Selling, General and Administrative.
Selling,
general and administrative expense was $31.9 million for the year ended
December 31, 2009, compared to $23.2 million for the year ended December 31,
2008. The increase of $8.7 million, or 38%, 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 year ended
December 31, 2009 also included $3.3 million of stock-based compensation
expense compared to $1.9 million for the year ended December 31, 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 our
products, continued growth in operations and the costs associated with
operating as a public company.
Research and Development
. Research and
development expense was $13.1 million for the year ended December 31, 2009,
compared to $12.5 million for the year ended December 31, 2008. The increase of
$655,000, or 5%, was primarily due to an increase in research and development
activities associated with on-going development of our RIO system, our MAKO
implant systems and potential future products. This was partially offset by 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. 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 $2.0 million for the year ended
December 31, 2009, compared to $1.8 million for the year ended December 31,
2008. The increase of $123,000, or 7%, 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 $432,000 for the year ended December 31, 2009, compared to
$988,000 for the year ended December 31, 2008. The decrease of $556,000, or
56%, was primarily due to lower yields realized on our cash, cash equivalents
and investments for the year ended December 31, 2009 compared with the same
period of 2008.
Interest and Other Expense.
Interest and
other expense was $3,000 for the year ended December 31, 2009, compared to
$110,000 for the year ended December 31, 2008. Through February 2008, interest
and other expense consisted primarily of the amortization of a $590,000
discount associated with a deferred license fee payment 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 year ended December 31, 2009 and 2008, due to net operating
losses in each period. In addition, no current or deferred income taxes were
recorded for the year ended December 31, 2009 and 2008, as all income tax
benefits were fully offset by a valuation allowance against our net deferred income
tax assets.
Year Ended December 31, 2008
Compared to the Year Ended December 31, 2007
Revenue.
Revenue was $2.9 million for the
year ended December 31, 2008, compared to $771,000 for the year ended December
31, 2007, and was primarily generated from the sale of implants and disposable
products utilized in knee MAKOplasty procedures. The increase in revenue of
$2.2 million was primarily due to an increase in MAKOplasty procedures
performed during the year ended December 31, 2008 as compared with the year
ended December 31, 2007. There were 601 procedures performed during the year
ended December 31, 2008 compared to 168 procedures performed during the year
ended December 31, 2007. Total revenue was also positively impacted by a
$434,000 increase in other revenue, which consists primarily of service revenue
on extended warranty services and net royalty revenues.
68
Cost of Revenue.
Cost of revenue was $3.4
million for the year ended December 31, 2008, compared to $583,000 for the year
ended December 31, 2007. The increase in cost of revenue of $2.9 million was
primarily due to an increase in knee MAKOplasty procedures performed, a
$730,000 write-off of obsolete and discontinued inventory in 2008 primarily due
to the launch of our RESTORIS implant system in 2008 and the anticipated launch
of our RIO system in the first half 2009, the establishment of warranty
accruals on sales of twelve TGS units and royalties incurred on sales of twelve
TGS units during the year ended December 31, 2008.
Selling, General and Administrative.
Selling, general and administrative expense was $23.2 million for the year
ended December 31, 2008, compared to $12.0 million for the year ended December
31, 2007. The increase of $11.1 million, or 92%, was primarily due to an
increase in sales, marketing and operations costs associated with the
production and commercialization of our products, 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 year ended
December 31, 2008 also included $1.9 million of stock-based compensation
expense compared with $1.0 million for the year ended December 31, 2007. The
increase in stock-based compensation expense was primarily due to additional
option and restricted stock grants made in 2008 and 2007.
Research and Development.
Research and
development expense was $12.5 million for the year ended December 31, 2008,
compared to $8.3 million for the year ended December 31, 2007. The increase of
$4.2 million, or 51%, was primarily due to an increase in research and
development activities associated with on-going development of our RIO system
and the RESTORIS and RESTORIS MCK implant systems. Research and development
expense for the year ended December 31, 2008 also included $1.4 million of
stock-based compensation expense compared with $184,000 for the year ended
December 31, 2007. The increase in stock-based compensation expense is due
primarily to a nonrecurring charge of $949,000 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.
Depreciation and Amortization.
Depreciation
and amortization expense was $1.8 million for the year ended December 31, 2008,
compared to $1.3 million for the year ended December 31, 2007. The increase of
$531,000, or 41%, was primarily due to an increase in depreciation of property
and equipment as a result of purchases made during 2008 and 2007.
Interest and Other Income.
Interest income
was $988,000 for the year ended December 31, 2008, compared to $1.1 million for
the year ended December 31, 2007. The decrease of $85,000, or 8%, was primarily
due to lower yields realized on our cash, cash equivalents and investments for
the year ended December 31, 2008 compared with the year ended December 31,
2007.
Interest and Other Expense.
Interest and
other expense was $110,000 for the year ended December 31, 2008, compared to
$311,000 for the year ended December 31, 2007. Through February 2008, interest
and other expense consisted primarily of the amortization of the $590,000
discount associated with a deferred license fee payment of $4.0 million which
had been fully amortized and paid upon the completion of our IPO in February
2008. Interest and other expense also included a $63,000 write down of our
variable auction rate securities in the first quarter of 2008.
Income Taxes.
No income taxes were
recognized for the years ended December 31, 2008 and 2007, due to net operating
losses in each period. In addition, no current or deferred income taxes were
recorded for the years ended December 31, 2008 and 2007, as all income tax
benefits were fully offset by a valuation allowance against our net deferred
income tax assets.
69
Liquidity and Capital Resources
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
Change
|
|
2008
|
|
Change
|
|
2007
|
|
Cash and cash equivalents
|
|
$
|
17,159
|
|
$
|
(45,388
|
)
|
|
62,547
|
|
$
|
52,932
|
|
$
|
9,615
|
|
Short-term investments
|
|
|
44,686
|
|
|
43,609
|
|
|
1,077
|
|
|
(2,007
|
)
|
|
3,084
|
|
Long-term investments
|
|
|
9,368
|
|
|
9,368
|
|
|
―
|
|
|
―
|
|
|
―
|
|
Total cash, cash
equivalents, and investments
|
|
$
|
71,213
|
|
$
|
7,589
|
|
$
|
63,624
|
|
$
|
50,925
|
|
$
|
12,699
|
|
Cash used in operating
activities
|
|
$
|
(45,572
|
)
|
$
|
(15,752
|
)
|
$
|
(29,820
|
)
|
$
|
(13,745
|
)
|
$
|
(16,075
|
)
|
Cash used in investing
activities
|
|
|
(54,180
|
)
|
|
(50,631
|
)
|
|
(3,549
|
)
|
|
(333
|
)
|
|
(3,216
|
)
|
Cash provided by financing
activities
|
|
|
54,364
|
|
|
(31,937
|
)
|
|
86,301
|
|
|
59,503
|
|
|
26,798
|
|
Net increase (decrease) in
cash and cash equivalents
|
|
$
|
(45,388
|
)
|
$
|
(98,320
|
)
|
$
|
52,932
|
|
$
|
45,425
|
|
$
|
7,507
|
|
We
have incurred net losses and negative cash flow from operating activities for
each period since our inception in November 2004. As of December 31, 2009, we
had an accumulated deficit of $114.2 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, our
equity financing in October 2008 and our sale of common stock in August 2009.
In February 2008, we completed our IPO of common stock, issuing a total of 5.1
million shares at an offering price to the public of $10.00 per share,
resulting in net proceeds to us, after underwriting discounts and commission
and 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.
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. The financing resulted in net
proceeds of approximately $39.7 million, after expenses of approximately
$525,000. 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 to participating investors, at the purchase
price of $0.125 per warrant, warrants to purchase 1,290,323 shares of common
stock at an exercise price of $7.44 per share. The warrants became exercisable
on April 29, 2009 and have a seven-year term.
Subject
to the satisfaction of certain business related milestones before December 31,
2009, we had the right, which we refer to as the call right, to require certain
participants in the financing to purchase an additional $20 million of common
stock and warrants to purchase common stock. We did not exercise our call
right, which expired on December 31, 2009, to require these participants to
purchase an additional $20 million of common stock. At the initial closing, the
investors that agreed to provide the additional $20 million investment received
warrants to purchase an additional 322,581 shares of our common stock at a
purchase price of $0.125 per warrant and an exercise price of $6.20 per share.
These warrants became exercisable on December 31, 2009.
In
August 2009, we completed a public offering of our common stock, issuing
8,050,000 shares at an offering price to the public of $7.25 per share,
resulting in net proceeds of approximately $54.3 million, after underwriting
discounts and commissions and expenses.
As
of December 31, 2009, we had approximately $71.2 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, certificates of deposit and investment grade 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
70
operating
activities was also affected by changes in operating assets and liabilities.
Included in changes in operating assets and liabilities for the year ended
December 31, 2009 are approximately $11.0 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, $7.4 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 and
$3.8 million of increases in accounts receivable due to increased sales in the
forth quarter of 2009 as compared to the forth quarter of 2008. Included in
changes in operating assets for the year ended December 31, 2008 are
approximately $8.2 million of increases to the deferred revenue balance, which
was partially offset by approximately $2.7 million of increases to the deferred
cost of revenue balance. The increases to the deferred revenue and deferred
cost of revenue balances are primarily related to twelve unit sales of our TGS
during the year ended December 31, 2008. 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 year ended December 31, 2009 was
primarily attributable to the purchase of investments of $60.0 million and
purchases of property and equipment of $790,000, which was partially offset by
proceeds of $6.7 million from sales and maturities of investments. Net cash
used in investing activities for the year ended December 31, 2008 was primarily
attributable to the payment of the $4.0 million deferred license fee due upon
completion of our IPO, purchases of $1.6 million of property and equipment as
we invested in the infrastructure to support the growth of our company and $2.0
million for the purchase of investments, which was partially offset by proceeds
of $4.0 million from sales and maturities of investments.
Net Cash Provided by
Financing Activities
Net
cash provided by our financing activities for the year ended December 31, 2009
was primarily attributable to net proceeds received in connection with our
equity financing in August 2009. Net cash provided by our financing activities
for the year ended December 31, 2008 was primarily attributable to net proceeds
received in connection with our IPO in February 2008 and to net proceeds
received in connection with our equity financing in October 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 unicompartmental and RESTORIS MCK
multicompartmental knee 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, support operations 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 RESTORIS unicompartmental and RESTOIS MCK
multicompartmental knee implant systems and our RIO system.
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 for at
least the next twelve months. 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. If we
71
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:
|
|
|
|
|
the revenue
generated by sales of our current and future products;
|
|
|
|
|
|
the expenses
we incur in selling and marketing our products;
|
|
|
|
|
|
the costs
and timing of regulatory clearance or approvals for upgrades or changes to
our products;
|
|
|
|
|
|
the rate of progress, cost and success of on-going product
development activities;
|
|
|
|
|
|
the emergence of competing or complementary
technological developments;
|
|
|
|
|
|
the costs of
filing, prosecuting, defending and enforcing any patent or license claims and
other intellectual property rights, or participating in litigation related
activities;
|
|
|
|
|
|
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
|
|
|
|
|
|
the
continued downturn in general economic conditions and interest rates.
|
Contractual
Obligations
The
following table summarizes our outstanding contractual obligations as of
December 31, 2009 and the effect those obligations are expected to have on our
liquidity and cash flows in future periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Payment Due by Period
|
|
|
|
|
|
December 31,
|
|
After
2014
|
|
|
|
Total
|
|
2010
|
|
2011-2012
|
|
2013-2014
|
|
|
Contractual
Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum royalty payments
licenses
|
|
$
|
11,724
|
|
$
|
1,258
|
|
$
|
3,358
|
|
$
|
3,085
|
|
$
|
4,023
|
|
Purchase commitments and
obligations
|
|
|
7,140
|
|
|
7,140
|
|
|
―
|
|
|
―
|
|
|
―
|
|
Development agreement
obligations
|
|
|
1,000
|
|
|
1,000
|
|
|
―
|
|
|
―
|
|
|
―
|
|
Operating lease real
estate
|
|
|
639
|
|
|
400
|
|
|
239
|
|
|
―
|
|
|
―
|
|
Total
|
|
$
|
20,503
|
|
$
|
9,798
|
|
$
|
3,597
|
|
$
|
3,085
|
|
$
|
4,023
|
|
Our
commitments for minimum royalty payments relate to payments under various
licenses and sublicenses as discussed in Item 8, Financial Statements and
Supplementary Data, Note 7 to the Financial Statements. Our commitments for
purchase commitments and obligations include an estimate of open purchase
orders and contractual obligations in the ordinary course of business,
including commitments with contract manufacturers and suppliers, for which we
have not received the goods or services. Our commitments for development
agreement obligations relate to payments under a research and development
agreement as discussed in Item 8, Financial Statements and Supplementary Data,
Note 7 to the Financial Statements. Our commitments for operating leases relate
to the lease for our headquarters in Fort Lauderdale, Florida.
Recent Accounting Pronouncements
Adopted Accounting Pronouncements
72
In
June 2008, the Financial Accounting Standards Board, or FASB, issued an
accounting standard update. As codified in Accounting Standards Codification
815-40, or ASC 815-40,
Derivatives and
Hedging
, this update provides guidance for determining whether an equity-linked
financial instrument (or embedded feature) is indexed to an entitys own stock.
The update applies to any freestanding financial instrument or embedded feature
that has all the characteristics of a derivative, for purposes of determining
whether that instrument or embedded feature qualifies for the first part of the
scope exception under ASC 815-10-15. The update also applies to any
freestanding financial instrument that is potentially settled in an entitys
own stock, regardless of whether the instrument has all the characteristics of
a derivative under previous derivative Generally Accepted Accounting
Principals, or GAAP, for purposes of determining whether the instrument is
within the scope of derivative accounting. ASC 815-40 was effective beginning
first quarter of fiscal 2009. The adoption did not have a material impact on
our results of operations and financial position.
Effective
January 1, 2009, we adopted a new accounting standard update regarding business
combinations. As codified under ASC 805,
Business
Combinations
, this update requires an entity to recognize the assets
acquired, liabilities assumed, contractual contingencies, and contingent
consideration at their fair value on the acquisition date. It further requires
that acquisition-related costs be recognized separately from the acquisition
and expensed as incurred; that restructuring costs generally be expensed in
periods subsequent to the acquisition date; and that changes in accounting for
deferred tax asset valuation allowances and acquired income tax uncertainties after
the measurement period be recognized as a component of provision for taxes. In
addition, acquired in-process research and development is capitalized as an
intangible asset and amortized over its estimated useful life. The adoption did
not have a material impact on our results of operations and financial position.
In
December 2007, the FASB issued accounting guidance regarding noncontrolling
interests, as codified in ASC 810-10-65. ASC 810-10-65 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 parents ownership
interest and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. ASC 810-10-65 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 did not have a material impact on our results of
operations and financial position.
Effective
April 1, 2009, we adopted a new accounting standard, as codified in ASC
820-10-65, which provides additional guidance for estimating fair value when
the volume and level of activity for the asset or liability have significantly
decreased. ASC 820-10-65 also includes guidance on identifying circumstances
that indicate a transaction is not orderly. The adoption did not have a material
impact on our results of operations and financial position.
In
April 2009, the FASB issued an accounting standard update, as codified in ASC
320-10-65, 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
did not have a material impact on our results of operations and financial
position.
Effective
April 1, 2009, we adopted a new accounting standard for subsequent events, as
codified in ASC 855-10, 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). ASC 855-10 is effective for interim or annual periods ending after
June 15, 2009. See Item 8, Financial
Statements and Supplementary Data, Note 11 to the Financial Statements for
discussion of subsequent event.
Effective
July 1, 2009, we adopted
The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles
, or ASC 105. ASC 105 establishes the FASB Accounting
Standards Codification as the source of authoritative accounting principles
recognized by the FASB to be applied in the
73
preparation of
financial statements in conformity with generally accepted accounting
principles. ASC 105 explicitly recognizes rules and interpretive releases of
the SEC under federal securities laws as authoritative GAAP for SEC
registrants. As ASC 105 was not intended to change or alter existing GAAP, it
did not have any impact on our financial statements.
Recent Accounting Pronouncements
In
September 2009, the FASB issued Update No. 2009-13,
Multiple-Deliverable Revenue Arrangements, a consensus of the FASB
Emerging Issues Task Force
, or ASU 2009-13. ASU 2009-13 updates the
existing multiple-element revenue arrangements guidance currently included
under ASC 605-25. ASU 2009-13 eliminates the need for objective and reliable
evidence of the fair value for the undelivered element in order for a delivered
item to be treated as a separate unit of accounting and eliminates the residual
method to allocate the arrangement consideration. In addition, the guidance
also expands the disclosure requirements for revenue recognition. ASU 2009-13
will be effective for the first annual reporting period beginning on or after
June 15, 2010, with early adoption permitted provided that the revised guidance
is retroactively applied to the beginning of the year of adoption. We are
currently evaluating the future impact that ASU 2009-13 will have on our
financial statements.
In
September 2009, the FASB issued Update No. 2009-14,
Certain Revenue Arrangements That Include Software Elements, a
consensus of the FASB Emerging Issues Task Force
, or ASU 2009-14.
ASU 2009-14 modifies the scope of ASC 985-605 to exclude from its requirements
(a) non-software components of tangible products and (b) software components of
tangible products that are sold, licensed, or leased with tangible products
when the software components and non-software components of the tangible
product function together to deliver the tangible products essential
functionality. ASU 2009-14 will be effective for the first annual reporting
period beginning on or after June 15, 2010, with early adoption permitted
provided that the revised guidance is retroactively applied to the beginning of
the year of adoption. We are currently evaluating the future impact that ASU
2009-14 will have on our financial statements.
Off-Balance Sheet Arrangements
We
do not have any off-balance sheet arrangements.
|
|
I
TEM 7A.
|
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,
certificates of deposit and investment grade 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.
74
|
|
I
TEM
8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
MAKO SURGICAL CORP.
Index to the Financial Statements
75
R
eport
of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
MAKO Surgical Corp.
We have audited the accompanying balance sheets of MAKO Surgical Corp.
as of December 31, 2009 and 2008, and the related statements of operations,
redeemable convertible preferred stock and stockholders equity (deficit), and
cash flows for each of the three years in the period ended December 31, 2009.
These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of MAKO Surgical Corp.
at December 31, 2009 and 2008, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2009, in
conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), MAKO Surgical Corp.s internal
control over financial reporting as of December 31, 2009, based on criteria
established in
Internal ControlIntegrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 10, 2010 expressed an unqualified opinion thereon.
|
|
|
/S/ Ernst & Young LLP
|
|
Certified Public Accountants
|
Fort
Lauderdale, Florida
|
|
March 10,
2010
|
|
76
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
MAKO Surgical Corp.
We have
audited MAKO Surgical Corp.s internal control over financial reporting as of
December 31, 2009, based on criteria established in
Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). MAKO Surgical Corp.s management is responsible for
maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the
companys internal control over financial reporting based on our audit.
We conducted
our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists,
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A companys
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A companys internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of the companys assets that could have a material effect on the financial
statements.
Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our
opinion, MAKO Surgical Corp. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009, based on the
COSO criteria.
We also have
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the balance sheets of MAKO Surgical Corp. as
of December 31, 2009 and 2008, and the related statements of operations,
redeemable convertible preferred stock and stockholders equity (deficit), and
cash flows for each of the three years in the period ended December 31, 2009 of
MAKO Surgical Corp. and our report dated March 10, 2010 expressed an
unqualified opinion thereon.
|
|
|
/s/ Ernst & Young LLP
|
|
Certified Public Accountants
|
Fort
Lauderdale, Florida
|
|
March 10,
2010
|
|
77
MAKO SURGICAL CORP.
B
alance
Sheets
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
17,159
|
|
$
|
62,547
|
|
Short-term investments
|
|
|
44,686
|
|
|
1,077
|
|
Accounts receivable
|
|
|
6,536
|
|
|
2,727
|
|
Inventory
|
|
|
10,190
|
|
|
7,673
|
|
Deferred cost of revenue
|
|
|
―
|
|
|
3,608
|
|
Prepaids and other assets
|
|
|
532
|
|
|
483
|
|
Total current assets
|
|
|
79,103
|
|
|
78,115
|
|
Long-term investments
|
|
|
9,368
|
|
|
―
|
|
Property and equipment, net
|
|
|
6,205
|
|
|
3,424
|
|
Intangible assets, net
|
|
|
4,234
|
|
|
4,817
|
|
Other assets
|
|
|
193
|
|
|
177
|
|
Total assets
|
|
$
|
99,103
|
|
$
|
86,533
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,159
|
|
$
|
1,809
|
|
Accrued compensation and employee benefits
|
|
|
3,709
|
|
|
2,338
|
|
Other accrued liabilities
|
|
|
2,872
|
|
|
4,283
|
|
Deferred revenue
|
|
|
548
|
|
|
11,518
|
|
Total current liabilities
|
|
|
8,288
|
|
|
19,948
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
|
21
|
|
|
71
|
|
Total liabilities
|
|
|
8,309
|
|
|
20,019
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 27,000,000 authorized; 0 shares
issued and outstanding as of December 31, 2009 and 2008
|
|
|
―
|
|
|
―
|
|
Common stock, $0.001 par value; 135,000,000 authorized; 33,036,378 and
24,684,786 shares issued and outstanding as of December 31, 2009 and 2008,
respectively
|
|
|
33
|
|
|
25
|
|
Additional paid-in capital
|
|
|
204,977
|
|
|
146,607
|
|
Accumulated deficit
|
|
|
(114,195
|
)
|
|
(80,172
|
)
|
Accumulated other comprehensive income (loss)
|
|
|
(21
|
)
|
|
54
|
|
Total stockholders equity
|
|
|
90,794
|
|
|
66,514
|
|
Total liabilities and stockholders equity
|
|
$
|
99,103
|
|
$
|
86,533
|
|
See accompanying notes.
78
MAKO SURGICAL CORP.
S
tatements
of Operations
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
Procedures
|
|
$
|
7,550
|
|
$
|
2,457
|
|
$
|
718
|
|
Systems RIO
|
|
|
14,715
|
|
|
―
|
|
|
―
|
|
Systems TGS, previously deferred
|
|
|
11,297
|
|
|
―
|
|
|
―
|
|
Service and other
|
|
|
646
|
|
|
487
|
|
|
53
|
|
Total
revenue
|
|
|
34,208
|
|
|
2,944
|
|
|
771
|
|
Cost of
revenue:
|
|
|
|
|
|
|
|
|
|
|
Procedures
|
|
|
3,337
|
|
|
1,521
|
|
|
197
|
|
Systems RIO
|
|
|
9,032
|
|
|
1,692
|
|
|
361
|
|
Systems RIO upgrades
|
|
|
5,183
|
|
|
―
|
|
|
―
|
|
Systems TGS, previously deferred
|
|
|
3,606
|
|
|
―
|
|
|
―
|
|
Service and other
|
|
|
546
|
|
|
233
|
|
|
25
|
|
Total cost
of revenue
|
|
|
21,704
|
|
|
3,446
|
|
|
583
|
|
Gross profit
(loss)
|
|
|
12,504
|
|
|
(502
|
)
|
|
188
|
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
31,878
|
|
|
23,158
|
|
|
12,042
|
|
Research and development
|
|
|
13,127
|
|
|
12,472
|
|
|
8,269
|
|
Depreciation and amortization
|
|
|
1,951
|
|
|
1,828
|
|
|
1,297
|
|
Total
operating costs and expenses
|
|
|
46,956
|
|
|
37,458
|
|
|
21,608
|
|
Loss from
operations
|
|
|
(34,452
|
)
|
|
(37,960
|
)
|
|
(21,420
|
)
|
Interest and
other income
|
|
|
432
|
|
|
988
|
|
|
1,073
|
|
Interest and
other expenses
|
|
|
(3
|
)
|
|
(110
|
)
|
|
(311
|
)
|
Net loss
|
|
|
(34,023
|
)
|
|
(37,082
|
)
|
|
(20,658
|
)
|
Accretion of
preferred stock
|
|
|
―
|
|
|
(44
|
)
|
|
(301
|
)
|
Dividends on
preferred stock
|
|
|
―
|
|
|
(521
|
)
|
|
(3,359
|
)
|
Net loss
attributable to common stockholders
|
|
$
|
(34,023
|
)
|
$
|
(37,647
|
)
|
$
|
(24,318
|
)
|
Net loss per
share Basic and diluted attributable to common stockholders
|
|
$
|
(1.22
|
)
|
$
|
(2.20
|
)
|
$
|
(14.75
|
)
|
Weighted
average common shares outstanding Basic and diluted
|
|
|
27,806
|
|
|
17,096
|
|
|
1,649
|
|
See accompanying notes.
79
MAKO SURGICAL CORP.
S
tatements of
Redeemable Convertible Preferred Stock and Stockholders Equity (Deficit)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
Convertible Preferred
|
|
Common
Shares
|
|
Stock
Amount
|
|
Additional
Paid-in
Capital
|
|
Note
Receivable
from
Stockholder
|
|
Accumulated
Deficit
|
|
Other
Comprehensive
Income (Loss)
|
|
Total
Stockholders
Equity (Deficit)
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
19,650
|
|
$
|
25,911
|
|
1,556
|
|
$
|
2
|
|
$
|
|
|
$
|
(71
|
)
|
$
|
(19,366
|
)
|
$
|
(2
|
)
|
$
|
(19,437
|
)
|
Issuance of Series C redeemable convertible preferred stock, net
of issuance costs of $84,000
|
|
13,514
|
|
|
29,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock upon exercise of options
|
|
|
|
|
|
|
1
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Employee share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
531
|
|
|
|
|
|
|
|
|
|
|
|
531
|
|
Interest on note receivable from stockholder
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
Modification of restricted stock
|
|
|
|
|
|
|
300
|
|
|
|
|
|
394
|
|
|
75
|
|
|
|
|
|
|
|
|
469
|
|
Return of 35,244 shares due to modification of restricted stock
|
|
|
|
|
|
|
(35
|
)
|
|
|
|
|
(392
|
)
|
|
|
|
|
|
|
|
|
|
|
(392
|
)
|
Restricted common stock compensation expense
|
|
|
|
|
|
|
49
|
|
|
|
|
|
302
|
|
|
|
|
|
|
|
|
|
|
|
302
|
|
Accretion to redemption value of Series A, B and C redeemable
convertible preferred stock
|
|
|
|
|
301
|
|
|
|
|
|
|
|
(301
|
)
|
|
|
|
|
|
|
|
|
|
|
(301
|
)
|
Accrued dividends on Series A, B and C redeemable convertible
preferred stock
|
|
|
|
|
3,359
|
|
|
|
|
|
|
|
(540
|
)
|
|
|
|
|
(2,819
|
)
|
|
|
|
|
(3,359
|
)
|
Change in unrealized gain on available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
6
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,658
|
)
|
|
|
|
|
(20,658
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,652
|
)
|
Balance at December 31, 2007
|
|
33,164
|
|
|
59,487
|
|
1,871
|
|
|
2
|
|
|
|
|
|
|
|
|
(42,843
|
)
|
|
4
|
|
|
(42,837
|
)
|
Issuance of common stock in initial public offering
|
|
|
|
|
|
|
5,100
|
|
|
5
|
|
|
43,789
|
|
|
|
|
|
|
|
|
|
|
|
43,794
|
|
Issuance of common stock in equity financing
|
|
|
|
|
|
|
6,451
|
|
|
7
|
|
|
39,726
|
|
|
|
|
|
|
|
|
|
|
|
39,733
|
|
Issuance of common stock upon exercise of options
|
|
|
|
|
|
|
62
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
46
|
|
Employee share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
1,467
|
|
|
|
|
|
|
|
|
|
|
|
1,467
|
|
Restricted common stock compensation expense
|
|
|
|
|
|
|
256
|
|
|
|
|
|
1,856
|
|
|
|
|
|
|
|
|
|
|
|
1,856
|
|
Accretion to redemption value of Series A, B and C redeemable
convertible preferred stock
|
|
|
|
|
44
|
|
|
|
|
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
(44
|
)
|
Accrued dividends on Series A, B and C redeemable convertible
preferred stock
|
|
|
|
|
521
|
|
|
|
|
|
|
|
(274
|
)
|
|
|
|
|
(247
|
)
|
|
|
|
|
(521
|
)
|
Conversion of Series A, B and C redeemable convertible preferred
shares into common shares
|
|
(33,164
|
)
|
|
(53,667
|
)
|
10,945
|
|
|
11
|
|
|
53,656
|
|
|
|
|
|
|
|
|
|
|
|
53,667
|
|
Reclassification of accrued dividends on redeemable convertible preferred
stock to additional paid-in capital
|
|
|
|
|
(6,385
|
)
|
|
|
|
|
|
|
6,385
|
|
|
|
|
|
|
|
|
|
|
|
6,385
|
|
Change in unrealized gain on available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
50
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,082
|
)
|
|
|
|
|
(37,082
|
)
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,032
|
)
|
Balance at December 31, 2008
|
|
|
|
$
|
|
|
24,685
|
|
$
|
25
|
|
$
|
146,607
|
|
$
|
|
|
$
|
(80,172
|
)
|
$
|
54
|
|
$
|
66,514
|
|
(continued)
80
MAKO SURGICAL CORP.
Statements of Redeemable Convertible
Preferred Stock and Stockholders Equity (Deficit)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
Convertible Preferred
|
|
Common
Shares
|
|
Stock
Amount
|
|
Additional
Paid-in
Capital
|
|
Note
Receivable
from
Stockholder
|
|
Accumulated
Deficit
|
|
Other
Comprehensive
Income (Loss)
|
|
Total
Stockholders
Equity (Deficit)
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
|
$
|
|
|
24,685
|
|
$
|
25
|
|
$
|
146,607
|
|
$
|
|
|
$
|
(80,172
|
)
|
$
|
54
|
|
$
|
66,514
|
|
Issuance of common stock in equity financing
|
|
|
|
|
|
|
8,050
|
|
|
8
|
|
|
54,300
|
|
|
|
|
|
|
|
|
|
|
|
54,308
|
|
Issuance of common stock under employee stock purchase plan
|
|
|
|
|
|
|
72
|
|
|
|
|
|
455
|
|
|
|
|
|
|
|
|
|
|
|
455
|
|
Issuance of common stock upon exercise of options and warrants
|
|
|
|
|
|
|
140
|
|
|
|
|
|
149
|
|
|
|
|
|
|
|
|
|
|
|
149
|
|
Employee share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
3,032
|
|
|
|
|
|
|
|
|
|
|
|
3,032
|
|
Restricted common stock compensation expense
|
|
|
|
|
|
|
145
|
|
|
|
|
|
982
|
|
|
|
|
|
|
|
|
|
|
|
982
|
|
Receipt of 56,045 shares delivered in payment of payroll taxes
|
|
|
|
|
|
|
(56
|
)
|
|
|
|
|
(492
|
)
|
|
|
|
|
|
|
|
|
|
|
(492
|
)
|
Deferred equity financing costs
|
|
|
|
|
|
|
|
|
|
|
|
|
(56
|
)
|
|
|
|
|
|
|
|
|
|
|
(56
|
)
|
Change in unrealized gain (loss) on available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(75
|
)
|
|
(75
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34,023
|
)
|
|
|
|
|
(34,023
|
)
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34,098
|
)
|
Balance at December 31, 2009
|
|
|
|
$
|
|
|
33,036
|
|
$
|
33
|
|
$
|
204,977
|
|
$
|
|
|
$
|
(114,195
|
)
|
$
|
(21
|
)
|
$
|
90,794
|
|
See accompanying notes.
81
MAKO SURGICAL CORP.
S
tatements of
Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
Ended December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(34,023
|
)
|
$
|
(37,082
|
)
|
$
|
(20,658
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,769
|
|
|
1,502
|
|
|
678
|
|
Amortization of intangible assets
|
|
|
682
|
|
|
660
|
|
|
645
|
|
Stock-based compensation
|
|
|
4,014
|
|
|
3,323
|
|
|
1,227
|
|
Inventory write-down
|
|
|
1,081
|
|
|
730
|
|
|
8
|
|
Amortization of premium on investment securities
|
|
|
188
|
|
|
―
|
|
|
―
|
|
Loss on asset impairment
|
|
|
51
|
|
|
―
|
|
|
14
|
|
Accrued interest expense on deferred license fee
|
|
|
―
|
|
|
45
|
|
|
305
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(3,809
|
)
|
|
(514
|
)
|
|
(1,634
|
)
|
Inventory
|
|
|
(7,358
|
)
|
|
(7,056
|
)
|
|
(2,123
|
)
|
Prepaid and other assets
|
|
|
(49
|
)
|
|
(173
|
)
|
|
97
|
|
Other assets
|
|
|
(16
|
)
|
|
(7
|
)
|
|
156
|
|
Accounts payable
|
|
|
(650
|
)
|
|
298
|
|
|
1,078
|
|
Accrued compensation and employee benefits
|
|
|
1,371
|
|
|
1,305
|
|
|
523
|
|
Other accrued liabilities
|
|
|
(1,411
|
)
|
|
1,603
|
|
|
1,664
|
|
Deferred cost of revenue
|
|
|
3,608
|
|
|
(2,682
|
)
|
|
(716
|
)
|
Deferred revenue
|
|
|
(11,020
|
)
|
|
8,228
|
|
|
2,661
|
|
Net cash used in operating activities
|
|
|
(45,572
|
)
|
|
(29,820
|
)
|
|
(16,075
|
)
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
Purchase of investments
|
|
|
(59,961
|
)
|
|
(1,990
|
)
|
|
(15,159
|
)
|
Proceeds from sales and maturities of investments
|
|
|
6,721
|
|
|
4,047
|
|
|
13,480
|
|
Acquisition of property and equipment
|
|
|
(790
|
)
|
|
(1,606
|
)
|
|
(1,087
|
)
|
Acquisition of intangible assets
|
|
|
(150
|
)
|
|
―
|
|
|
(450
|
)
|
Payment of deferred license fee
|
|
|
―
|
|
|
(4,000
|
)
|
|
―
|
|
Net cash used in investing activities
|
|
|
(54,180
|
)
|
|
(3,549
|
)
|
|
(3,216
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock in equity financing, net of
underwriting fees of $3,502 and $0 for the years ended December 31, 2009 and
2008, respectively
|
|
|
54,861
|
|
|
40,202
|
|
|
―
|
|
Deferred equity financing costs
|
|
|
(609
|
)
|
|
(469
|
)
|
|
―
|
|
Proceeds from initial public offering of common stock, net of
underwriting fees of $3,570
|
|
|
―
|
|
|
47,430
|
|
|
―
|
|
Deferred initial public offering costs
|
|
|
―
|
|
|
(908
|
)
|
|
(2,728
|
)
|
Proceeds from issuance of Series C redeemable convertible preferred
stock, net of stock issuance costs
|
|
|
―
|
|
|
―
|
|
|
29,916
|
|
Proceeds from employee stock purchase plan
|
|
|
455
|
|
|
―
|
|
|
―
|
|
Exercise of common stock options for cash
|
|
|
149
|
|
|
46
|
|
|
2
|
|
Payment of payroll taxes relating to vesting of restricted stock
|
|
|
(492
|
)
|
|
―
|
|
|
―
|
|
Payment of CEO payroll taxes relating to restricted stock modification
|
|
|
―
|
|
|
―
|
|
|
(392
|
)
|
Net cash provided by financing activities
|
|
|
54,364
|
|
|
86,301
|
|
|
26,798
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(45,388
|
)
|
|
52,932
|
|
|
7,507
|
|
Cash and cash equivalents at beginning of year
|
|
|
62,547
|
|
|
9,615
|
|
|
2,108
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
17,159
|
|
$
|
62,547
|
|
$
|
9,615
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
Receipt of 56,045 and 35,244 shares of common stock delivered in
payment of payroll taxes for the years ended December 31, 2009 and 2007,
respectively
|
|
$
|
492
|
|
$
|
―
|
|
$
|
392
|
|
Transfers of inventory to property and equipment
|
|
|
3,760
|
|
|
999
|
|
|
695
|
|
Accretion of redeemable convertible preferred stock
|
|
|
―
|
|
|
44
|
|
|
301
|
|
Accrued dividends on redeemable convertible preferred stock
|
|
|
―
|
|
|
521
|
|
|
3,359
|
|
Conversion of redeemable convertible preferred stock into 10,945,080
common shares
|
|
|
―
|
|
|
53,667
|
|
|
―
|
|
Reclassification of accrued dividends on redeemable convertible
preferred stock to additional paid-in capital
|
|
|
―
|
|
|
6,385
|
|
|
―
|
|
Reclassification of deferred initial public offering costs to
additional paid-in capital
|
|
|
―
|
|
|
3,636
|
|
|
―
|
|
Licensing of intellectual property
|
|
|
―
|
|
|
―
|
|
|
30
|
|
Deferred license fee payable
|
|
|
―
|
|
|
―
|
|
|
30
|
|
Interest on note receivable for common stock
|
|
|
―
|
|
|
―
|
|
|
4
|
|
See accompanying notes.
82
MAKO SURGICAL CORP.
N
otes to
Financial Statements
1. Description of the Business
MAKO
Surgical Corp. (the Company or MAKO) is an emerging medical device company
that markets its advanced robotic arm solution and orthopedic implants for
minimally invasive orthopedic knee procedures. The Company was incorporated in
the State of Delaware on November 12, 2004 and is headquartered in
Fort Lauderdale, Florida.
In
February 2008, the Company effected a one for 3.03 reverse split of its
issued and outstanding common stock, which has been retroactively reflected in
these financial statements and accompanying notes. Also, in February 2008, the
Company completed its initial public offering (IPO) of common stock, issuing
a total of 5.1 million shares at an offering price to the public of $10.00 per
share, resulting in net proceeds to the Company, after underwriting discounts
and commissions and expenses, of approximately $43.8 million.
In
conjunction with the completion of the Companys IPO in February 2008, all of
the Companys outstanding Series A, B and C redeemable convertible
preferred stock was converted into 10,945,080 shares of common stock,
adjusted for the February 2008 reverse stock split. In connection therewith, all
remaining redeemable convertible preferred stock discounts and accrued
dividends were reclassified to additional paid-in capital and were not paid.
In
October 2008, the Company entered into a Securities Purchase Agreement (the
Securities Purchase Agreement) for an equity financing of up to approximately
$60 million, with initial gross proceeds of approximately $40.2 million, which
the Company closed on October 31, 2008, and conditional access to an additional
$20 million (which conditional access expired on December 31, 2009). The
financing resulted in net proceeds to the Company of approximately $39.7
million, after expenses of approximately $525,000. See Note 5 for further
discussion of the Securities Purchase Agreement.
In
August 2009, the Company completed a public offering of its common stock,
issuing 8,050,000 shares at an offering price to the public of $7.25 per share,
resulting in net proceeds to the Company, after underwriting discounts and
commissions and expenses, of approximately $54.3 million.
2. Summary of Significant Accounting Policies
Basis of Presentation and Use of
Estimates
The
financial statements have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. The accounting estimates that require managements most
significant, difficult and subjective judgments include revenue recognition,
allowance for doubtful accounts, inventory valuation, valuation allowance for
deferred income tax assets, impairment of long-lived assets and the
determination of stock-based compensation. Actual results could differ
significantly from these estimates.
Liquidity and Operations
In
executing its current business plan, the Company believes its existing cash,
cash equivalents and investment balances and interest income earned on these
balances will be sufficient to meet its anticipated cash requirements for at
least the next twelve months. To the extent the Companys available cash, cash
equivalents and investment balances are insufficient to satisfy its operating
requirements after that period, the Company will need to seek additional
sources of funds, including selling additional equity, debt or other securities
or entering into a credit
83
facility, or
modifying its current business plan. The sale of additional equity and
convertible debt securities may result in dilution to the Companys current
stockholders. If the Company raises additional funds through the issuance of
debt securities, these securities may have rights senior to those of its common
stock and could contain covenants that could restrict its operations and
issuance of dividends. The Company may also require additional capital beyond
its currently forecasted amounts. Any required additional capital, whether forecasted
or not, may not be available on reasonable terms, or at all. If the Company is
unable to obtain additional financing, the Company may be required to reduce
the scope of, delay or eliminate some or all of its planned research,
development and commercialization activities, which could materially harm its
business and results of operations.
Concentrations of Credit Risk and
Other Risks and Uncertainties
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist primarily of cash and cash equivalents and investments.
The Companys cash and cash equivalents are held in demand and money market
accounts at three large financial institutions. The Companys investments are
held in a variety of interest bearing instruments, including notes and bonds
from U.S. government agencies, certificates of deposit and investment grade
rated U.S. corporate debt at three large financial institutions. Such deposits
are generally in excess of insured limits. The Company has not experienced any
historical losses on its deposits of cash and cash equivalents.
The
Company is subject to risks common to emerging companies in the medical device
industry including, but not limited to: new technological innovations,
dependence on key personnel, dependence on key suppliers, changes in general
economic conditions and interest rates, protection of proprietary technology,
compliance with changing government regulations and taxes, uncertainty of
widespread market acceptance of products, access to credit for capital
purchases by our customers, product liability and the need to obtain additional
financing. The Companys products include components subject to rapid
technological change. Certain components used in manufacturing have relatively
few alternative sources of supply and establishing additional or replacement
suppliers for such components cannot be accomplished quickly. The inability of
any of these suppliers to fulfill the Companys supply requirements may negatively
impact future operating results. While the Company has ongoing programs to
minimize the adverse effect of such uncertainty and considers technological
change in estimating the net realizable value of its inventory, uncertainty
continues to exist.
The
Companys current versions of its RIO
®
Robotic Arm Interactive
Orthopedic system (RIO), which is the version 2.0 of its Tactile Guidance
System (TGS), its RESTORIS
®
unicompartmental and RESTORIS MCK
multicompartmental knee implant systems and its TGS have been cleared by the
U.S. Food and Drug Administration (FDA). Certain products currently under
development by the Company will require clearance or approval by the FDA or
other international regulatory agencies prior to commercial sale. There can be
no assurance that the Companys products will receive the necessary clearances
or approvals. If the Company were to be denied such clearance or approval or
such clearance or approval were delayed, it could have a material adverse
impact on the Company.
The
Company may perform credit evaluations of its customers financial condition
and, generally, requires no collateral from its customers. The Company will
provide an allowance for doubtful accounts when collections become doubtful but
has not experienced any credit losses to date.
Financial
Accounting Standards Board (FASB) Accounting Standards Codification (ASC)
280,
Segment
Reporting
, establishes standards for reporting information about
operating segments. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or decision making
group, in deciding how to allocate resources and in assessing performance. The
Companys chief operating decision maker is its CEO. The Companys CEO reviews
financial information presented on an aggregate basis for purposes of
allocating resources and evaluating financial performance. The Company has one
business activity and there are no segment managers who are held accountable
for operations, operating results and plans for products or components below
the aggregate Company level. Accordingly, the Company reports as a single
operating segment. To date, all of the Companys revenue is from companies
located in the United States. No one customer accounted for more than 10% of
the Companys
84
total revenue
for the year ended December 31, 2009. The following table presents information
about the Companys revenue by significant customer for the years ended
December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
(in thousands)
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
Company A
|
|
$
|
417
|
|
$
|
331
|
|
Company B
|
|
|
277
|
|
|
161
|
|
Company C
|
|
|
493
|
|
|
126
|
|
Company D
|
|
|
274
|
|
|
18
|
|
Others
|
|
|
996
|
|
|
82
|
|
Net Revenue
|
|
$
|
2,457
|
|
$
|
718
|
|
Cash and Cash Equivalents
The
Company considers all highly liquid investments with an original maturity at
date of purchase of 90 days or less to be cash equivalents.
Fair Value of Financial Instruments
Carrying
amounts of certain of the Companys financial instruments, including cash and
cash equivalents, investments, accounts receivable and other accrued
liabilities approximate fair value due to their short maturities or market
rates of interest.
Allowance for Doubtful Accounts
The
allowance for doubtful accounts is based on the Companys assessment of the
collectability of customer accounts. The Company regularly reviews the
allowance by considering factors such as historical experience, credit quality,
the age of the accounts receivable balances and current economic conditions
that may affect a customers ability to pay. The Company has not experienced
any collectability issues to date and has no allowance, provision for doubtful
accounts receivable or write-offs to date in the accompanying financial
statements.
Accrual for Warranty Costs
Upon
installation of a RIO system, the Company establishes an accrual for the
estimated costs associated with providing a standard one-year warranty for
defects in materials and workmanship.
Inventory
Inventory
is stated at the lower of cost or market value on a first-in, first-out basis.
Inventory costs include direct materials, direct labor and manufacturing
overhead. The Company reviews its inventory periodically to determine net
realizable value and considers product upgrades in its periodic review of
realizability. The Company writes down inventory, if required, based on
forecasted demand and technological obsolescence. These factors are impacted by
market and economic conditions, technology changes and new product
introductions and require estimates that may include uncertain elements.
Beginning
with the fourth quarter of 2008, manufacturing overhead costs have been
capitalized and included in inventory. As of December 31, 2009 and 2008,
capitalized manufacturing overhead included in inventory was approximately $1.1
million and $282,000, respectively. Previously, such overhead costs were fully
expensed as selling, general and administrative expense as capitalizable
amounts were not significant.
85
Property and Equipment
Property
and equipment are stated at cost, net of accumulated depreciation. Depreciation
of property and equipment is computed using the straight-line method over their
estimated useful lives of two to seven years. Leasehold improvements are
amortized on a straight-line basis over the lesser of their useful life or the
term of the lease and are included in depreciation expense in the accompanying
statements of operations. Upon retirement or sale, the cost and related
accumulated depreciation are removed from the balance sheet and the resulting
gain or loss is reflected in operations. Maintenance and repairs are charged to
operations as incurred.
Intangible Assets
The
Companys intangible assets are comprised of licenses to intellectual property
rights. These intangible assets are carried at cost, net of accumulated
amortization. Amortization is recorded using the straight-line method, over
their respective useful lives (generally the life of underlying patents), which
range from approximately 5 to 13 years.
Impairment of Long-Lived Assets
The
Company evaluates its long-lived assets for indicators of impairment by
comparison of the carrying amounts to future net undiscounted cash flows
expected to be generated by such assets when events or changes in circumstances
indicate the carrying amount of an asset may not be recoverable. Should an
impairment exist, the impairment loss would be measured based on the excess
carrying value of the asset over the assets fair value or estimated discounted
future cash flows.
Revenue Recognition
Revenue
is generated from unit sales of the Companys RIO system, including
installation services, training, upgrades and enhancements, from sales of
implants and disposable products, and by providing extended warranty services.
The Companys RIO system, as well as upgrades and enhancements to its RIO
system, include software that is essential to the functionality of the product
and, accordingly, the Company accounts for the sale of the RIO system pursuant
to ASC 985-605,
Software Revenue Recognition
(ASC 985-605).
The
Company recognizes system revenue for sales of the RIO system when there is
persuasive evidence of a sales arrangement, the fee is fixed or determinable,
collection of the fee is probable and delivery has occurred as prescribed by
ASC 985-605. For all sales, the Company uses either a signed agreement or a
binding purchase order as evidence of an arrangement.
For
arrangements with multiple elements, the Company allocates arrangement
consideration to the RIO systems, upgrades, enhancements and services based
upon vendor specific objective evidence (VSOE) of fair value of the
respective elements. Revenue and direct cost of revenue associated with the
sale of the RIO systems are recognized upon the earlier of (1) delivery of all
elements or (2) establishment of VSOE of fair value for all undelivered
elements.
Subsequent
to December 31, 2008, the Company no longer manufactures TGS units, to which
associated TGS sales arrangements required it to provide upgrades and
enhancements, through and including the delivery of the RIO system. The Company
commercially released the RIO system in the first quarter of 2009. Sales
arrangements for RIO systems do not require the Company to provide upgrades and
enhancements. As a result, revenues related to RIO system sales will be recognized
upon installation of the system, delivery of associated instrumentation and
training of at least one surgeon.
For
sales of TGS units through December 31, 2008, VSOE of fair value was not
established for upgrades and enhancements (through and including delivery of
the RIO), which the TGS sales arrangements required the Company to provide.
Accordingly, prior to delivery of the RIO system, sales of TGS units were
recorded as deferred revenue and the direct cost of revenue associated with the
sale of TGS units was recorded as deferred
86
cost of
revenue. Revenue for all previously deferred TGS sales was recognized in our
statement of operations during the year ended December 31, 2009, upon delivery
of the RIO system. As of December 31, 2009, the deferred revenue balance
consists primarily of deferred service revenue as discussed below.
A
portion of the Companys customers acquire the RIO system through a
leasing arrangement with a third-party leasing company. In these instances, the
Company typically sells the RIO system to the leasing company, and the customer
enters into an independent leasing arrangement with the leasing company. The
Company treats these leasing transactions the same as sales transactions for
purposes of recognizing revenue for the sale. The Company sells implants and
disposable products utilized in knee MAKOplasty procedures directly to the
customers.
Procedure
revenue from the sale of implants and disposable products utilized in knee
MAKOplasty procedures is recognized when persuasive evidence of an arrangement
exists, delivery has occurred or service has been rendered, the price is fixed
or determinable and collectability is reasonably assured. The implants and
disposable products are a separate unit of accounting from the RIO systems as
(1) they have value to the customer on a standalone basis, (2) objective and
reliable evidence of the fair value of the item exists and (3) no right of
return exists once the implants and disposable products are implanted or consumed.
Accordingly, as the Companys implants and disposable products are sold on a
procedural basis, the revenue and costs associated with the sale of implants
and disposable products are recognized at the time of sale (i.e., at the time
of the related surgical procedure).
Costs
associated with establishing an accrual for the RIO system standard one-year
warranty liability and royalties covered by licensing arrangements related to
the sale of RIO systems are expensed upon installation and are included in cost
of revenue - systems, in the statements of operations.
Service
revenue, which is included in other revenue, consists of extended warranty
services on the RIO system hardware, and is deferred and recognized ratably
over the service period until no further obligation exists. Costs associated
with providing extended warranty services are expensed as incurred.
Deferred Revenue and Deferred Cost of Revenue
Deferred
revenue consists of deferred system revenue and deferred service revenue.
Deferred system revenue arises from timing differences between the installation
of RIO systems and satisfaction of all revenue recognition criteria consistent
with the Companys revenue recognition policy. Deferred service revenue also results
from the advance payment for services to be delivered over a period of time,
usually in one-year increments. Service revenue is recognized ratably over the
service period. Deferred cost of revenue consists of the direct costs
associated with the manufacture of RIO systems for which the revenue has been
deferred in accordance with the Companys revenue recognition policy. Deferred
revenue and associated deferred cost of revenue expected to be realized within
one year are classified as current liabilities and current assets,
respectively. The deferred revenue balance as of December 31, 2009 consists
primarily of deferred service revenue for extended warranty services on the RIO
system hardware.
Research and Development Costs
Costs
related to research, design and development of products are charged to research
and development expense as incurred. These costs include direct salary costs
for research and development personnel, costs for materials used in research
and development activities and costs for outside services.
87
Shipping
and Handling Costs
Costs
incurred for shipping and handling are included in cost of revenue at the time
the expense is incurred.
Software Development Costs
Software
development costs are included in research and development and are expensed as
incurred. After technological feasibility is established, material software
development costs are capitalized. The capitalized cost is then amortized on a
straight-line basis over the estimated product life, or on the ratio of current
revenue to total projected product revenue, whichever is greater. To date, the
period between achieving technological feasibility, which the Company has
defined as the establishment of a working model which typically occurs when the
verification and validation testing is complete, and the general availability
of such software has been short and software development costs qualifying for
capitalization have been insignificant. Accordingly, the Company has not
capitalized any software development costs to date.
Stock-Based Compensation
The
Company recognizes compensation expense for its stock-based awards in
accordance with ASC 718,
Compensation-Stock Compensation
. ASC 718
requires the recognition of compensation expense, using a fair value based
method, for costs related to all share-based payments including stock options.
ASC 718 requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model.
The
Company accounts for stock-based compensation arrangements with non-employees
in accordance with the ASC 505-50,
Equity-Based Payments to Non-Employees
. The Company records the expense of
such services based on the estimated fair value of the equity instrument using
the Black-Scholes-Merton pricing model. The value of the equity instrument is
charged to expense over the term of the service agreement.
See
Note 8 for a detailed discussion of the various stock option plans and
related stock-based compensation.
Advertising Costs
Advertising
costs are expensed as incurred. Advertising costs were approximately $1.3
million, $1.4 million and $431,000 for the years ended December 31, 2009, 2008
and 2007, respectively.
Income Taxes
The
Company accounts for income taxes under ASC 740,
Income Taxes
. Deferred
income taxes are determined based upon differences between financial reporting
and income tax bases of assets and liabilities and are measured using the
enacted income tax rates and laws that will be in effect when the differences
are expected to reverse. Valuation allowances are established when necessary to
reduce deferred income tax assets to the amounts expected to be realized. The
Company recognizes any interest and penalties related to unrecognized tax
benefits as a component of income tax expense.
Operating Leases
Rental
payments and incentives, if any, are recognized on a straight-line basis over
the life of a lease. See Note 7 for further discussion of operating
leases.
Net Loss Per Share
The
Company calculated net loss per share in accordance with ASC 260,
Earnings per
Share
. Basic earnings per share (EPS) is calculated by dividing
the net income or loss available to common stockholders adjusted for redeemable
convertible preferred stock accretion and dividends by the weighted average
number of common
88
shares
outstanding for the period, without consideration for common stock equivalents.
Diluted EPS is computed by dividing the net income or loss available to common
stockholders by the weighted average number of common shares outstanding for
the period and the weighted average number of dilutive common stock equivalents
outstanding for the period determined using the treasury stock method. The
following table sets forth potential shares of common stock that are not
included in the calculation of diluted net loss per share because to do so
would be anti-dilutive as of the end of each period presented:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Stock
options outstanding
|
|
|
3,478
|
|
|
2,193
|
|
|
1,917
|
|
Warrants to
purchase common stock
|
|
|
2,065
|
|
|
2,076
|
|
|
463
|
|
Unvested
restricted stock
|
|
|
222
|
|
|
267
|
|
|
428
|
|
Redeemable
convertible preferred stock
|
|
|
―
|
|
|
―
|
|
|
33,164
|
|
Comprehensive Loss
Comprehensive
loss is defined as the change in equity from transactions and other events and
circumstances other than those resulting from investments by owners and
distributions to owners. For the years ended December 31, 2009, 2008 and
2007, the Company recorded comprehensive losses of approximately $34.1 million,
$37.0 million and $20.7 million, respectively. The difference between
comprehensive loss and net loss for the years ended December 31, 2009, 2008
and 2007 is due to changes in unrealized gains and losses on the Companys
available-for-sale securities.
Recent Accounting Pronouncements
Adopted Accounting Pronouncements
In
June 2008, the Financial Accounting Standards Board (FASB) issued an
accounting standard update. As codified in ASC 815-40,
Derivatives and Hedging
, this update
provides guidance for determining whether an equity-linked financial instrument
(or embedded feature) is indexed to an entitys own stock. The update applies
to any freestanding financial instrument or embedded feature that has all the
characteristics of a derivative, for purposes of determining whether that
instrument or embedded feature qualifies for the first part of the scope
exception under ASC 815-10-15. The update also applies to any freestanding
financial instrument that is potentially settled in an entitys own stock,
regardless of whether the instrument has all the characteristics of a
derivative under previous derivative Generally Accepted Accounting Principals
(GAAP), for purposes of determining whether the instrument is within the
scope of derivative accounting. ASC 815-40 was effective beginning with the
first quarter of fiscal 2009. The adoption did not have a material impact on
the Companys results of operations and financial position.
Effective
January 1, 2009, the Company adopted a new accounting standard update regarding
business combinations. As codified under ASC 805,
Business Combinations
, this update requires an entity to recognize
the assets acquired, liabilities assumed, contractual contingencies, and
contingent consideration at their fair value on the acquisition date. It
further requires that acquisition-related costs be recognized separately from
the acquisition and expensed as incurred; that restructuring costs generally be
expensed in periods subsequent to the acquisition date; and that changes in
accounting for deferred tax asset valuation allowances and acquired income tax
uncertainties after the measurement period be recognized as a component of
provision for taxes. In addition, acquired in-process research and development
is capitalized as an intangible asset and amortized over its estimated useful
life.
Effective
April 1, 2009, the Company adopted a new accounting standard, as codified in
ASC 820-10-65, which provides additional guidance for estimating fair value
when the volume and level of activity for the asset or liability have
significantly decreased. ASC 820-10-65 also includes guidance on identifying
circumstances that
89
indicate a
transaction is not orderly. The adoption did not have a material impact on the
Companys results of operations and financial position.
In
April 2009, the FASB issued an accounting standard update, as codified in ASC
320-10-65, 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
did not have a material impact on the Companys results of operations and
financial position.
Effective
April 1, 2009, the Company adopted a new accounting standard for subsequent
events, as codified in ASC 855-10, 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). ASC 855-10 is effective for interim or annual periods
ending after June 15, 2009. See Note 11 for discussion of subsequent event.
Effective
July 1, 2009, the Company adopted
The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles
(ASC 105). ASC 105 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. ASC 105
explicitly recognizes rules and interpretive releases of the SEC under federal
securities laws as authoritative GAAP for SEC registrants. As ASC 105 was not
intended to change or alter existing GAAP, it did not have any impact on the
Companys financial statements.
New Accounting Pronouncements
In
September 2009, the FASB issued Update No. 2009-13,
Multiple-Deliverable Revenue Arrangements
,
a consensus of the FASB Emerging Issues Task Force
(ASU 2009-13). ASU 2009-13 updates the existing multiple-element revenue
arrangements guidance currently included under ASC 605-25. ASU 2009-13
eliminates the need for objective and reliable evidence of the fair value for
the undelivered element in order for a delivered item to be treated as a separate
unit of accounting and eliminates the residual method to allocate the
arrangement consideration. In addition, the guidance also expands the
disclosure requirements for revenue recognition. ASU 2009-13 will be effective
for the first annual reporting period beginning on or after June 15, 2010, with
early adoption permitted provided that the revised guidance is retroactively
applied to the beginning of the year of adoption. The Company is currently
evaluating the future impact that ASU 2009-13 will have on its financial
statements.
In
September 2009, the FASB issued Update No. 2009-14,
Certain Revenue Arrangements That Include Software Elements, a
consensus of the FASB Emerging Issues Task Force
(ASU 2009-14).
ASU 2009-14 modifies the scope of ASC 985-605 to exclude from its requirements
(a) non-software components of tangible products and (b) software components of
tangible products that are sold, licensed, or leased with tangible products
when the software components and non-software components of the tangible
product function together to deliver the tangible products essential
functionality. ASU 2009-14 will be effective for the first annual reporting
period beginning on or after June 15, 2010, with early adoption permitted
provided that the revised guidance is retroactively applied to the beginning of
the year of adoption. The Company is currently evaluating the future impact
that ASU 2009-14 will have on its financial statements.
90
Reclassifications
Certain
insignificant reclassifications have been made to the prior periods statements
of cash flows to conform to the current periods presentation.
3. Investments
The
Companys investments are classified as available-for-sale. Available-for-sale
securities are carried at fair value, with the unrealized gains and losses
included in other comprehensive income within stockholders equity (deficit).
Realized gains and losses and declines in value determined to be
other-than-temporary on available-for-sale securities are included in interest
and other expenses. During the years ended December 31, 2009, 2008 and 2007,
realized gains or losses recognized on the sale of investments were not
significant. Interest and dividends on securities classified as
available-for-sale are included in interest and other income. The cost of
securities sold is based on the specific identification method.
The
amortized cost and fair value of short and long-term investments, with gross
unrealized gains and losses, were as follows:
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
32,860
|
|
$
|
31
|
|
$
|
(24
|
)
|
$
|
32,867
|
|
Certificates of deposit
|
|
|
10,297
|
|
|
1
|
|
|
(25
|
)
|
|
10,273
|
|
U.S. corporate debt
|
|
|
1,532
|
|
|
14
|
|
|
―
|
|
|
1,546
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
|
5,418
|
|
|
―
|
|
|
(18
|
)
|
|
5,400
|
|
Certificates of deposit
|
|
|
2,462
|
|
|
―
|
|
|
(10
|
)
|
|
2,452
|
|
U.S. corporate debt
|
|
|
1,506
|
|
|
10
|
|
|
―
|
|
|
1,516
|
|
Total investments
|
|
$
|
54,075
|
|
$
|
56
|
|
$
|
(77
|
)
|
$
|
54,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
61
|
|
$
|
―
|
|
$
|
―
|
|
$
|
61
|
|
Variable auction rate securities
|
|
|
962
|
|
|
54
|
|
|
―
|
|
|
1,016
|
|
Total short-term investments
|
|
$
|
1,023
|
|
$
|
54
|
|
$
|
―
|
|
$
|
1,077
|
|
As of December
31, 2009 and December 31, 2008, all short-term investments had maturity dates
or interest reset dates of less than one year. As of December 31, 2009, all
long-term investments had maturity dates between one and two years.
91
The fair
values of the Companys investments based on the level of inputs are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
Fair Value Measurements at the Reporting Date Using
|
|
|
|
December
31,
2009
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Short-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
32,867
|
|
$
|
32,867
|
|
$
|
―
|
|
$
|
―
|
|
Certificates of deposit
|
|
|
10,273
|
|
|
10,273
|
|
|
―
|
|
|
―
|
|
U.S. corporate debt
|
|
|
1,546
|
|
|
1,546
|
|
|
―
|
|
|
―
|
|
Long-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
|
5,400
|
|
|
5,400
|
|
|
―
|
|
|
―
|
|
Certificates of deposit
|
|
|
2,452
|
|
|
2,452
|
|
|
―
|
|
|
―
|
|
U.S. corporate debt
|
|
|
1,516
|
|
|
1,516
|
|
|
―
|
|
|
―
|
|
Total
investments
|
|
$
|
54,054
|
|
$
|
54,054
|
|
$
|
―
|
|
$
|
―
|
|
The table
below provides a reconciliation of auction rate securities assets measured at
fair value on a recurring basis which use Level 3 or significant unobservable
inputs for the year ended December 31, 2009.
|
|
|
|
|
(in thousands)
|
|
Fair Value Measurements Using Significant Unobservable Inputs
|
|
|
|
Year Ended
December 31, 2009
|
|
Balance at beginning of year
|
|
$
|
1,016
|
|
Transfers into Level 3
|
|
|
―
|
|
Total gains realized included in earnings
|
|
|
63
|
|
Total change in other comprehensive income
|
|
|
(54
|
)
|
Sales/Redemptions
|
|
|
(1,025
|
)
|
Balance at December 31, 2009
|
|
$
|
―
|
|
|
|
|
|
|
The total amount of gains or losses for the
period included in earnings attributable to the change in unrealized gains or
losses relating to assets still held at the reporting date
|
|
$
|
―
|
|
In
February 2008, the FASB issued an accounting standard update, as codified in
ASC 820-10, that delayed the effective date of fair value measurements
accounting for certain nonfinancial assets and certain nonfinancial
liabilities, until the beginning of the first quarter of fiscal 2009. The
Company adopted this accounting standard update effective January 1, 2009.
The adoption of this update did not have a material impact on the Companys
financial position or its results of operations.
92
4. Selected Balance Sheet Components
The
following table provides details of selected balance sheet items:
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
Inventory:
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
2,770
|
|
$
|
3,809
|
|
Work-in-process
|
|
|
932
|
|
|
748
|
|
Finished
goods
|
|
|
6,488
|
|
|
3,116
|
|
Total
inventory
|
|
$
|
10,190
|
|
$
|
7,673
|
|
The Company
incurred write-offs totaling approximately $1.1 million and $730,000 during the
years ended December 31, 2009 and 2008, respectively. Write-offs in 2009
primarily relate to technology changes associated with the launch of the RIO
system in 2009 and disposal of spare TGS inventory associated with the launch
of the RIO system. Write-offs in 2008 primarily relate to discontinued portions
of the Companys existing implant lines in connection with the launch of
RESTORIS and to the discontinuation of the manufacturing of the Companys TGS
in anticipation of the launch of the RIO system.
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31,
|
|
Estimated
Useful Life
|
|
|
|
2009
|
|
2008
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
|
|
Consigned
RIO systems and instruments
|
|
$
|
2,551
|
|
$
|
705
|
|
|
2-5 years
|
|
Service and
demo RIO systems and instruments
|
|
|
2,354
|
|
|
549
|
|
|
2-5 years
|
|
Computer
equipment and software
|
|
|
2,160
|
|
|
1,669
|
|
|
3-5 years
|
|
Manufacturing
and laboratory equipment
|
|
|
1,654
|
|
|
1,261
|
|
|
5 years
|
|
Office
furniture and equipment
|
|
|
882
|
|
|
804
|
|
|
7 years
|
|
Leasehold
improvements
|
|
|
607
|
|
|
387
|
|
|
Lesser of
useful life or lease term
|
|
|
|
|
10,208
|
|
|
5,375
|
|
|
|
|
Less
accumulated depreciation and amortization
|
|
|
(4,003
|
)
|
|
(1,951
|
)
|
|
|
|
Total
property and equipment, net
|
|
$
|
6,205
|
|
$
|
3,424
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
Other accrued liabilities:
|
|
|
|
|
|
|
|
Accrued
royalties
|
|
$
|
413
|
|
$
|
429
|
|
Accrued
legal fees
|
|
|
172
|
|
|
586
|
|
Other
|
|
|
2,287
|
|
|
3,268
|
|
|
|
$
|
2,872
|
|
$
|
4,283
|
|
5. Related Parties
Employee Loans
During
2006, the Company issued $225,000 in employee loans to certain officers of the
Company (the Employee Loans). The Employee Loans accrued interest at a rate
of 4.0% per annum, compounded annually. The interest was paid biweekly. The
Employee Loans and accrued interest were due upon the earlier of one year from
the date of the Employee Loan or a liquidation event, as defined. The Employee
Loans were fully repaid in
93
April 2007. In
May and June 2007, the Company issued $225,000 in employee loans to certain
officers of the Company under terms that were substantially similar to the
Employee Loans issued in 2006. In August and September 2007, the Company
forgave the $225,000 of outstanding loans, including accrued interest, with a
charge to the statement of operations. No Employee Loans were outstanding as of
December 31, 2009 and 2008.
Restricted Stock and
Note Receivable from Related Party
In
July 2005 and May 2006, the Company issued a total of 446,287 shares of
restricted common stock to its CEO and 49,504 shares of unrestricted
common stock to an entity affiliated with the CEO in exchange for promissory
notes from the CEO totaling approximately $631,000 (representing the fair value
of the shares on the date of issuance) approximately 50% of which was
nonrecourse. The promissory notes accrued interest at a rate of 8% per annum,
with 25% of the restricted stock vesting immediately and the remainder vesting
monthly over 48 months as service is provided. The restricted stock was
pledged as collateral against the promissory notes. In March 2007, the Company
issued 82,508 shares of restricted common stock to its CEO at a purchase
price of $2.48 per share (the estimated fair value at the date of issuance) in
exchange for a promissory note of $205,000, 50% of which was nonrecourse and a
pledge agreement. The March 2007 restricted stock, pledge agreement and
promissory note were issued under terms substantially similar to the July 2005
and May 2006 restricted stock issuances. Because it was unclear as to whether
the recourse portion had substance as of the dates of issuance of the
restricted stock and the promissory notes, the Company determined to treat the
entire amount of the promissory notes related to the restricted stock as
nonrecourse for accounting purposes. A nonrecourse note issued for restricted
stock is in substance an option to acquire the stock. Accordingly, the Company
recorded compensation expense for the restricted stock grants and the
promissory notes and the restricted stock were not then recorded in the
financial statements. The compensation expense was determined under the
Black-Scholes-Merton model assuming a risk free interest rate of 0.0% (as the
interest rate on the promissory notes was greater than the risk free interest
rate and the excess was not significant to the Black-Scholes-Merton
valuation risk free interest rate ranging from 4.08% to 4.96% less the
stated interest rate of 8% implicit in the promissory notes), a volatility
factor ranging from 57.1% to 66.5% and a 6.25 year estimated life. The
value of the common stock was initially determined by the Companys board of
directors and was validated as reasonable on a retrospective basis in a March 2007
valuation by an independent valuation firm.
On
September 5, 2007, the Company forgave approximately $1,149,000 of
outstanding loans, including accrued interest of $113,000, to its CEO, which
represents all loans outstanding to the Companys CEO. Of this amount $949,000
was associated with the issuances of the restricted and unrestricted stock and
$200,000 was associated with the employee loans discussed above. In connection
with the forgiveness of the loans, 35,244 shares of common stock were surrendered
by the CEO to the Company to pay for the payroll taxes associated with the
taxable income from the forgiveness of the loans. The forgiveness of the notes
receivable resulted in a modification to the original award. Accordingly, the
Company accounted for the modification by determining the amount of the
incremental compensation charge to be recorded in accordance with ASC
718-20-35. The original award, which was accounted for as a stock option, was
revalued on the date of modification using the Black-Scholes-Merton model with
current inputs for risk-free rate, volatility and market value. This calculated
amount was compared to the fair value of the restricted stock award on the date
of modification resulting in the incremental charge. Due to the forgiveness of
the note, the Company ceased to record the award as a stock option and
commenced the recording of the award as a restricted stock award. Accordingly,
on the date of modification, the Company recognized the incremental charge for
the portion of the vested shares and is recording the additional portion
related to the unvested shares over the remaining term. The forgiveness
resulted in a modification to the original terms of the restricted stock-based
awards with a charge of approximately $395,000 recorded in the financial
statements in September 2007. The remaining unrecognized compensation expense
of approximately $533,000 relating to the unvested restricted stock will be
recorded in the financial statements over the remaining vesting period, along
with the related vested common stock. The compensation expense associated with
the modification of the terms of the restricted stock was determined under the
Black-Scholes-Merton model assuming a risk free interest rate of 0.0% (as the
interest rate on the promissory notes was greater than the risk free interest
rate and the excess was not significant to the Black-Scholes-Merton
valuation risk free interest rate of 4.29% less the stated interest rate
of 8% implicit in the promissory notes), a volatility factor of 54.07% and
94
an estimated
life ranging from 4.10 to 5.80 years. The value of the common stock on the
modification date was determined in an August 2007 valuation by an independent
valuation firm.
See
Note 8 for further discussion of restricted stock.
Securities
Purchase Agreement
In
October 2008, the Company 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 the Company closed on October
31, 2008, and conditional access to an additional $20 million. The financing
resulted in net proceeds to the Company of approximately $39.7 million, after
expenses of approximately $525,000. In connection with the financing, the Company
issued and sold to the participating investors 6,451,613 shares of its common
stock at a purchase price of $6.20 per share and issued to participating
investors, at the purchase price of $0.125 per warrant, warrants to purchase
1,290,323 shares of common stock at an exercise price of $7.44 per share. The
warrants became exercisable on April 29, 2009 and have a seven-year term.
Subject
to the Companys satisfaction of certain business related milestones before
December 31, 2009, the Company had the right (the Call Right) to require
certain participants in the financing to purchase an additional $20 million of
common stock and warrants to purchase common stock. The Company did not
exercise its Call Right, which expired on December 31, 2009, to require these
participants to purchase an additional $20 million of common stock. At the
initial closing, the investors that agreed to provide the additional $20
million investment received warrants to purchase an additional 322,581 shares
of common stock at a purchase price of $0.125 per warrant and an exercise price
of $6.20 per share. These warrants became exercisable on December 31, 2009 and
have a seven-year term.
The
participating investors consisted of eleven accredited investors, six of which
were existing stockholders of the Company who were deemed to be affiliates of
the Company by virtue of their being represented on the Companys Board of
Directors or by virtue of their Board membership.
6. Intangible Assets
The
Companys intangible assets are comprised of a purchased patent application and
licenses to intellectual property rights (the Licenses). The Licenses are
amortized on a straight line basis over their estimated useful lives which
range from approximately 5 to 13 years. See Note 7 for additional
discussion of Licenses.
The
following tables present details of MAKOs intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in thousands)
|
|
2009
|
|
2008
|
|
|
|
Amount
|
|
Weighted
Average
Amortization
Period
|
|
Amount
|
|
Weighted
Average
Amortization
Period
|
|
Licenses
|
|
$
|
6,679
|
|
|
9.9
|
|
$
|
6,549
|
|
|
10.0
|
|
Patent
|
|
|
―
|
|
|
|
|
|
60
|
|
|
17.8
|
|
|
|
|
6,679
|
|
|
9.9
|
|
|
6,609
|
|
|
10.1
|
|
Less:
accumulated amortization
|
|
|
(2,445
|
)
|
|
|
|
|
(1,792
|
)
|
|
|
|
Intangible
assets, net
|
|
$
|
4,234
|
|
|
|
|
$
|
4,817
|
|
|
|
|
Amortization
expense related to intangible assets was approximately $682,000, $660,000 and
$645,000 for the years ended December 31, 2009, 2008 and 2007,
respectively.
95
The
estimated future amortization expense of intangible assets for the next five
years as of December 31, 2009 is as follows:
|
|
|
|
|
(in thousands)
|
|
|
|
|
2010
|
|
$
|
688
|
|
2011
|
|
|
688
|
|
2012
|
|
|
688
|
|
2013
|
|
|
683
|
|
2014
|
|
|
655
|
|
Total
|
|
$
|
3,402
|
|
7. Commitments and Contingencies
Operating Leases
The
Company leases its facility under an operating lease that expires in July 2011.
The Company has the option to renew its facility lease for two consecutive
three year periods. Rent expense on a straight-line basis was $613,000,
$498,000 and $314,000 for the years ended December 31, 2009, 2008 and
2007, respectively. The rent expense for the years ended December 31,
2009, 2008 and 2007 included the Companys monthly variable operating costs of
the facility.
Future
minimum lease commitments, excluding monthly variable operating costs, under
the Companys operating lease as of December 31, 2009 are approximately as
follows:
|
|
|
|
|
(in thousands)
|
|
|
|
|
2010
|
|
|
400
|
|
2011
|
|
|
239
|
|
|
|
$
|
639
|
|
Purchase Commitments
At
December 31, 2009, the Company was committed to make future purchases for
inventory related items under various purchase arrangements with fixed purchase
provisions aggregating approximately $7.1 million.
License and Royalty
Agreements
In
December 2004, the Company was granted a limited license to Z-Kat, Inc.s
(Z-Kat) computer assisted surgery (CAS) and haptic robotic intellectual
property portfolio for use in the field of orthopedics (the Z-Kat License).
In December 2006, the Company entered into an addendum to the Z-Kat License (the
Addendum). Under the Addendum, the Company obtained the right to take
enforcement action against all third parties with respect to any intellectual
property rights held by Z-Kat in the field of orthopedics; and MAKO assumed the
obligation to pay the annual minimum royalty to a third-party CAS licensor due
to the importance of maintaining the licensed rights. The Z-Kat License is
fully paid up as to intellectual property owned by Z-Kat. The Z-Kat License
includes sublicenses to third-party intellectual property rights for which the
Company is obligated to make ongoing royalty payments of 2% on the sale of
certain products or components thereof and minimum annual payments totaling
$555,000. By their terms, the Z-Kat License and the component sublicenses generally
continue until all of the licensed patents have expired, which, based on the
licensed granted patents and presently pending patent applications is currently
estimated to be December 2024.
In
December 2008, a third-party CAS intellectual property licensee of Z-Kat from
which MAKO had the right to receive royalty payments under the Addendum
terminated its license. Accordingly, the Company no longer receives royalties
under this license.
96
See
Note 11 for further discussion of the Z-Kat License and Addendum.
In
March 2006, the Company entered into a license agreement that covers a number
of technologies related to the application of computers and robotics to surgery
in exchange for a payment of $2 million upon execution of the agreement
(the Upfront License Fee) and a deferred payment of $4 million payable
upon a change of control, as defined (e.g., IPO, acquisition or change in
voting ownership greater than 50.01%) (the Deferred License Fee). The license
also requires royalty payments of 2% of the selling price of each RIO system.
The Upfront License Fee and net present value of the Deferred License Fee were
included in intangible assets in the accompanying balance sheets. The net
present value of the Deferred License Fee obligation was approximately $3.4
million, net of a discount of $590,000 and was recorded as a long-term debt
obligation as the Company believed it was probable at the inception of the
agreement that the contingent obligation would become payable. The net present
value of the Deferred License Fee was determined using an incremental borrowing
rate of 8% and an expected payment date of approximately two years from the
effective date of the license agreement. The discount on the debt obligation
was being amortized over the estimated term of the Deferred License Fee
obligation as interest expense which was approximately $45,000 and $305,000 for
the years ended December 31, 2008 and 2007, respectively, in the
accompanying statements of operations. In February 2008, the Company paid the
$4 million Deferred License Fee due upon completion of the Companys IPO.
In
May 2009, the Company entered into a license agreement for patents relating to
its RIO system (the Robotic Arm License). The Robotic Arm License requires minimum
running royalties on sales of the Companys RIO systems. The minimum running
royalties are estimated to be approximately $600,000 for the year ended
December 31, 2010, 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 $1.3
million annually.
The
Company has other license agreements related to current product offerings and
research and development projects. Upfront license fees paid for these
agreements total approximately $1.1 million. Royalty payments related to these
agreements are anticipated to range between 1% and 5% of future sales of the
Companys RIO system and components thereof and/or products. These royalty
payments are subject to certain minimum annual royalty payments as shown in the
schedule below. The terms of these license agreements continue until the
related licensed patents and intellectual property rights expire, which is
expected to range between 7 and 17 years. The net expense related to the
Companys license and royalty agreements was approximately $1.5 million,
$525,000 and $304,000 for the years ended December 31, 2009, 2008 and
2007, respectively.
As
of December 31, 2009, future annual minimum royalty payments under the
licenses and sublicenses are anticipated to be as follows:
|
|
|
|
|
(in thousands)
|
|
|
|
|
2010
|
|
$
|
1,258
|
|
2011
|
|
|
1,499
|
|
2012
|
|
|
1,859
|
|
2013
|
|
|
1,689
|
|
2014
|
|
|
1,396
|
|
Thereafter
|
|
|
4,023
|
|
|
|
$
|
11,724
|
|
Development
Agreement
In
June 2009, the Company 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 MAKOplasty procedures. The R&D Agreement
required an up-front payment of $450,000, and requires future milestone
payments based on development progress. The aggregate milestone payments the
Company is obligated to pay under the R&D Agreement are $1.6 million
assuming the achievement of all development milestones. Through December 31,
97
2009, the
Company paid the $450,000 up-front payment and the Company paid $550,000 of
milestone payments which became due upon the achievement of the related
milestones. The aggregate up-front payment and milestone payments of $2.0
million the Company is 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 the current expectation
that all development milestones will be achieved.
Contingencies
The
Company is a party to legal contingencies or claims arising in the normal
course of business, none of which the Company believes is material to its
financial position, results of operations or cash flows.
8. Preferred Stock and Stockholders Equity
Preferred
Stock
As
of December 31, 2009 and 2008, the Company was authorized to issue
27,000,000 shares of $0.001 par value preferred stock. As of December
31, 2009 and 2008, there were no shares of preferred stock issued or
outstanding. All shares of Series A, B and C redeemable convertible preferred
stock that were issued and outstanding as of December 31, 2007 converted into
10,945,080 shares of common stock upon closing of the Companys IPO in February
2008.
Common
Stock
As
of December 31, 2009 and 2008, the Company was authorized to issue 135,000,000
shares of $0.001 par value common stock. Common stockholders are entitled to
dividends as and if declared by the Board of Directors, subject to the rights
of holders of all classes of stock outstanding having priority rights as to
dividends. There have been no dividends declared to date on the common stock.
The holder of each share of common stock is entitled to one vote.
In
December 2004, the Company issued 189,768 shares of restricted common
stock to certain consultants (the Consultant Restricted Stock). The
Consultant Restricted Stock vested in tranches upon the Companys achievement
of certain business milestones and any unvested restricted stock vested
immediately upon completion of an initial public offering of common stock. Upon
vesting, the Company recorded a consulting expense equal to the estimated fair
value of the Companys common stock on the date of vesting. As of
January 1, 2008, 94,884 shares of the Consultant Restricted Stock
were unvested. Upon closing of the IPO in February 2008, the vesting of the
remaining 94,884 shares of Consultant Restricted Stock was accelerated and the
Company recognized $949,000 of compensation expense associated with the
accelerated vesting of the Consultant Restricted Stock during the year ended
December 31, 2008 based on the IPO price of $10.00 per share.
401K Plan
The
Company maintains a qualified deferred compensation plan under Section 401K of
the Internal Revenue Code, covering substantially all full-time employees,
which permits employees to contribute up to 84% of pre-tax annual compensation
up to annual statutory limitations. The discretionary company match for
employee contributions to the plan is 25% of up to the first 6% of the
participants earnings contributed to the plan. The discretionary company match
commenced in 2008 and to date has not been significant.
Employee Stock
Purchase Plan
In
January 2008, the Companys Board of Directors and stockholders approved the
MAKO Surgical Corp. 2008 Employee Stock Purchase Plan (the 2008 Employee Stock
Purchase Plan). The 2008 Employee Stock Purchase Plan became effective upon
closing of the IPO. The 2008 Employee Stock Purchase Plan authorizes the
issuance of 625,000 shares of the Companys common stock for purchase by
eligible employees of the Company or any of its participating affiliates. The
shares of common stock issuable under the 2008 Employee Stock
98
Purchase Plan
may be authorized but unissued shares, treasury shares or shares purchased on
the open market. The purchase price for a purchase period may not be less than
85% of the fair market value of the Companys common stock on the first trading
day of the applicable purchase period or the last trading day of such purchase
period, whichever is lower. The initial purchase period of the 2008 Employee
Stock Purchase Plan began on October 1, 2008. During the year ended December
31, 2009, the Company issued approximately 72,000 shares under the 2008
Employee Stock Purchase Plan. As of December 31, 2009, there were approximately
553,000 shares reserved for future grant under the 2008 Employee Stock Purchase
Plan.
Stock Option Plans
and Stock-Based Compensation
The
Company recognizes compensation expense for its stock-based awards in
accordance with ASC 718,
Compensation-Stock Compensation
. ASC 718
requires the recognition of compensation expense, using a fair value based
method, for costs related to all stock-based payments including stock options.
ASC 718 requires companies to estimate the fair value of stock-based payment
awards on the date of grant using an option-pricing model.
During
the year ended December 31, 2009, 2008 and 2007, stock-based compensation
expense was $4.0 million, $3.3 million and $1.2 million respectively. Included
within stock-based compensation expense for the year ended December 31, 2009
were $2.9 million related to stock option grants, $982,000 related to the
partial vesting of shares of restricted stock granted to the Companys CEO at
various dates from 2005 through 2009, and $164,000 related to employee stock
purchases under the 2008 Employee Stock Purchase Plan.
In
December 2004, the Companys stockholders approved the Companys 2004 Stock
Incentive Plan (the 2004 Plan). Under the 2004 Plan, the Board of Directors
was authorized to grant restricted common stock and options to purchase shares
of common stock to employees, directors and consultants. No further awards will
be made under the 2004 Plan. In January 2008, the Companys Board of Directors
and stockholders approved the MAKO Surgical Corp. 2008 Omnibus Incentive Plan
(the 2008 Plan, and together with the 2004 Plan, the Plans). The 2008 Plan
became effective upon the closing of the IPO and will expire January 9,
2018 unless earlier terminated by the Board of Directors. The aggregate number
of shares of the Companys common stock that may be issued initially pursuant
to stock awards under the 2008 Plan is 1,084,703 shares, which includes
approximately 85,000 shares previously reserved but unallocated under the 2004
Plan. Awards under the 2008 Plan may be made in the form of: stock options,
which may be either incentive stock options or non-qualified stock options; stock
appreciation rights; restricted stock; restricted stock units; dividend
equivalent rights; performance shares; performance units; cash-based awards;
other stock-based awards, including unrestricted shares; and any combination of
the foregoing.
The
2008 Plan contains an evergreen provision whereby the authorized shares
increase on January 1st of each year in an amount equal to the least of (1)
four percent (4%) of the total number of shares of the Companys common stock
outstanding on December 31st of the preceding year, (2) 2.5 million shares and
(3) a number of shares determined by the Companys Board of Directors that is
lesser than (1) and (2). The number of additional shares authorized under the
2008 Plan on January 1, 2009 and 2010 was approximately 998,000 and 1,330,000,
respectively.
Generally,
the Companys outstanding stock options vest over four years. Stock options
granted to certain non-employee directors generally vest over three years.
Continued vesting typically terminates when the employment or consulting
relationship ends. Vesting generally begins on the date of grant; however,
certain stock options granted in 2007 began vesting upon the achievement of
performance conditions.
Under
the terms of the Plans, the maximum term of options intended to be incentive
stock options granted to persons who own at least 10% of the voting power of
all outstanding stock on the date of grant is 5 years. The maximum term of
all other options is 10 years. Options issued under the 2008 Plan that are
forfeited or expire will again be made available for issuing grants under the
2008 Plan. Options issued under the 2004 Plan that are forfeited or expire will
not be made available for issuing grants under the 2008 Plan. All future awards
will be made under the Companys 2008 Plan.
99
As
of December 31, 2009, the Company had reserved shares of common stock for the
issuance of common stock under the 2008 Employee Stock Purchase Plan, the
exercise of warrants and the issuance of options granted under the 2008 Plan as
follows:
|
|
|
|
|
(in thousands)
|
|
|
|
|
2008 Employee Stock
Purchase Plan
|
|
|
625
|
|
Warrants to purchase
common stock
|
|
|
2,076
|
|
2008 Plan
|
|
|
2,083
|
|
|
|
|
4,784
|
|
Only
employees are eligible to receive incentive stock options. Non-employees may be
granted non-qualified options. The Board of Directors has the authority to set
the exercise price of all options granted, subject to the exercise price of
incentive stock options being no less than 100% of the estimated fair value, as
determined by the Board of Directors, of a share of common stock on the date of
grant; and no less than 85% of the estimated fair value for non-qualified stock
options, except for an employee or non-employee with options who owns more than
10% of the voting power of all classes of stock of the Company, in which case
the exercise price shall be no less than 110% of the fair market value per
share on the grant date. Options become exercisable as determined by the Board
of Directors.
Activity
under the Plans is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
|
|
Outstanding Options
|
|
|
|
Shares/Options
Available
For Grant
|
|
Number of
Options
|
|
Weighted
Average
Exercise
Price
|
|
Balance at December 31, 2008
|
|
|
733
|
|
|
2,193
|
|
|
5.56
|
|
Shares
reserved
|
|
|
998
|
|
|
―
|
|
|
―
|
|
Restricted
stock issued
|
|
|
(100
|
)
|
|
―
|
|
|
―
|
|
Options
granted
|
|
|
(1,482
|
)
|
|
1,482
|
|
|
8.03
|
|
Options
exercised
|
|
|
―
|
|
|
(133
|
)
|
|
1.13
|
|
Options
forfeited under the 2004 Plan
|
|
|
―
|
|
|
(39
|
)
|
|
9.25
|
|
Options
forfeited under the 2008 Plan
|
|
|
25
|
|
|
(25
|
)
|
|
8.30
|
|
Balance at December 31, 2009
|
|
|
174
|
|
|
3,478
|
|
$
|
6.71
|
|
The
options outstanding and exercisable, by exercise price, at December 31,
2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
(in thousands,
except per
share data)
|
|
Number
Of
Options
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value (1)
|
|
Number
Of
Options
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value (1)
|
|
Range of Exercise Prices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.67
|
|
241
|
|
|
|
$
|
0.67
|
|
|
|
|
241
|
|
|
|
$
|
0.67
|
|
|
|
|
$1.27 $2.48
|
|
798
|
|
|
|
$
|
1.72
|
|
|
|
|
680
|
|
|
|
$
|
1.63
|
|
|
|
|
$6.90 $8.06
|
|
1,483
|
|
|
|
$
|
7.94
|
|
|
|
|
282
|
|
|
|
$
|
7.98
|
|
|
|
|
$8.27 11.39
|
|
956
|
|
|
|
$
|
10.49
|
|
|
|
|
383
|
|
|
|
$
|
10.57
|
|
|
|
|
|
|
3,478
|
|
7.82
|
|
$
|
6.71
|
|
$
|
15,271
|
|
1,586
|
|
6.80
|
|
$
|
4.77
|
|
$
|
10,041
|
|
100
|
|
(1)
|
The
aggregate intrinsic value represents the total pre-tax intrinsic value, based
on the Companys closing stock price of $11.10 on December 31, 2009, which
would have been received by the option holders had all option holders
exercised their options as of that date.
|
As
of December 31, 2009, approximately 3,390,000 options were vested and expected
to vest at a weighted average exercise price of $6.67 per share, a weighted
average contractual life of 7.8 years and aggregate intrinsic value of $15.0
million.
The
weighted average fair values of options granted were $4.43, $5.08 and $4.54 for
the years ended December 31, 2009, 2008 and 2007, respectively. The total fair
value of shares vested was approximately $2.8 million, $1.3 million and
$260,000 during the years ended December 31, 2009, 2008 and 2007, respectively.
The total intrinsic value of options exercised was $1.0 million and $491,000
for the years ended December 31, 2009 and 2008. The total intrinsic value of
options exercised was not significant for the year ended December 31, 2007.
The
Company records stock-based compensation expense on a straight-line basis over
the vesting period. As of December 31, 2009, there was total unrecognized
compensation cost of approximately $7.9 million, net of estimated forfeitures,
related to non-vested stock option grants to the Companys employees and
non-employee directors. The unrecognized compensation cost will be adjusted for
future changes in estimated forfeitures, and is expected to be recognized over
a remaining weighted average period of 2.8 years as of December 31, 2009.
On
May 22, 2009, the Company issued 100,000 shares of restricted stock to its
CEO at an estimated fair value of $8.70 per share on the date of issuance. The
restricted stock will vest over a four-year period. For the year ended December
31, 2009, 56,045 shares of common stock were surrendered by the CEO to the
Company to cover payroll taxes associated with the taxable income from the
vesting of restricted stock previously granted to the Companys CEO. As of
December 31, 2009, 755,105 shares of restricted stock granted to the
Companys CEO were issued and outstanding.
Restricted
stock activity for the year ended December 31, 2009 is as follows:
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
Shares
|
|
Weighted Average
Fair Value
|
|
Unvested
shares at December 31, 2008
|
|
267
|
|
$
|
7.78
|
|
Unvested
shares at December 31, 2009
|
|
222
|
|
|
8.86
|
|
Shares
granted in 2009
|
|
100
|
|
|
8.70
|
|
Shares
vested in 2009
|
|
145
|
|
|
6.77
|
|
As
of December 31, 2009, the remaining stock-based compensation expense for
the restricted stock awards was approximately $2.0 million, which will be
recognized on a straight line basis over a remaining weighted average period of
2.30 years.
The
Company uses the Black-Scholes-Merton pricing model to determine the fair value
of stock options. The determination of the fair value of stock-based payment
awards on the date of grant using a pricing model is affected by our stock
price as well as assumptions regarding a number of complex and subjective
variables. These variables include our expected stock price volatility over the
term of the awards, actual and projected employee stock option exercise
behaviors, risk-free interest rates and expected dividends.
101
The
estimated grant date fair values of the employee stock options were calculated
using the Black-Scholes-Merton valuation model, based on the following
assumptions:
|
|
|
|
|
|
|
Stock Option Plans
|
|
Years Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
Risk-free
interest rate
|
|
1.99% - 3.53%
|
|
1.59% - 3.62%
|
|
4.50% - 5.14%
|
Expected
life
|
|
6.25 years
|
|
6.25 years
|
|
6.25 years
|
Expected
dividends
|
|
―
|
|
―
|
|
―
|
Expected
volatility
|
|
54.43% - 57.71%
|
|
56.36% - 58.31%
|
|
56.24% - 60.00%
|
The
Company estimates the fair value of each share of stock which will be issued
under the 2008 Employee Stock Purchase Plan based upon its stock prices at the
beginning of each offering period using a Black-Scholes-Merton pricing model
and amortizes that value to expense over the plan purchase period. The fair
values determined for the years ended December 31, 2009 and 2008, as well
as the assumptions used in calculating those values are as follows:
|
|
|
|
|
|
|
2008 Employee Stock Purchase Plan
|
|
|
|
Year Ended
December 31,
|
|
Year Ended
December 31,
|
|
|
|
|
2009
|
|
2008
|
Fair Value
|
|
|
|
$1.82 - $2.54
|
|
$1.82 - $1.89
|
Assumptions
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
|
0.60% - 3.20%
|
|
1.87% - 3.29%
|
Expected life
|
|
|
|
0.25 years
|
|
0.25 years
|
Expected dividends
|
|
|
|
―
|
|
―
|
Expected volatility
|
|
|
|
34.50% - 60.68%
|
|
57.05% - 60.68%
|
Risk-Free
Interest Rate.
The risk-free rate is based on U.S.
Treasury zero-coupon issues with remaining terms similar to the expected term
on the options.
Weighted-Average
Expected Term.
The expected term of options granted is
determined using the average period the stock options are expected to remain
outstanding and is based on the options vesting term, contractual terms and
historical exercise and vesting information used to develop reasonable
expectations about future exercise patterns and post-vesting employment
termination behavior. The expected term of the 2008 Employee Stock Purchase
Plan is equal to the duration of the purchase period.
Dividend Yield.
The Company has never declared or paid any cash dividends and does not plan to
pay cash dividends in the foreseeable future, and, therefore, used an expected
dividend yield of zero in the valuation model.
Volatility.
Since the Company was a private entity until February 2008 with no historical
data regarding the volatility of its common stock, the expected volatility used
for the years ended December 31, 2009, 2008 and 2007, is based on
volatility of similar entities, referred to as guideline companies. In
evaluating similarity, the Company considered factors such as industry, stage
of life cycle and size.
Forfeitures.
ASC 718 requires the Company to estimate forfeitures at the time of grant, and
revise those estimates in subsequent periods if actual forfeitures differ from
those estimates. The Company uses historical data to estimate pre-vesting
option forfeitures and records stock-based compensation expense only for those
awards that are expected to vest. All stock-based payment awards are amortized
on a straight-line basis over the requisite service periods of the awards,
which are generally the vesting periods. If the Companys actual forfeiture
rate is materially different from its estimate, the stock-based compensation
expense could be significantly different from what the Company has recorded in
the accompanying periods.
102
Warrants
In
December 2004, the Company issued at the purchase price of $0.03 per share
warrants to purchase 462,716 shares of common stock. The warrants are
immediately exercisable at an exercise price of $3.00 per share, with the
exercise period expiring in December 2014. As of December 31, 2009 and
2008, 451,916 and 462,716 warrants were outstanding and exercisable,
respectively.
As
more fully described in Note 5, in October 2008, the Company entered into a
Securities Purchase Agreement for an equity financing of up to $60 million,
with initial gross proceeds of approximately $40.2 million, and conditional
access to an additional $20 million. In connection with the financing, the
Company 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. The warrants became exercisable on April 29,
2009 and have a seven-year term. In addition, as consideration for the Call
Right, the Company 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 participating investors. These warrants became exercisable on December
31, 2009 and have a seven-year term.
9. Income Taxes
The
provision for income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Years Ended
|
|
|
|
December 31,
2009
|
|
December 31,
2008
|
|
December 31,
2007
|
|
Current
income taxes:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
―
|
|
$
|
―
|
|
$
|
―
|
|
State
|
|
|
―
|
|
|
―
|
|
|
―
|
|
Total
current income taxes
|
|
|
―
|
|
|
―
|
|
|
―
|
|
Deferred
income taxes
|
|
|
(12,593
|
)
|
|
(13,031
|
)
|
|
(7,835
|
)
|
Change in valuation allowance
|
|
|
12,593
|
|
|
13,031
|
|
|
7,835
|
|
Provision
for income taxes
|
|
$
|
―
|
|
$
|
―
|
|
$
|
―
|
|
The
Company accounts for income taxes under ASC 740,
Income Taxes
. Deferred
income taxes are determined based upon differences between financial reporting
and income tax bases of assets and liabilities and are measured using the
enacted income tax rates and laws that will be in effect when the differences
are expected to reverse. The Company recognizes any interest and penalties
related to unrecognized tax benefits as a component of income tax expense.
No
current or deferred income taxes were recorded for the years ended
December 31, 2009, 2008 and 2007, as the Companys income tax benefits
were fully offset by a corresponding increase to the valuation allowance
against its net deferred income tax assets.
At
December 31, 2009, 2008 and 2007, the Company had federal and state net
operating loss carryforwards of approximately $100.2 million, $60 million and
$32.9 million, respectively, available to offset future taxable income. These
net operating loss carryforwards will expire in varying amounts from 2024
through 2029.
The
Tax Reform Act of 1986 limits the annual utilization of net operating loss and
tax credit carryforwards, following an ownership change of the Company. Note
that as a result of the Companys equity financings in 2008, the Company
underwent a change of ownership for purposes of the Tax Reform Act during the
tax year ended December 31, 2008.
103
Deferred
income taxes reflect the net tax effect of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Companys net deferred income taxes are as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
Current
deferred income tax assets:
|
|
|
|
|
|
|
|
Deferred
revenue
|
|
$
|
212
|
|
$
|
4,443
|
|
Total
current deferred income tax assets
|
|
|
212
|
|
|
4,443
|
|
|
|
|
|
|
|
|
|
Noncurrent
deferred income tax assets:
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
|
38,650
|
|
|
23,144
|
|
Amortization
|
|
|
404
|
|
|
322
|
|
Other
|
|
|
481
|
|
|
656
|
|
Total
noncurrent deferred income tax assets
|
|
|
39,535
|
|
|
24,122
|
|
|
|
|
|
|
|
|
|
Current
deferred income tax liabilities:
|
|
|
|
|
|
|
|
Other
deferred income tax liabilities
|
|
|
(2
|
)
|
|
―
|
|
Deferred
costs
|
|
|
―
|
|
|
(1,392
|
)
|
Total
current deferred income tax liabilities
|
|
|
(2
|
)
|
|
(1,392
|
)
|
|
|
|
|
|
|
|
|
Noncurrent
deferred income tax liabilities:
|
|
|
|
|
|
|
|
Other
deferred income tax liabilities
|
|
|
―
|
|
|
(21
|
)
|
Total
noncurrent deferred income tax liabilities
|
|
|
―
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
Less
valuation allowance
|
|
|
(39,745
|
)
|
|
(27,152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deferred income tax assets, net
|
|
$
|
―
|
|
$
|
―
|
|
Due
to uncertainty surrounding realization of the deferred income tax assets in
future periods, the Company has recorded a 100% valuation allowance against its
net deferred tax assets. If it is determined in the future that it is more
likely than not that the deferred income tax assets are realizable, the valuation
allowance will be reduced.
The
reconciliation of the income tax provision computed at the U.S. federal
statutory rate to income tax provision is as follows:
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
2009
|
|
December 31,
2008
|
|
December 31,
2007
|
|
|
|
|
|
|
|
|
|
Tax at U.S.
statutory rate
|
|
(35.00
|
)%
|
(35.00
|
)%
|
(35.00
|
)%
|
State taxes,
net of federal impact
|
|
(3.28
|
)%
|
(3.26
|
)%
|
(3.55
|
)%
|
Non-deductible
items
|
|
2.92
|
%
|
3.13
|
%
|
0.28
|
%
|
Change in
valuation allowance
|
|
35.13
|
%
|
35.14
|
%
|
37.93
|
%
|
Other, net
|
|
0.23
|
%
|
(0.01
|
)%
|
0.34
|
%
|
Effective
income tax rate
|
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
In accordance
with ASC 740, the Company has decided to classify any interest and penalties as
a component of income tax expense. To date, there have been no interest or
penalties charged to the Company in relation to the
104
underpayment of income taxes. The Companys primary tax
jurisdictions are the United States, Florida, California, Rhode Island, Ohio,
New York, Georgia, Texas, Illinois, North Carolina, Pennsylvania, Maryland,
Colorado, Oklahoma, Washington, West Virginia, Wisconsin, Michigan, Mississippi
and Tennessee. The tax years from 2005 through 2009 remain open and are subject
to examination by the appropriate governmental agencies.
10. Selected Quarterly Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
2009
|
|
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
Revenue
|
|
$
|
3,727
|
|
$
|
14,904
|
|
$
|
6,726
|
|
$
|
8,851
|
|
Gross profit (loss)
|
|
|
655
|
|
|
4,622
|
|
|
2,765
|
|
|
4,462
|
|
Loss from operations
|
|
|
(9,107
|
)
|
|
(6,491
|
)
|
|
(9,498
|
)
|
|
(9,356
|
)
|
Net loss
|
|
|
(8,885
|
)
|
|
(6,424
|
)
|
|
(9,439
|
)
|
|
(9,275
|
)
|
Net loss attributable to common stockholders
|
|
|
(8,885
|
)
|
|
(6,424
|
)
|
|
(9,439
|
)
|
|
(9,275
|
)
|
Net loss per share basic and diluted attributable to common
stockholders
|
|
|
(0.36
|
)
|
|
(0.26
|
)
|
|
(0.33
|
)
|
|
(0.28
|
)
|
Revenue
for the first and second quarter of 2009 includes approximately $2.5 million
and $8.8 million, respectively, of revenue from previously deferred unit sales
of our TGS. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
2008
|
|
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
Revenue
|
|
$
|
498
|
|
$
|
704
|
|
$
|
777
|
|
$
|
965
|
|
Gross profit (loss)
|
|
|
128
|
|
|
224
|
|
|
(584
|
)
|
|
(270
|
)
|
Loss from operations
|
|
|
(8,552
|
)
|
|
(7,805
|
)
|
|
(10,443
|
)
|
|
(11,160
|
)
|
Net loss
|
|
|
(8,501
|
)
|
|
(7,565
|
)
|
|
(10,202
|
)
|
|
(10,814
|
)
|
Net loss attributable to common stockholders
|
|
|
(9,066
|
)
|
|
(7,565
|
)
|
|
(10,202
|
)
|
|
(10,814
|
)
|
Net loss per share basic and diluted
attributable to common stockholders
|
|
|
(0.95
|
)
|
|
(0.42
|
)
|
|
(0.56
|
)
|
|
(0.48
|
)
|
11. Subsequent Event
In
February 2010, the Company completed the acquisition of substantially all of
the intellectual property portfolio of Z-Kat. The terms of the Asset Purchase
Agreement between the Company and Z-Kat (the Asset Purchase Agreement)
terminated the Companys prior licenses with Z-Kat, including Z-Kats
nonexclusive sublicense to the Companys intellectual property portfolio, and
transferred to the Company ownership rights to certain intellectual property
assets for core technologies in CAS, haptics and robotics, including U.S. and
foreign patents and patent applications, proprietary software and documentation,
trade secrets and trademarks owned by Z-Kat, and certain contractual and other
rights to patents, patent applications and other intellectual property licensed
to Z-Kat under licenses. In connection with the acquisition, the Company also
entered into a new license agreement with Z-Kat (the License Agreement)
pursuant to which the Company obtained an exclusive worldwide, fully
transferable, perpetual, royalty-free and fully paid-up sublicense to certain
intellectual property for technologies in CAS licensed by Z-Kat. This new
License Agreement expands the Companys rights in this intellectual property
from the field of orthopedics to the medical field generally. Certain of the
Companys rights under the Asset Purchase Agreement and License Agreement remain
subject to any prior license granted by Z-Kat, including the license to Biomet
Manufacturing Corp. In consideration for consummation of the transactions
105
contemplated
by the Asset Purchase Agreement and License Agreement, the Company issued
230,458 shares of its unregistered common stock to Z-Kat in a private
placement. The Asset Purchase Agreement and License Agreement, the entry into
which was deemed to be a related party transaction as certain directors and
executive officers of the Company have a material interest in Z-Kat by virtue
of their ownership of Z-Kat stock, were approved by the board of directors and
audit committee of the Company.
|
|
I
TEM 9.
|
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|
None.
|
|
ITEM 9A.
|
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 December
31, 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 December 31, 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.
Managements Report on Internal Control Over
Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is
defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Securities
Exchange Act of 1934, as amended, as a process designed by, or under the supervision
of, a companys principal executive and financial officers, or the certifying
officers, and effected by a companys board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Internal
control over financial reporting includes policies and procedures that pertain
to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of our assets; provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
our financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made only in
accordance with the authorization of our board of directors and management; and
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a
material effect on our financial statements.
Under
the supervision and with the participation of our management, including the
certifying officers, we conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the criteria established in
Internal Control Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on this evaluation
under the criteria established in Internal Control Integrated Framework, our
management concluded that our internal control over financial reporting was
effective as of December 31, 2009. Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject
106
to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
The
effectiveness of our internal control over financial reporting as of December
31, 2009 has been audited by our independent registered public account firm, as
stated in their report, which is included herein.
During
the most recently completed fiscal quarter, there was no change in our internal
control over financial reporting that has materially affected or is reasonably
likely to materially affect, our internal control over financial reporting.
|
|
ITEM 9B.
|
OTHER INFORMATION
|
None
107
P
ART III.
|
|
I
TEM 10.
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The
information required by this item will be contained under the following
headings in our definitive proxy statement to be filed in connection with our
2010 annual meeting of stockholders and, upon filing with the SEC, will be
incorporated herein by reference:
|
|
|
|
|
Section
16(a) Beneficial Ownership Reporting Compliance
|
|
|
|
|
|
Election of
Directors
|
|
|
|
|
|
Board of
Directors and Corporate Governance
|
|
|
|
|
|
Executive
Officers
|
|
|
I
TEM 11.
|
EXECUTIVE COMPENSATION
|
The
information required by this item will be contained under the following
headings in our definitive proxy statement to be filed in connection with our
2010 annual meeting of stockholders and, upon filing with the SEC, will be
incorporated herein by reference:
|
|
|
|
|
Director
Compensation
|
|
|
|
|
|
Compensation
Discussion and Analysis
|
|
|
|
|
|
Compensation
Committee Report
|
|
|
|
|
|
Executive
Compensation
|
|
|
I
TEM 12.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|
The
information required by this item will be contained under the following heading
in our definitive proxy statement to be filed in connection with our 2010
annual meeting of stockholders and, upon filing with the SEC, will be
incorporated herein by reference:
The
information under Item 5. Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity SecuritiesEquity
Compensation Plan Information in this annual report on Form 10-K is also
incorporated herein by reference.
|
|
I
TEM 13.
|
CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS
AND DIRECTOR INDEPENDENCE
|
The
information required by this item will be contained under the following heading
in our definitive proxy statement to be filed in connection with our 2010
annual meeting of stockholders and, upon filing with the SEC, will be
incorporated herein by reference:
|
|
|
|
|
Board of
Directors and Corporate Governance Independent Directors
|
|
|
|
|
|
Certain
Relationships and Related Person Transactions
|
108
|
|
I
TEM 14.
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES
|
The
information required by this item will be contained under the following heading
in our definitive proxy statement to be filed in connection with our 2010
annual meeting of stockholders and, upon filing with the SEC, will be
incorporated herein by reference:
|
|
|
|
|
Ratification
of the Appointment of Ernst & Young LLP as Independent Registered Public
Accounting Firm
|
109
P
ART IV
|
|
I
TEM 15.
|
EXHIBITS, FINANCIAL STATEMENTS and
FINANCIAL STATEMENT SCHEDULES
|
|
|
|
(a) The
following documents are filed as a part of this Annual Report on Form 10-K:
|
|
|
|
1.
Financial Statements
|
|
|
|
See Item 8,
Financial Statements and Supplementary Data,
Index to Financial Statements
.
|
|
|
|
2.
Financial Statement Schedules
|
|
|
No
financial statement schedules are provided because the information called for
is not required or is shown either in the financial statements or the notes
thereto.
|
|
|
|
(b)
Exhibits
|
|
|
|
|
Exhibit
No.
|
|
Description
|
|
|
|
|
|
3.1
|
|
Third
Amended and Restated Certificate of Incorporation of the Registrant, dated
February 20, 2008 (2)
|
|
|
|
3.2
|
|
Fourth
Amended and Restated Bylaws of the Registrant effective October 31, 2008 (6)
|
|
|
|
4.1
|
|
Securities
Purchase Agreement by and among the Registrant and Investors named therein,
dated as of October 28, 2008 (6)
|
|
|
|
4.2
|
|
Form of
Warrant (6)
|
|
|
|
4.3
|
|
Form of Call
Warrant (6)
|
|
|
|
4.4
|
|
Form of Call
Exercise Warrant (6)
|
|
|
|
10.1
|
|
Form of
Indemnity Agreement for Directors and Executive Officers (3)
|
|
|
|
10.2+
|
|
2004 Stock
Incentive Plan and forms of agreements related thereto (3)
|
|
|
|
10.3+
|
|
2008 Omnibus
Incentive Plan (3)
|
|
|
|
10.4+
|
|
2008
Employee Stock Purchase Plan (3)
|
|
|
|
10.5+
|
|
Amended
Employment Agreement, dated as of November 12, 2007, by and between
Registrant and Maurice R. Ferré, M.D (3)
|
|
|
|
10.6+
|
|
Employment
Agreement, dated as of January 1, 2005, by and between Registrant and
Rony Abovitz (3)
|
|
|
|
10.7+
|
|
Amendment to
Employment Agreement, dated as of February 5, 2007, by and between
Registrant and Rony Abovitz (3)
|
|
|
|
10.8
|
|
Multi-Tenant
Lease, by and between Registrant and Westport Business Park Associates LLP,
last dated January 31, 2006 (3)
|
|
|
|
10.9+
|
|
Form of
Incentive Stock Option Agreement related to the 2008 Omnibus Incentive Plan (4)
|
|
|
|
10.10+
|
|
Employment
Agreement between Registrant and Duncan Moffat, effective as of April 28,
2008 (5)
|
|
|
|
10.11+
|
|
Form of
Non-Qualified Stock Option Agreement related to the 2008 Omnibus
|
110
|
|
|
|
|
Incentive
Plan (5)
|
|
|
|
10.12+
|
|
Form of
Restricted Stock Unit Agreement related to the 2008 Omnibus Incentive Plan (5)
|
|
|
|
10.13+
|
|
Form of
Subscription Agreement related to the 2008 Employee Stock Purchase Plan (5)
|
|
|
|
10.14+
|
|
2009
Leadership Cash Bonus Plan (7)
|
|
|
|
10.15+
|
|
2009
Performance Bonus Plan for S. Nunes SVP of Sales & Marketing (7)
|
|
|
|
10.16+
|
|
Amendment to
Amended Employment Agreement by and between Registrant and Maurice R. Ferré,
M.D., effective February 13, 2009 (8)
|
|
|
|
10.17+
|
|
Amended and
Restated Employment Agreement by and between Registrant and Fritz L. LaPorte,
effective February 13, 2009 (8)
|
|
|
|
10.18+
|
|
Amended and
Restated Employment Agreement by and between Registrant and Menashe R. Frank,
effective February 13, 2009 (8)
|
|
|
|
10.19+
|
|
Amended and
Restated Employment Agreement by and between Registrant and Steven J. Nunes,
effective February 13, 2009 (8)
|
|
|
|
10.20+
|
|
Employment
Agreement by and between Registrant and Ivan Delevic, effective April 27,
2009 (9)
|
|
|
|
10.21+
|
|
2010
Leadership Cash Bonus Plan (10)
|
|
|
|
10.22+
|
|
2010
Performance Bonus Plan for S. Nunes SVP of Sales & Marketing (10)
|
|
|
|
10.23+
|
|
Second
Amendment to Amended Employment Agreement by and between Registrant and
Maurice R. Ferré, M.D., effective February 17, 2010 (10)
|
|
|
|
23
|
|
Consent of
Ernst & Young LLP, Independent Registered Public Accounting Firm (1)
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange
Act (1)
|
|
|
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange
Act (1)
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer pursuant to18 U.S.C. §1350 (1)
|
|
|
|
32.2
|
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. §1350 (1)
|
|
|
|
99.1
|
|
Registration
Rights Agreement by and between Registrant and Z-Kat, Inc. dated February 25,
2010 (1)
|
|
|
(1)
|
Filed
herewith
|
|
|
(2)
|
Incorporated
by reference to Registrants Annual Report on Form 10-K for the period ended December 31, 2007 filed with the SEC on
March 31, 2008
|
|
|
(3)
|
Incorporated
by reference to Registrants Registration Statement on Form S-1, as amended,
filed with the SEC on September 19, 2007 (Registration No. 333-146162)
|
|
|
(4)
|
Incorporated
by reference to Registrants Current Report on Form 8-K filed with the SEC on
February 26, 2008
|
|
|
(5)
|
Incorporated
by reference to Registrants Current Report on Form 8-K filed with the SEC on
April 29, 2008
|
|
|
(6)
|
Incorporated
by reference to Registrants Current Report on Form 8-K filed with the SEC on
October 30, 2008
|
111
|
|
(7)
|
Incorporated
by reference to Registrants Current Report on Form 8-K filed with the SEC on
February 13, 2009
|
|
|
(8)
|
Incorporated
by reference to Registrants Current Report on Form 8-K filed with the SEC on
February 20, 2009
|
|
|
(9)
|
Incorporated
by reference to Registrants Current Report on Form 8-K filed with the SEC on
April 28, 2009
|
|
|
(10)
|
Incorporated
by reference to Registrants Current Report on Form 8-K filed with the SEC on
February 23, 2010
|
|
|
+
|
Indicates
management contract or compensatory plan.
|
112
S
IGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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.
|
|
|
|
|
By:
|
/s/ Maurice
R. Ferré, M.D.
|
|
|
|
President,
Chief Executive Officer
|
|
|
|
and Chairman
of the Board
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
Dated:
March 10, 2010
|
|
|
|
|
|
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ Maurice
R. Ferré, M.D.
|
|
President,
Chief Executive Officer and Chairman of the Board (Principal Executive
Officer)
|
|
March 10, 2010
|
Maurice R.
Ferré, M.D.
|
|
|
|
|
|
|
|
/s/ Fritz L. LaPorte
|
|
Senior Vice
President of Finance and Administration, Chief Financial Officer and
Treasurer (Principal Accounting and Financial Officer)
|
|
March 10, 2010
|
Fritz L. LaPorte
|
|
|
|
|
|
|
|
/s/ S. Morry
Blumenfeld, Ph.D.
|
|
Director
|
|
March 10, 2010
|
S. Morry
Blumenfeld, Ph.D.
|
|
|
|
|
|
|
|
|
|
/s/ Marcelo G. Chao
|
|
Director
|
|
March 10, 2010
|
Marcelo G. Chao
|
|
|
|
|
|
|
|
|
|
/s/
Christopher C. Dewey
|
|
Director
|
|
March 10, 2010
|
Christopher
C. Dewey
|
|
|
|
|
|
|
|
|
|
/s/ Charles
W. Federico
|
|
Director
|
|
March 10, 2010
|
Charles W.
Federico
|
|
|
|
|
|
|
|
|
|
/s/ John G.
Freund, M.D.
|
|
Director
|
|
March 10, 2010
|
John G.
Freund, M.D.
|
|
|
|
|
|
|
|
|
|
/s/ Frederic
H. Moll, M.D.
|
|
Director
|
|
March 10, 2010
|
Frederic H.
Moll, M.D.
|
|
|
|
|
|
|
|
|
|
/s/ William
D. Pruitt
|
|
Director
|
|
March 10, 2010
|
William D.
Pruitt
|
|
|
|
|
|
|
|
|
|
/s/ John J.
Savarese, M.D.
|
|
Director
|
|
March 10, 2010
|
John J.
Savarese, M.D.
|
|
|
|
|
113
E
XHIBIT INDEX
|
|
|
|
Exhibit
No.
|
|
Description
|
|
23
|
|
Consent of
Ernst & Young LLP, Independent Public Registered Accounting Firm
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act
|
|
|
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer pursuant to18 U.S.C. §1350
|
|
|
|
32.2
|
|
Certification
of Chief Financial Officer pursuant to18 U.S.C. §1350
|
|
|
|
99.1
|
|
Registration
Rights Agreement by and between Registrant and Z-Kat, Inc. dated February 25,
2010
|
114
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