may depend on actions by regulators and other third parties, over
which we will have no control. These provisions may require us to make payments
or could lead to costly and disruptive disputes. In addition, these provisions could
require us to record additional non-cash expenses. Such provisions in future
financings could also require us to issue additional dilutive securities,
although the provisions of the private placement in October 2008 include no
such requirement.
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Table of Contents
We are obligated to
develop and maintain proper and effective internal control over financial
reporting, and we may not complete our analysis of our internal control over
financial reporting in a timely manner or this internal control may not be
determined to be effective, which may adversely affect investor confidence in
our company and, as a result, the value of our common stock.
We
are required, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or
Section 404, to furnish a report by management on, among other things, the
effectiveness of our internal control over financial reporting beginning in our
annual reports on Form 10-K. For our annual report on Form 10-K for our year
ended December 31, 2008, this assessment concluded that no material weaknesses
in our internal control over financial reporting have been identified by our
management as of December 31, 2008. If our auditors are unable to express an
opinion on the effectiveness of our internal control over financial reporting,
which, in accordance with SEC rules will be required as of December 31, 2009,
we could lose investor confidence in the accuracy and completeness of our
financial reports, which would have a material adverse effect on the price of
our common stock. Future failure to comply with the rules might make it more
difficult for us to obtain certain types of insurance, including director and
officer liability insurance, and we might be forced to accept reduced policy
limits and coverage and/or incur substantially higher costs to obtain the same
or similar coverage. The impact of these events could also make it more
difficult for us to attract and retain qualified persons to serve on our board
of directors, on committees of our board of directors, or as executive
officers.
In
addition, as a public company, we incur significant additional legal,
accounting and other expenses that we did not incur as a private company, and
our administrative staff is required to perform additional tasks. For example,
we have increased the size of our accounting staff, updated our accounting
systems and procedures, revised the roles and duties of our board committees,
retained a transfer agent, adopted an insider trading policy and disclosure
controls and procedures and are bearing all of the internal and external costs
of preparing and distributing periodic public reports in compliance with our
obligations under the securities laws. Changing laws, regulations and standards
relating to corporate governance and public disclosure, and related regulations
implemented by the SEC and The NASDAQ Global Market, are creating uncertainty
for public companies, increasing legal and financial compliance costs and
making some activities more time consuming. These laws, regulations and
standards are subject to varying interpretations, in many cases due to their
lack of specificity, and, as a result, their application in practice may evolve
over time as new guidance is provided by regulatory and governing bodies. We
are investing resources to comply with evolving laws, regulations and
standards, and this investment will result in increased general and
administrative expenses and a diversion of management’s time and attention from
revenue generating activities to compliance activities. If our efforts to comply
with new laws, regulations and standards differ from the activities intended by
regulatory or governing bodies due to ambiguities related to practice,
regulatory authorities may initiate legal proceedings against us and our
business may be harmed.
I
TEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
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(a)
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Sales of Unregistered Securities
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Not
applicable.
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(b)
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Use of Proceeds from Registered Securities
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Our
IPO was effected through a registration statement on Form S-1 (File
No. 333-146162) that was declared effective by the SEC on February 14,
2008. We registered 5,100,000 shares of our common stock with an aggregate
offering price of $51 million, all of which shares we sold. The offering was
completed after the sale of all 5,100,000 shares. J.P. Morgan
Securities Inc. and Morgan Stanley & Co. Incorporated were the joint
book-running managing underwriters of our IPO and Cowen and Company and
Wachovia Securities acted as co-managers. The underwriters elected not to
exercise their over-allotment option. We paid $3.6 million of the proceeds in
underwriting discounts and commissions, and we incurred an additional
$3.6 million of expenses. None of the expenses were paid, directly or
indirectly, to directors, officers or persons owning 10% or more of our common
stock, or to our affiliates.
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Table of Contents
As
of June 30, 2009, all of the aggregate net proceeds of the initial public
offering had been used. The use of the proceeds consisted of approximately
$14.3 million of the IPO proceeds for sales and marketing activities, $12.7
million for research and development activities, $12.8 million for working
capital and general corporate purposes and $4.0 million for a deferred license
fee payment due to IBM upon completion of IPO.
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(c)
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Issuer Purchases of Equity Securities
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The
following table summarizes the surrenders of the Company’s common stock during
the three month period ended June 30, 2009:
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Total
Number of
Shares
Purchased(1)
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Average
Price Paid
per Share(1)
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Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
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Maximum
Dollar Value of
Shares that May
Yet be
Purchased
Under the Plans
or Programs
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Period
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April 1 to 30, 2009
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—
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$
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—
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—
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$
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—
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May 1 to 31, 2009
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40,211
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8.70
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—
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—
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June 1 to 30, 2009
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—
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—
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—
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—
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40,211
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$
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8.70
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—
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$
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—
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(1)
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Represents the surrender of
shares of common stock of the Company to satisfy the tax withholding
obligations associated with the vesting of restricted stock.
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I
TEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We
held our 2009 annual meeting of stockholders on June 11, 2009 at our
headquarters in Fort Lauderdale, Florida. We submitted the following matters to
a vote of our stockholders, with the results of voting as follows:
Proposal
1 – Election of three Class II directors, each to serve until the 2012 Annual
Meeting of Stockholders and until his successor is duly elected and qualified:
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NOMINEE
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FOR
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WITHHELD
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Charles W. Federico
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17,755,804
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328,384
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Maurice R. Ferré, M.D.
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18,071,840
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12,348
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Fredric H. Moll, M.D.
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15,545,747
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2,538,441
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Our
other directors who were in office prior to the 2009 Annual Meeting of
Stockholders and with terms of office that continue after the meeting are S.
Morry Blumenfeld, Ph.D., Marcelo G. Chao, Christopher C. Dewey, John G. Freund,
M.D., William D. Pruitt, and John J. Savarese, M.D.
Proposal
2 – Ratification of the appointment of Ernst & Young LLP as our independent
registered public accounting firm for 2009:
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FOR
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AGAINST
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ABSTAIN
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18,065,566
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14,394
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4,228
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54
Table of Contents
I
TEM
6. EXHIBITS.
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Exhibit
No.
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Description
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31.1
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Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act
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31.2
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Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act
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32.1
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Certification
of Chief Executive Officer pursuant to18 U.S.C. §1350
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32.2
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Certification
of Chief Financial Officer pursuant to18 U.S.C. §1350
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S
IGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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MAKO
Surgical Corp.
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Date: August
5, 2009
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By:
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/s/ Fritz L.
LaPorte
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Fritz L.
LaPorte
Senior Vice President of Finance and
Administration, Chief Financial Officer and
Treasurer
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55
Table of Contents
E
XHIBIT INDEX
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Exhibit
No.
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Description
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31.1
|
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Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act
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31.2
|
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act
|
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32.1
|
|
Certification
of Chief Executive Officer pursuant to18 U.S.C. §1350
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32.2
|
|
Certification
of Chief Financial Officer pursuant to18 U.S.C. §1350
|
56
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