Table of Contents
Research and
Development
. Research and development
expense was $15.0 million for the year ended December 31, 2010, compared
to $13.1 million for the year ended December 31, 2009. The increase of
$1.9 million, or 14%, 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, including our hip MAKOplasty
application and associated implant systems. We expect our research and
development expense to increase as we continue to expand our research and
development activities, including the support of existing products and the
research of potential future products, including our hip MAKOplasty application
and associated implant systems.
Depreciation
and Amortization
. Depreciation and amortization
expense was $3.0 million for the year ended December 31, 2010, compared to $2.0
million for the year ended December 31, 2009. The increase of $1.0 million, or
56%, was primarily due to an increase in depreciation of property and equipment
as a result of purchases made during 2010 and 2009 due to the growth in our
business, the expansion of our facilities in 2010 to accommodate an increase in
employees necessary to support such growth.
Interest and
Other Income
. Interest and other income was
$317,000 for the year ended December 31, 2010, compared to $432,000 for the
year ended December 31, 2009. The decrease of $115,000, or 27%, was primarily
due to lower yields realized on our cash, cash equivalents and investments for
the year ended December 31, 2010 compared with the same period of 2009 which is
attributable to a cash investment strategy which emphasizes the security of the
principal invested and fulfillment of liquidity needs.
Income Taxes
. No
federal income taxes were recognized for the year ended December 31, 2010 and
2009, due to net operating losses in each period. State and local income taxes
were $68,000 for the year ended December 31, 2010, compared to $56,000 for the
year ended December 31, 2009. Income taxes recognized to date have not been
significant due to net operating losses we have incurred in each period since
our inception in November 2004. In addition, no current or deferred income
taxes were recorded for the years ended December 31, 2010 and 2009, as all
income tax benefits were fully offset by a valuation allowance against our net
deferred income tax assets.
Year
Ended December 31, 2009 Compared to the Year Ended December 31, 2008
Revenue
.
Revenue was $34.2 million for the year ended December 31, 2009, compared to
$2.9 million for the year ended December 31, 2008. The increase in revenue of
$31.3 million was primarily due to $14.7 million of revenue from 19 unit sales
of our RIO system and the recognition of approximately $11.3 million of revenue
from 17 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. Prior to 2009, recognized revenue was primarily
generated from the sale of implants and disposable products utilized in knee
MAKOplasty procedures. Total revenue was also positively impacted by a $5.1
million increase in procedure revenue attributable to an increase in knee
MAKOplasty procedures performed during the year ended December 31, 2009 as
compared with the year ended December 31, 2008. There were 1,602 knee
MAKOplasty procedures performed during the year ended December 31, 2009
compared to 601 knee MAKOplasty procedures performed during year ended December
31, 2008.
Cost of Revenue
.
Cost of revenue was $21.5 million for the year ended December 31, 2009,
compared to $3.3 million for the year ended December 31, 2008. The increase in
cost of revenue of $18.2 million was primarily due to the cost of revenue from
19 unit sales of our RIO system, the recognition of the direct cost of revenue
from 17 previously deferred unit sales of our TGS, including the cost of
providing the RIO system upgrades, as described in the Critical Accounting
Policies and Significant Judgments and Estimates section above, and an
increase in knee MAKOplasty procedures performed.
Selling,
General and Administrative
. Selling, general and
administrative expense was $32.1 million for the year ended December 31, 2009,
compared to $23.3 million for the year ended December 31, 2008. The increase of
$8.8 million, or 38%, was primarily due to an increase in sales, marketing and
operations costs
75
Table of Contents
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.
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.
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 federal income taxes were recognized for the year ended December 31, 2009
and 2008, due to net operating losses in each period. State and local income
taxes were $56,000 for the year ended December 31, 2009. Income taxes
recognized to date have not been significant due to net operating losses we
have incurred in each period since our inception in November 2004. 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.
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
Change
|
|
2009
|
|
Change
|
|
2008
|
|
Cash and cash equivalents
|
|
$
|
27,108
|
|
$
|
9,949
|
|
|
17,159
|
|
$
|
(45,388
|
)
|
$
|
62,547
|
|
Short-term investments
|
|
|
46,401
|
|
|
1,715
|
|
|
44,686
|
|
|
43,609
|
|
|
1,077
|
|
Long-term investments
|
|
|
23,283
|
|
|
13,915
|
|
|
9,368
|
|
|
9,368
|
|
|
―
|
|
Total cash, cash equivalents, and investments
|
|
$
|
96,792
|
|
$
|
25,579
|
|
$
|
71,213
|
|
$
|
7,589
|
|
$
|
63,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in operating activities
|
|
$
|
(30,292
|
)
|
$
|
15,280
|
|
$
|
(45,572
|
)
|
$
|
(15,752
|
)
|
$
|
(29,820
|
)
|
Cash used in investing activities
|
|
|
(20,076
|
)
|
|
34,104
|
|
|
(54,180
|
)
|
|
(50,631
|
)
|
|
(3,549
|
)
|
Cash provided by financing activities
|
|
|
60,317
|
|
|
5,953
|
|
|
54,364
|
|
|
(31,937
|
)
|
|
86,301
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
9,949
|
|
$
|
55,337
|
|
$
|
(45,388
|
)
|
$
|
(98,320
|
)
|
$
|
52,932
|
|
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, 2010, we
had an accumulated deficit of $152.9 million and have financed our
operations principally through the sale of our equity securities.
76
Table of Contents
In
November 2010, we completed a public offering of our common stock, issuing
6,325,000 shares at a price per share of $9.44, resulting in net proceeds of
approximately $59.3 million, after expenses.
As
of December 31, 2010, we had approximately $96.8 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, inventory write-downs and property and equipment
write-downs. For the year ended December 31, 2010, inventory write-downs of
$1.7 million and property and equipment write-downs of $1.2 million were
incurred primarily due to the write-off of excess RESTORIS Classic implants and
instrumentation as discussed in Factors Which May Influence Future Results of
Operations above. Net cash used in operating activities was also affected by
changes in operating assets and liabilities. Included in changes in operating
assets and liabilities for the year ended December 31, 2010 are approximately
$6.1 million of increases to inventory necessitated by increased sales of
implants and disposable products to support the growth of knee MAKOplasty and
preparation for the anticipated launch of our hip MAKOplasty application, $5.0
million of increases to accounts receivable due to increased sales in 2010,
which was partially offset by $4.0 million of increases to other accrued
liabilities and accrued compensation and employee benefits. 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 17 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 fourth quarter of 2009 as
compared to the fourth quarter of 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, 2010 was
primarily attributable to the purchase of investments of $65.8 million and
purchases of property and equipment of $2.6 million, which was partially offset
by proceeds of $49.7 million from sales and maturities of investments.
Purchases of investments in 2010 were primarily driven by net proceeds of $59.3
million received in a public offering of our common stock in November 2010. 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 Provided by
Financing Activities
Net
cash provided by our financing activities for the year ended December 31, 2010
was primarily attributable to net proceeds of $59.3 million received in public
offering of our common stock in November 2010. Net cash provided by our
financing activities for the year ended December 31, 2009 was primarily
attributable to net proceeds of $54.3 million received in connection with our
equity financing in August 2009.
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,
continue to commercialize our RIO system and RESTORIS MCK multicompartmental
knee implant system, continue research and development of existing and future
products, including our hip
77
Table of Contents
MAKOplasty
application and associated implant systems, and continue development of the
corporate infrastructure required to sell and market our products and support
operations. We also expect to experience increased cash requirements for
inventory and property and equipment in conjunction with the continued
commercialization of our RESTORIS MCK multicompartmental knee implant system
and our RIO system and introducing other potential future applications,
including our hip MAKOplasty application and associated implant systems.
In
executing our current business plan, we believe our existing cash, cash
equivalents and investment balances, and interest income we earn on these
balances will be sufficient to meet our anticipated cash requirements 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, 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
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 existing products as well as future 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 future
unknown impact of recently enacted healthcare legislation;
|
|
|
|
|
|
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
|
|
|
|
|
|
general
economic conditions and interest rates.
|
Contractual Obligations
The
following table summarizes our outstanding contractual obligations as of
December 31, 2010 and the effect those obligations are expected to have on
our liquidity and cash flows in future periods:
78
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Payment
Due by Period
|
|
|
|
|
|
December
31,
|
|
After
|
|
|
Total
|
|
2011
|
|
2012-2013
|
|
2014-2015
|
|
2015
|
|
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum royalty payments
licenses
|
|
$
|
14,150
|
|
$
|
1,069
|
|
$
|
3,538
|
|
$
|
4,068
|
|
$
|
5,475
|
|
Operating lease real
estate
|
|
|
5,823
|
|
|
290
|
|
|
689
|
|
|
1,161
|
|
|
3,683
|
|
Purchase commitments and
obligations
|
|
|
8,005
|
|
|
8,005
|
|
|
―
|
|
|
―
|
|
|
―
|
|
Development agreement
obligations
|
|
|
1,000
|
|
|
750
|
|
|
250
|
|
|
―
|
|
|
―
|
|
Total
|
|
$
|
28,978
|
|
$
|
10,114
|
|
$
|
4,477
|
|
$
|
5,229
|
|
$
|
9,158
|
|
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
operating leases relate to the lease for our headquarters in
Fort Lauderdale, Florida. 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 development agreements as discussed in Item 8, Financial
Statements and Supplementary Data, Notes 5 and 7 to the Financial Statements.
Off-Balance Sheet Arrangements
We
do not have any off-balance sheet arrangements.
|
|
ITE
M 7A.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Our
exposure to market risk is confined to our cash, cash equivalents, investments
and exchange rate risk on international sales. 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 or exchange rate risk. We do not believe that a variation in market
rates of interest would significantly impact the value of our investment
portfolio. We do not believe that a variation in the value of the U.S. dollar
relative to foreign currencies would significantly impact our results of
operations.
79
Table of Contents
|
|
I
TEM 8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
MAKO SURGICAL CORP.
Index to the Financial Statements
80
Table of Contents
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, 2010 and 2009, 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, 2010.
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, 2010 and 2009, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2010, 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, 2010, 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, 2011 expressed an unqualified opinion thereon.
|
|
|
/s/ ERNST & YOUNG LLP
|
|
Certified Public Accountants
|
Boca Raton,
Florida
|
|
March 10,
2011
|
|
81
Table of Contents
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, 2010, 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
Managements 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, 2010, 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, 2010 and 2009, 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, 2010 of MAKO Surgical Corp. and our report dated March 10, 2011
expressed an unqualified opinion thereon.
|
|
|
/s/ ERNST & YOUNG LLP
|
|
Certified Public Accountants
|
Boca Raton,
Florida
|
|
March 10,
2011
|
|
82
Table of Contents
MAKO SURGICAL CORP.
B
alance Sheets
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
ASSETS
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
27,108
|
|
$
|
17,159
|
|
Short-term investments
|
|
|
46,401
|
|
|
44,686
|
|
Accounts receivable
|
|
|
11,560
|
|
|
6,536
|
|
Inventory
|
|
|
10,504
|
|
|
10,190
|
|
Prepaids and other assets
|
|
|
1,283
|
|
|
532
|
|
Total current assets
|
|
|
96,856
|
|
|
79,103
|
|
Long-term investments
|
|
|
23,283
|
|
|
9,368
|
|
Property and equipment, net
|
|
|
9,212
|
|
|
6,205
|
|
Intangible assets, net
|
|
|
7,530
|
|
|
4,234
|
|
Other assets
|
|
|
198
|
|
|
193
|
|
Total assets
|
|
$
|
137,079
|
|
$
|
99,103
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,518
|
|
$
|
1,159
|
|
Accrued compensation and employee benefits
|
|
|
5,546
|
|
|
3,709
|
|
Other accrued liabilities
|
|
|
5,064
|
|
|
2,872
|
|
Deferred revenue
|
|
|
3,071
|
|
|
548
|
|
Total current liabilities
|
|
|
15,199
|
|
|
8,288
|
|
|
|
|
|
|
|
|
|
Deferred revenue, non-current
|
|
|
109
|
|
|
21
|
|
Total liabilities
|
|
|
15,308
|
|
|
8,309
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 7)
|
|
|
―
|
|
|
―
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 27,000,000 authorized; 0 shares
issued and outstanding as of December 31, 2010 and 2009
|
|
|
―
|
|
|
―
|
|
Common stock, $0.001 par value; 135,000,000 authorized; 39,945,467 and
33,036,378 shares issued and outstanding as of December 31, 2010 and 2009,
respectively
|
|
|
40
|
|
|
33
|
|
Additional paid-in capital
|
|
|
274,712
|
|
|
204,977
|
|
Accumulated deficit
|
|
|
(152,882
|
)
|
|
(114,195
|
)
|
Accumulated other comprehensive loss
|
|
|
(99
|
)
|
|
(21
|
)
|
Total stockholders equity
|
|
|
121,771
|
|
|
90,794
|
|
Total liabilities and stockholders equity
|
|
$
|
137,079
|
|
$
|
99,103
|
|
See accompanying notes.
83
Table of Contents
MAKO SURGICAL CORP.
S
tatements of
Operations
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
Procedures
|
|
$
|
17,620
|
|
$
|
7,550
|
|
$
|
2,457
|
|
Systems RIO
|
|
|
24,928
|
|
|
14,715
|
|
|
―
|
|
Systems TGS, previously deferred
|
|
|
―
|
|
|
11,297
|
|
|
―
|
|
Service and other
|
|
|
1,748
|
|
|
646
|
|
|
487
|
|
Total revenue
|
|
|
44,296
|
|
|
34,208
|
|
|
2,944
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
Procedures
|
|
|
5,960
|
|
|
3,087
|
|
|
1,387
|
|
Systems RIO
|
|
|
11,171
|
|
|
9,032
|
|
|
1,692
|
|
Systems RIO upgrades
|
|
|
―
|
|
|
5,183
|
|
|
―
|
|
Systems TGS, previously deferred
|
|
|
―
|
|
|
3,606
|
|
|
―
|
|
Service and other
|
|
|
1,042
|
|
|
546
|
|
|
233
|
|
Total cost of revenue
|
|
|
18,173
|
|
|
21,454
|
|
|
3,312
|
|
Gross profit (loss)
|
|
|
26,123
|
|
|
12,754
|
|
|
(368
|
)
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
47,041
|
|
|
32,072
|
|
|
23,292
|
|
Research and development
|
|
|
14,975
|
|
|
13,127
|
|
|
12,472
|
|
Depreciation and amortization
|
|
|
3,043
|
|
|
1,951
|
|
|
1,828
|
|
Total operating costs and expenses
|
|
|
65,059
|
|
|
47,150
|
|
|
37,592
|
|
Loss from operations
|
|
|
(38,936
|
)
|
|
(34,396
|
)
|
|
(37,960
|
)
|
Interest and other income
|
|
|
317
|
|
|
432
|
|
|
988
|
|
Interest and other expenses
|
|
|
―
|
|
|
(3
|
)
|
|
(110
|
)
|
Loss before income taxes
|
|
|
(38,619
|
)
|
|
(33,967
|
)
|
|
(37,082
|
)
|
Income tax expense
|
|
|
68
|
|
|
56
|
|
|
―
|
|
Net loss
|
|
|
(38,687
|
)
|
|
(34,023
|
)
|
|
(37,082
|
)
|
Accretion of preferred stock
|
|
|
―
|
|
|
―
|
|
|
(44
|
)
|
Dividends on preferred stock
|
|
|
―
|
|
|
―
|
|
|
(521
|
)
|
Net loss attributable to common
stockholders
|
|
$
|
(38,687
|
)
|
$
|
(34,023
|
)
|
$
|
(37,647
|
)
|
Net loss per share Basic and diluted
attributable to common stockholders
|
|
$
|
(1.13
|
)
|
$
|
(1.22
|
)
|
$
|
(2.20
|
)
|
Weighted average common shares outstanding
Basic and diluted
|
|
|
34,349
|
|
|
27,806
|
|
|
17,096
|
|
See accompanying notes.
84
Table of Contents
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
|
|
Accumulated
Deficit
|
|
Other
Comprehensive
Income (Loss)
|
|
Total
Stockholders
Equity (Deficit)
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
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
|
|
Stock-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)
85
Table of Contents
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
|
|
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
|
|
Stock-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
|
)
|
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
|
|
Issuance of common stock in equity financing
|
|
|
|
|
|
|
|
|
6,325
|
|
|
6
|
|
|
59,277
|
|
|
|
|
|
|
|
|
59,283
|
|
Issuance of common stock under employee stock purchase plan
|
|
|
|
|
|
|
|
|
86
|
|
|
|
|
|
765
|
|
|
|
|
|
|
|
|
765
|
|
Issuance of common stock upon exercise of options and warrants
|
|
|
|
|
|
|
|
|
199
|
|
|
|
|
|
611
|
|
|
|
|
|
|
|
|
611
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,027
|
|
|
|
|
|
|
|
|
5,027
|
|
Restricted common stock compensation expense
|
|
|
|
|
|
|
|
|
97
|
|
|
|
|
|
1,344
|
|
|
|
|
|
|
|
|
1,344
|
|
Receipt of 28,307 shares delivered in payment of payroll taxes
|
|
|
|
|
|
|
|
|
(28
|
)
|
|
|
|
|
(342
|
)
|
|
|
|
|
|
|
|
(342
|
)
|
Issuance of stock to a related party for intangible assets
|
|
|
|
|
|
|
|
|
230
|
|
|
1
|
|
|
3,053
|
|
|
|
|
|
|
|
|
3,054
|
|
Change in unrealized loss on available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(78
|
)
|
|
(78
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38,687
|
)
|
|
|
|
|
(38,687
|
)
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38,765
|
)
|
Balance at December 31, 2010
|
|
|
|
|
$
|
|
|
|
39,945
|
|
$
|
40
|
|
$
|
274,712
|
|
$
|
(152,882
|
)
|
$
|
(99
|
)
|
$
|
121,771
|
|
See accompanying notes.
86
Table of Contents
MAKO SURGICAL CORP.
S
tatements of
Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(38,687
|
)
|
$
|
(34,023
|
)
|
$
|
(37,082
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
2,445
|
|
|
1,769
|
|
|
1,502
|
|
Amortization of intangible assets
|
|
|
1,070
|
|
|
682
|
|
|
660
|
|
Stock-based compensation
|
|
|
6,371
|
|
|
4,014
|
|
|
3,323
|
|
Inventory write-down
|
|
|
1,701
|
|
|
1,081
|
|
|
730
|
|
Amortization of premium on investment securities
|
|
|
480
|
|
|
188
|
|
|
―
|
|
Loss on asset impairment
|
|
|
1,248
|
|
|
51
|
|
|
―
|
|
Accrued interest expense on deferred license fee
|
|
|
―
|
|
|
―
|
|
|
45
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(5,024
|
)
|
|
(3,809
|
)
|
|
(514
|
)
|
Inventory
|
|
|
(6,087
|
)
|
|
(7,358
|
)
|
|
(7,056
|
)
|
Prepaid and other assets
|
|
|
(751
|
)
|
|
(49
|
)
|
|
(173
|
)
|
Other assets
|
|
|
(57
|
)
|
|
(16
|
)
|
|
(7
|
)
|
Accounts payable
|
|
|
359
|
|
|
(650
|
)
|
|
298
|
|
Accrued compensation and employee benefits
|
|
|
1,837
|
|
|
1,371
|
|
|
1,305
|
|
Other accrued liabilities
|
|
|
2,192
|
|
|
(1,411
|
)
|
|
1,603
|
|
Deferred cost of revenue
|
|
|
―
|
|
|
3,608
|
|
|
(2,682
|
)
|
Deferred revenue
|
|
|
2,611
|
|
|
(11,020
|
)
|
|
8,228
|
|
Net cash used in operating activities
|
|
|
(30,292
|
)
|
|
(45,572
|
)
|
|
(29,820
|
)
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
Purchase of investments
|
|
|
(65,828
|
)
|
|
(59,961
|
)
|
|
(1,990
|
)
|
Proceeds from sales and maturities of investments
|
|
|
49,692
|
|
|
6,721
|
|
|
4,047
|
|
Acquisition of property and equipment
|
|
|
(2,628
|
)
|
|
(790
|
)
|
|
(1,606
|
)
|
Acquisition of intangible assets
|
|
|
(1,312
|
)
|
|
(150
|
)
|
|
―
|
|
Payment of deferred license fee
|
|
|
―
|
|
|
―
|
|
|
(4,000
|
)
|
Net cash used in investing activities
|
|
|
(20,076
|
)
|
|
(54,180
|
)
|
|
(3,549
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock in equity financing, net of
underwriting fees
|
|
|
59,708
|
|
|
54,861
|
|
|
40,202
|
|
Equity financing costs
|
|
|
(425
|
)
|
|
(609
|
)
|
|
(469
|
)
|
Proceeds from initial public offering of common stock, net of
underwriting fees
|
|
|
―
|
|
|
―
|
|
|
47,430
|
|
Initial public offering costs
|
|
|
―
|
|
|
―
|
|
|
(908
|
)
|
Proceeds from employee stock purchase plan
|
|
|
765
|
|
|
455
|
|
|
―
|
|
Exercise of common stock options and warrants for cash
|
|
|
611
|
|
|
149
|
|
|
46
|
|
Payment of payroll taxes relating to vesting of restricted stock
|
|
|
(342
|
)
|
|
(492
|
)
|
|
―
|
|
Net cash provided by financing activities
|
|
|
60,317
|
|
|
54,364
|
|
|
86,301
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
9,949
|
|
|
(45,388
|
)
|
|
52,932
|
|
Cash and cash equivalents at beginning of year
|
|
|
17,159
|
|
|
62,547
|
|
|
9,615
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
27,108
|
|
$
|
17,159
|
|
$
|
62,547
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
Receipt of 28,307 and 56,045 shares of common stock delivered in
payment of payroll taxes for the years ended December 31, 2010 and 2009,
respectively
|
|
$
|
342
|
|
$
|
492
|
|
$
|
―
|
|
Transfers of inventory to property and equipment
|
|
|
2,259
|
|
|
3,760
|
|
|
999
|
|
Issuance of stock to a related party for intangible assets
|
|
|
3,054
|
|
|
―
|
|
|
―
|
|
Accretion of redeemable convertible preferred stock
|
|
|
―
|
|
|
―
|
|
|
44
|
|
Accrued dividends on redeemable convertible preferred stock
|
|
|
―
|
|
|
―
|
|
|
521
|
|
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
|
|
See accompanying notes.
87
Table of Contents
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
orthopedic procedures called MAKOplasty®. The Company was incorporated in
the State of Delaware on November 12, 2004 and is headquartered in
Fort Lauderdale, Florida. The Companys common stock trades on The NASDAQ
Global Select Market under the ticker symbol MAKO.
In
November 2010, the Company completed a public offering of its common stock,
issuing 6,325,000 shares at a price per share of $9.44, resulting in net
proceeds of approximately $59.3 million, after expenses.
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, the Company will need to seek additional sources of funds,
including selling additional equity, debt or other securities or entering into
a credit 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 the
Companys 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, investments, and
accounts receivable. The Companys cash and cash equivalents are held in demand
and money market accounts at four 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.
88
Table of Contents
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.
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
Company expects to derive most of its revenue from capital sales of its RIO
system, future applications to the RIO system, including the RIO-enabled hip
application, recurring sales of implants and disposable products required for
each MAKOplasty procedure, and service plans that are sold with the RIO system.
If the Company is unable to achieve commercial acceptance of MAKOplasty or
obtain regulatory clearances or approvals for future products, including
products to treat other joints of the human body, its revenue would be
adversely affected and the Company would not become profitable.
The
Companys current versions of its RIO® Robotic Arm Interactive Orthopedic
(RIO) system, which is the second generation 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.
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, substantially all of the Companys revenue is from
companies located in the United States. No one customer accounted for more than
10% of the Companys total revenue for the years ended December 31, 2010 and
2009. The following table presents information about the Companys revenue by
significant customer for the year ended December 31, 2008:
89
Table of Contents
|
|
|
|
|
(in thousands)
|
|
Year Ended
December 31,
|
|
|
|
2008
|
|
Company A
|
|
$
|
417
|
|
Company B
|
|
|
277
|
|
Company C
|
|
|
493
|
|
Company D
|
|
|
274
|
|
Others
|
|
|
996
|
|
Net Revenue
|
|
$
|
2,457
|
|
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
Company regularly reviews customer balances 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 for doubtful accounts or write-offs to date in the
accompanying financial statements.
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, 2010 and 2009,
capitalized manufacturing overhead included in inventory was approximately $1.7
million and $1.1 million, respectively. Prior to 2009, such overhead costs were
fully expensed as selling, general and administrative expense as capitalizable
amounts were not significant.
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.
The
Company loans instrumentation to its customers, who use the instrumentation to
perform MAKOplasty procedures in conjunction with using the RIO system. These
loaned instrument sets are comprised
90
Table of Contents
of tools and
equipment that facilitate the implantation of the Companys implants (Implant
Instruments). Implant Instruments loaned to customers are not part of the
tangible product sold and title of Implant Instruments remains with the
Company. Accordingly, Implant Instruments are classified as a long-lived asset
and included as a component of property and equipment. Undeployed Implant
Instruments are carried at cost, net of allowances for excess and obsolete
instruments. Implant Instruments in the field are carried at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method based on an estimated useful life of five years. The Company reviews
instruments for impairment whenever events or changes in circumstances indicate
that the carrying value of an instrument may not be recoverable. To better
reflect the economics of the Implant Instruments and enhance comparability with
other companies in our industry, depreciation expense on Implant Instruments
has been reclassified from cost of revenue procedures to selling, general and
administrative expense beginning in the first quarter of 2010. Depreciation
expense for implant instruments was $464,000, $250,000 and $134,000 for the
years ended December 31, 2010, 2009 and 2008, respectively.
Prior
to 2010, Implant Instruments were included as components of a RIO system sale
and undeployed Implant Instruments were classified as inventory. Beginning in
the first quarter of 2010, Implant Instruments are no longer included as
components of a RIO system sale. To better reflect the economics of the Implant
Instruments no longer being sold, undeployed Implant Instruments have been
reclassified from inventory to property and equipment. As of December 31, 2010,
approximately $1.2 million of undeployed Implant Instruments have been included
as property and equipment.
The
Company also enters into RIO system consignment arrangements for clinical
evaluation and clinical research purposes with terms ranging from one to three
years. Under the terms of such arrangements, the Company installs a RIO system
at the customer site and retains title to the RIO system, while the customer
has use of the RIO system and purchases the Companys implants and disposables
products. Depreciation expense on consigned RIO systems and instruments is
classified in selling, general and administrative expense and is computed using
the straight-line method based on the estimated useful life of three years. As
of December 31, 2010, the Company had three consigned RIO systems.
Service
and demonstration RIO systems and instruments consist of RIO systems,
associated instrumentation, service tools and equipment, and MAKOplasty
procedure models used for sales demonstrations, surgeon training, and temporary
RIO system placements at customer sites under warranty and extended warranty
agreements. Service and demonstration RIO systems and instruments are
classified as a long-lived asset and included as a component of property and
equipment. Depreciation expense on service and demonstration RIO systems and
instruments is classified in selling, general and administrative expense and is
computed using the straight-line method based on an estimated useful life of
three years.
Intangible
Assets
The
Companys intangible assets are comprised of patents, patent applications and
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, which range from 5 to
13 years based on the respective anticipated lives of the underlying patents
and patent applications.
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.
91
Table of Contents
Revenue
Recognition
Revenue
is generated: from (1) unit sales of the Companys RIO system, including
associated instrumentation, installation services and training; (2) sales of
implants and disposable products; and (3) sales of warranty and maintenance
services. The Company recognizes revenue in accordance with Accounting
Standards Codification (ASC) 605-10-S99,
Revenue Recognition
, when persuasive
evidence of an arrangement exists, the fee is fixed or determinable, collection
of the fee is probable and delivery has occurred. For all sales, the Company
uses either a signed agreement or a binding purchase order as evidence of an
arrangement.
The
Companys multiple-element arrangements are generally comprised of the
following elements that qualify as separate units of accounting: (1) RIO system
sales; (2) sales of implants and disposable products; and (3) warranty and
maintenance services on the RIO system hardware. The Companys revenue
recognition policies generally result in revenue recognition at the following
points:
|
|
|
|
1.
|
RIO system
sales: Revenues related to RIO system sales are recognized upon installation
of the system and training of at least one surgeon, which typically occurs
prior to or concurrent with the RIO system installation.
|
|
|
|
|
2.
|
Procedure
revenue: Revenues from the sale of implants and disposable products utilized
in MAKOplasty procedures are recognized at the time of sale (i.e., at the
time of the related surgical procedure).
|
|
|
|
|
3.
|
Service
revenue: Revenues from warranty and maintenance services on the RIO system
hardware are deferred and recognized ratably over the service period until no
further obligation exists. Sales of the Companys RIO system generally
include a one-year warranty and maintenance obligation for services. Upon
installation of the RIO system, the Company defers the revenue attributable
to the warranty and maintenance obligation and recognizes it ratably over the
warranty and maintenance period. Costs associated with providing warranty and
maintenance services are expensed to cost of revenue as incurred.
|
A
portion of the Companys end-user customers acquire the RIO system through
a leasing arrangement with one of a number of qualified third-party leasing
companies. In these instances, the Company typically sells the RIO system to the
third-party leasing company, and the end-user customer enters into an
independent leasing arrangement with the third-party leasing company. The
Company recognizes RIO system revenue for a RIO system sale to a third-party
leasing company on the same basis as a RIO system sale directly to an end-user
customer. The Company sells implants and disposable products utilized in
MAKOplasty procedures directly to end-user customers under a separate
agreement.
The
Companys sales contracts generally do not provide the customer with a right of
return. If such a right is provided, all related revenues would be deferred
until such right expires or is waived. In a limited number of RIO system sales,
the Companys agreement with a customer provides for a customer acceptance
period, which typically does not exceed three months, following which the
customer may either accept or return the RIO system. No system revenue is
recognized for these RIO system sales until the customer has unconditionally
accepted the RIO system.
Effective
January 1, 2010, the Company early adopted the Financial Accounting Standards
Board (FASB) Accounting Standard Update No. 2009-13,
Multiple-Deliverable
Revenue Arrangementsa consensus of the FASB Emerging Issues Task Force
(ASU 2009-13) and Update No. 2009-14,
Certain Revenue Arrangements That Include Software
Elements, a consensus of the FASB Emerging Issues Task Force
(ASU
2009-14) on a prospective basis for applicable transactions originating or
materially modified after December 31, 2009. In accordance with ASU 2009-13 (as
codified under ASC 605-25,
Multiple-Element Arrangements
) and ASU
2009-14, the Company allocates arrangement consideration to the RIO systems and
associated instrumentation, its implants and disposables and its warranty and
maintenance services based upon the relative selling-price method. Under this
method, revenue is allocated at the time of sale to all deliverables based on
their relative selling price using a specific hierarchy. The hierarchy is as
follows: vendor-specific objective evidence (VSOE) of
fair value of the respective elements, third-party evidence of selling price
(TPS), or best estimate of selling price (ESP).
92
Table of Contents
The
Company uses ESP for its RIO system, TPS for its implants and disposables and
VSOE of fair value for its warranty and maintenance services to allocate
arrangement consideration. VSOE of fair value is based on the price charged
when the element is sold separately. TPS is established by evaluating largely
interchangeable competitor products or services in stand-alone sales. ESP is
established by determine the price at which the Company would transact a sale
if the product was sold on a stand-alone basis. The Company determines ESP for
its systems by considering multiple factors including, but not limited to,
geographies, type of customer, and market conditions. The Company regularly
reviews ESP and maintains internal controls over the establishment and updates
of these estimates.
The
Companys RIO system includes software that is essential to the functionality
of the product. Since the RIO systems software and non-software components
function together to deliver the RIO systems essential functionality, they are
considered one deliverable that is excluded from the software revenue
recognition guidance under ASU 2009-13 and ASU 2009-14.
Prior
to the adoption of ASU 2009-13 and ASU 2009-14, the Company accounted for the
sale of the RIO systems and associated instrumentation pursuant to ASC 985-605,
Software
Revenue Recognition
, which required the Company to allocate
arrangement consideration to the RIO systems and associated instrumentation
based upon VSOE of fair value of the respective elements. Had the new
accounting guidance been applied to revenue at the beginning of 2009, the
resultant revenue and net loss for the year ended December 31, 2009 would
have been substantially the same.
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 are generally
recognized upon installation of the system 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 system), 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 cost of revenue. Revenue
for all previously deferred TGS sales was recognized in the Companys statement
of operations during the year ended December 31, 2009, upon delivery of the RIO
system. As of December 31, 2010, the deferred revenue balance consists
primarily of deferred service revenue as discussed below.
Costs
associated with establishing an accrual for 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.
93
Table of Contents
Deferred Revenue and Deferred Cost
of Revenue
Deferred
revenue consists of deferred service revenue and deferred system revenue.
Deferred service revenue 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 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 revenue expected to be realized within one
year is classified as a current liability. The deferred revenue balance as of
December 31, 2010 consists primarily of deferred service revenue for warranty
and maintenance services on the RIO system hardware.
Foreign
Currency Transactions
Gains
or losses from foreign currency transactions are included in interest and other
income. To date, realized gains and losses recognized from foreign currency
transactions were not significant.
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.
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 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.
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.
94
Table of Contents
Advertising
Costs
Advertising
costs are expensed as incurred. Advertising costs were approximately $1.6
million, $1.3 million and $1.4 million for the years ended December 31, 2010,
2009 and 2008, 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. The Company recognizes any interest and penalties related
to unrecognized tax benefits as a component of income tax expense.
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.
Operating
Leases
Rental
payments and incentives 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 attributable to common stockholders by the weighted average
number of common shares outstanding for the period, without consideration for
common stock equivalents. Diluted EPS is computed by dividing the net income or
loss attributable 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,
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Stock
options outstanding
|
|
|
4,405
|
|
|
3,478
|
|
|
2,193
|
|
Warrants to
purchase common stock
|
|
|
2,039
|
|
|
2,065
|
|
|
2,076
|
|
Unvested
restricted stock
|
|
|
503
|
|
|
222
|
|
|
267
|
|
Reclassifications
Certain
reclassifications have been made to the prior periods statement of operations
to conform to the current periods presentation. The Company reclassified
depreciation expense on its Implant Instruments from cost of revenue
procedures to selling, general and administrative expense as described in
greater detail in Property and Equipment above. In addition, the Company
reclassified its income tax expense from selling, general and administrative
expense to income tax expense.
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
95
Table of Contents
equity.
Realized gains and losses, interest and dividends, amortization of premium and
discount on investment securities and declines in value determined to be
other-than-temporary on available-for-sale securities are included in interest
and other income. During the years ended December 31, 2010, 2009 and 2008,
realized gains and losses recognized on the sale of investments were not
significant. 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, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
34,483
|
|
$
|
4
|
|
$
|
(16
|
)
|
$
|
34,471
|
|
Certificates of deposit
|
|
|
10,453
|
|
|
1
|
|
|
(28
|
)
|
|
10,426
|
|
U.S. corporate debt
|
|
|
1,501
|
|
|
3
|
|
|
―
|
|
|
1,504
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
|
17,251
|
|
|
2
|
|
|
(8
|
)
|
|
17,245
|
|
Certificates of deposit
|
|
|
6,095
|
|
|
―
|
|
|
(57
|
)
|
|
6,038
|
|
Total investments
|
|
$
|
69,783
|
|
$
|
10
|
|
$
|
(109
|
)
|
$
|
69,684
|
|
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, 2010 and December 31, 2009, all short-term investments had
maturity dates of less than one year. As of December 31, 2010 and December 31,
2009, all long-term investments had maturity dates between one and three years.
96
Table of Contents
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, 2010
|
|
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
|
|
$
|
34,471
|
|
$
|
34,471
|
|
$
|
―
|
|
$
|
―
|
|
Certificates of deposit
|
|
|
10,426
|
|
|
10,426
|
|
|
―
|
|
|
―
|
|
U.S. corporate debt
|
|
|
1,504
|
|
|
1,504
|
|
|
―
|
|
|
―
|
|
Long-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
|
17,245
|
|
|
17,245
|
|
|
―
|
|
|
―
|
|
Certificates of deposit
|
|
|
6,038
|
|
|
6,038
|
|
|
―
|
|
|
―
|
|
Total
investments
|
|
$
|
69,684
|
|
$
|
69,684
|
|
$
|
―
|
|
$
|
―
|
|
No
investments measured at fair value on a recurring basis used Level 3 or
significant unobservable inputs for the year ended December 31, 2010. There have
been no transfers between Level 1 and Level 2 measurements during the year
ended December 31, 2010.
4. Selected Balance Sheet Components
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
Inventory:
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
2,522
|
|
$
|
2,770
|
|
Work-in-process
|
|
|
972
|
|
|
932
|
|
Finished
goods
|
|
|
7,010
|
|
|
6,488
|
|
Total
inventory
|
|
$
|
10,504
|
|
$
|
10,190
|
|
The
Company incurred inventory write-offs totaling approximately $1.7 million and
$1.1 million during the years ended December 31, 2010 and 2009, respectively.
For
the year ended December 31, 2010, the Company wrote-off $2.6 million, or
$(0.08) per basic and diluted share, of excess RESTORIS unicompartmental knee
implant system (RESTORIS Classic) implants and related instrumentation.
Excess implants of $1.4 million was charged to cost of revenue procedures,
cancellation charges of $208,000 was charged to cost of revenue service and
other and excess instrumentation of $1.0 million was charged to selling, general
and administrative expenses. These charges were necessitated by the rapid
adoption of the RESTORIS MCK multicompartmental knee implant system (RESTORIS
MCK) and the corresponding decline in the usage of RESTORIS Classic. RESTORIS
Classic was introduced in the third quarter of 2008 and was modeled after
existing well-known unicompartmental designs. In connection with the launch of
the RIO system, in the second quarter of 2009, the Company launched its next
generation RESTORIS MCK which was designed as a premium addition to the
RESTORIS product family with the goal of delivering a more natural feeling knee
by preserving bone and providing anatomical features such as high flexion.
Write-offs
of $1.1 million 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.
97
Table of Contents
The
Company reviews its inventory periodically to determine net realizable value
and considers product upgrades in its periodic review of realizability.
Depending on demand for the Companys products and technical obsolescence,
additional future write-offs of the Companys inventory may occur.
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31,
|
|
Estimated
Useful Life
|
|
|
|
2010
|
|
2009
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
|
|
Consigned
RIO systems and instruments
|
|
$
|
3,287
|
|
$
|
2,551
|
|
|
3-5 years
|
|
Service and
demo RIO systems and instruments
|
|
|
4,029
|
|
|
2,354
|
|
|
3 years
|
|
Computer
equipment and software
|
|
|
2,960
|
|
|
2,160
|
|
|
3-5 years
|
|
Manufacturing
and laboratory equipment
|
|
|
1,945
|
|
|
1,654
|
|
|
3-5 years
|
|
Undeployed
implant instruments
|
|
|
1,226
|
|
|
―
|
|
|
See note 2
|
|
Office
furniture and equipment
|
|
|
1,038
|
|
|
882
|
|
|
7 years
|
|
Leasehold
improvements
|
|
|
738
|
|
|
607
|
|
|
Lesser of 5-10 years or lease term
|
|
|
|
|
15,223
|
|
|
10,208
|
|
|
|
|
Less
accumulated depreciation and amortization
|
|
|
(6,011
|
)
|
|
(4,003
|
)
|
|
|
|
Total
property and equipment, net
|
|
$
|
9,212
|
|
$
|
6,205
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
Other accrued liabilities:
|
|
|
|
|
|
|
|
Accrued
royalties
|
|
$
|
833
|
|
$
|
413
|
|
Accrued
consulting fees
|
|
|
792
|
|
|
231
|
|
Other
|
|
|
3,439
|
|
|
2,228
|
|
|
|
$
|
5,064
|
|
$
|
2,872
|
|
98
Table of Contents
5. Related Party Transactions
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.
Asset
Purchase Agreement
In
February 2010, the Company completed the acquisition of substantially all of
the intellectual property portfolio of Z-Kat, Inc. (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 computer assisted surgery
(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 sublicense agreement with Z-Kat (the License Agreement) pertaining to
certain intellectual property for technologies in CAS licensed by Z-Kat. The
License Agreement was terminated by MAKO in December 2010. Certain of the
Companys rights under the Asset Purchase Agreement remain subject to any prior
license granted by Z-Kat, including a license to Biomet Manufacturing Corp. In
consideration for consummation of the transactions 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, which was
treated as a related party transaction because certain directors and executive
officers of the Company had a material interest in Z-Kat by virtue of their
ownership of Z-Kat stock. The Company and Z-Kat are not entities under common
control. The Asset Purchase Agreement and License Agreement were approved by
the independent members of the board of directors and audit committee of the
Company. The value of the intellectual property acquired under the Asset
Purchase Agreement of $3.1 million was based on the closing price per share of
$13.25 of the Companys common stock on February 25, 2010, the date the
transaction was closed, and was recorded as an intangible asset and is being
amortized over its estimated useful life of eight years.
License
Agreement
In
August 2009, the Company entered into a License Agreement (the Sensor
Agreement) with a third-party sensor company associated with the potential
future development of intellectual property and technology
99
Table of Contents
related to
sensing devices in orthopedics. The Sensor Agreement required an initial payment
of $50,000 and required future payments in the event that the Company decided
to enter into a licensing and supply agreement with the third-party sensor
company following the end of the research and development period. In August
2010, the Company exercised its option to enter into a non-exclusive license
and supply agreement for an upfront payment of $250,000 (the Non-Exclusive
License Payment). The Non-Exclusive License Payment was recorded as an
intangible asset and will be amortized over its estimated useful life of ten
years. In October 2010, the Company exercised its option to enter into an
exclusive license and supply agreement which required an upfront payment of
$500,000 and a future payment of $250,000 which is anticipated to be paid in the
first quarter of 2011 (the Exclusive License Payments). The Exclusive License
Payments will be recorded as an intangible asset and amortized over its
estimated useful life of approximately five years. The Sensor Agreement was
treated as a related party transaction because certain directors of the Company
had a material interest in the third-party sensor company by virtue of their
ownership of the third-party sensor companys outstanding stock. The Company
and the third-party sensor company are not entities under common control.
6. Intangible Assets
The
Companys intangible assets are comprised of purchased patents, patent
applications 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)
|
|
2010
|
|
2009
|
|
|
|
Amount
|
|
Weighted
Average
Amortization
Period
|
|
Amount
|
|
Weighted
Average
Amortization
Period
|
|
Licenses
|
|
$
|
7,880
|
|
|
9.4
|
|
$
|
6,679
|
|
|
9.9
|
|
Z-Kat
intellectual property (see Note 5)
|
|
|
3,166
|
|
|
8.0
|
|
|
―
|
|
|
|
|
|
|
|
11,046
|
|
|
9.0
|
|
|
6,679
|
|
|
9.9
|
|
Less:
accumulated amortization
|
|
|
(3,516
|
)
|
|
|
|
|
(2,445
|
)
|
|
|
|
Intangible
assets, net
|
|
$
|
7,530
|
|
|
|
|
$
|
4,234
|
|
|
|
|
Amortization
expense related to intangible assets was approximately $1.1 million, $682,000
and $660,000 for the years ended December 31, 2010, 2009 and 2008,
respectively.
The
estimated future amortization expense of intangible assets for the next five
years as of December 31, 2010 is as follows:
|
|
|
|
|
(in thousands)
|
|
|
|
|
2011
|
|
$
|
1,279
|
|
2012
|
|
|
1,279
|
|
2013
|
|
|
1,273
|
|
2014
|
|
|
1,245
|
|
2015
|
|
|
1,198
|
|
Total
|
|
$
|
6,274
|
|
100
Table of Contents
7. Commitments and Contingencies
Operating Leases
In
September 2010, the Company entered into an expanded ten year operating lease
for the Companys existing headquarters in Fort Lauderdale, Florida, to allow
for expansion to support anticipated growth, and terminated the previous lease.
Under the new lease, the Company has the option to renew its facility lease for
two consecutive five year periods. The lease provides for periodic rent
increases and requires the Company to pay the operating costs including taxes,
insurance and maintenance. Rent expense on a straight-line basis was $624,000,
$613,000 and $498,000 for the years ended December 31, 2010, 2009 and
2008, respectively. The rent expense for the years ended December 31,
2010, 2009 and 2008 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, 2010 are as follows:
|
|
|
|
|
(in thousands)
|
|
|
|
|
2011
|
|
$
|
290
|
|
2012
|
|
|
337
|
|
2013
|
|
|
352
|
|
2014
|
|
|
504
|
|
2015
|
|
|
657
|
|
Thereafter
|
|
|
3,683
|
|
Total
|
|
$
|
5,823
|
|
Purchase Commitments
At
December 31, 2010, the Company was committed to make future purchases for
inventory related items and instrumentation under various purchase arrangements
with fixed purchase provisions aggregating approximately $8.0 million.
License and Royalty
Agreements
The
Asset Purchase Agreement with Z-Kat includes licenses with 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 $75,000.
See
Note 5 for further discussion of the Asset Purchase Agreement.
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 for the year
ended December 31, 2008, 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
running royalty payments of 1.8% on sales of Companys RIO systems and requires
annual minimum royalty payments on sales of the Companys RIO systems
101
Table of Contents
inclusive of
the running royalty payments. The minimum running royalties are estimated to be
approximately $1.0 million 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 $1.7 million annually.
Effective
as of January 2010, the Company entered into a research and license agreement
(the Research and License Agreement) associated with potential future
products for use with the Companys RIO system. The Research and License
Agreement required an upfront payment of $300,000 for research services upon
the execution of the agreement and requires an additional $500,000 to be paid
quarterly over two years beginning in January 2011. The payments for research
services are being expensed as research and development expense on a
straight-line basis from January 2010 through December 2012, the period in
which research services are being performed under the Research and License
Agreement. The Research and License Agreement required a $200,000 upfront
license payment upon execution of the agreement, running royalty payments of 3%
on sales of products and processes covered under the Agreement and requires
minimum royalty payments (inclusive of running royalty payments) not to exceed
$250,000 over the term of agreement.
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 $2.1 million. Royalty payments related to these
agreements are anticipated to range between 1% and 6% 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 6 and 16 years. The net expense related to the Companys
license and royalty agreements was approximately $2.0 million, $1.5 million and
$525,000 for the years ended December 31, 2010, 2009 and 2008,
respectively.
As
of December 31, 2010, future annual minimum royalty payments under the
licenses and sublicenses are anticipated to be as follows:
|
|
|
|
|
(in thousands)
|
|
|
|
|
2011
|
|
$
|
1,069
|
|
2012
|
|
|
1,554
|
|
2013
|
|
|
1,984
|
|
2014
|
|
|
2,034
|
|
2015
|
|
|
2,034
|
|
Thereafter
|
|
|
5,475
|
|
|
|
$
|
14,150
|
|
Development Agreements
In
June 2009, the Company entered into a Research and Development License and
Supply Agreement (the R&D Agreement) associated with a potential future
implant system 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, 2010, the
Company paid the $450,000 up-front payment and $1.1 million 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 were recognized as research and
development expense on a straight-line basis from June 2009 through August
2010, the period in which development services were performed under the R&D
Agreement. As of December 31, 2010, the Company had an accrued liability of
$500,000 which will become payable upon the achievement of the final milestone
under the R&D Agreement, which the Company believes is probable.
102
Table of Contents
In
October 2010, the Company entered into a Strategic Alliance Agreement (the
Pipeline Agreement) with Pipeline Biomedical Holdings, LLC (Pipeline) to
develop and supply potential future advanced implant technologies for use with the
Companys RIO system, including the development of a MAKO-branded RESTORIS
family of hip implant systems for use with the hip MAKOplasty application. Upon
execution of the Pipeline Agreement on October 1, 2010, the Company issued and
delivered to Pipeline 203,417 unregistered restricted shares of its common
stock (the Pipeline Shares) as consideration for the rights granted to MAKO
under the Pipeline Agreement. The restricted shares vest upon achievement of
certain performance conditions within six months of the effective date of the Pipeline
Agreement. If the performance conditions are not achieved, the Company may
terminate the Pipeline Agreement at its option subject to a breakup fee not to
exceed $800,000 (the Breakup Fee). The value of the Pipeline Shares will be
recognized as a component of research and development expense on a straight
line basis over 33 months from the effective date of the Pipeline Agreement
through June 30, 2013 the period over which Pipeline is expected to perform
development services under the Pipeline Agreement. In accordance with ASC
505-50-30-30; however, no research and development expense associated with the
services under the Pipeline Agreement will be recognized for the Pipeline
Shares until achievement of the performance conditions. Although the Company
believes the performance conditions will be met by Pipeline, as of December 31,
2010, the Company accrued $400,000 in expense for its obligation under the
Breakup Fee. Upon achievement of the performance conditions, the Company will
record an adjustment for the difference between the amount accrued to date for
the Breakup Fee obligation and the ratable portion of the expense to be
recognized for the Pipeline Shares from the effective date of the Pipeline
Agreement to the achievement of the performance conditions. The total amount of
expense to be recognized for the Pipeline Shares will be determined on the date
the performance conditions are achieved. The Company has no further obligation
beyond the previously issued Pipeline Shares to fund Pipelines research of
implant technologies under the Pipeline Agreement. The Pipeline Agreement
contains provisions under which Pipeline will supply the Company implants
developed under the Pipeline Agreement. Subsequent to December 31, 2010, the
performance conditions were achieved and the Pipeline Shares vested.
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. Stockholders Equity
Preferred
Stock
As
of December 31, 2010 and 2009, the Company was authorized to issue
27,000,000 shares of $0.001 par value preferred stock. As of December
31, 2010 and 2009, 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, 2010 and 2009, 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,
103
Table of Contents
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.
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, 2010, 2009 and
2008, the Company recorded comprehensive losses of approximately $38.8 million,
$34.1 million and $37.0 million, respectively. The difference between
comprehensive loss and net loss for the years ended December 31, 2010,
2009 and 2008 is due to changes in unrealized gains and losses on the Companys
available-for-sale securities.
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 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. During the year ended December 31, 2010, the
Company issued approximately 86,000 shares under the 2008 Employee Stock
Purchase Plan. As of December 31, 2010, there were approximately 467,000 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 years ended December 31, 2010, 2009 and 2008, stock-based compensation
expense was $6.4 million, $4.0 million and $3.3 million respectively. Included
within stock-based compensation expense for the year ended December 31, 2010
were $4.8 million related to stock option grants, $1.3 million related to the partial
vesting of shares of restricted stock granted to the Companys CEO at various
dates from 2006 through 2010, and $256,000 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
104
Table of Contents
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. 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.
Generally,
the Companys outstanding stock options vest over four years. Stock options
granted to certain non-employee directors prior to 2010 generally vest over
three years; however, stock options granted to non-employee directors after
January 1, 2010 generally vest over one year. Continued vesting typically
terminates when the employment or consulting relationship ends. Vesting
generally begins on the date of grant.
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, 2010 and 2011 was approximately 1,330,000 and
1,618,000, respectively.
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 equity
awards will be made under the Companys 2008 Plan.
As
of December 31, 2010, 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
|
|
|
3,413
|
|
|
|
|
6,114
|
|
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.
105
Table of Contents
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, 2009
|
|
|
174
|
|
|
3,478
|
|
|
6.71
|
|
Shares reserved
|
|
|
1,330
|
|
|
―
|
|
|
―
|
|
Restricted stock issued
|
|
|
(175
|
)
|
|
―
|
|
|
―
|
|
Shares swapped under the 2008 Plan
|
|
|
2
|
|
|
―
|
|
|
―
|
|
Options granted
|
|
|
(1,183
|
)
|
|
1,183
|
|
|
12.41
|
|
Options exercised
|
|
|
―
|
|
|
(180
|
)
|
|
3.48
|
|
Options forfeited under the 2004 Plan
|
|
|
―
|
|
|
(20
|
)
|
|
6.96
|
|
Options forfeited under the 2008 Plan
|
|
|
56
|
|
|
(56
|
)
|
|
8.75
|
|
Balance at December 31, 2010
|
|
|
204
|
|
|
4,405
|
|
$
|
8.35
|
|
The
options outstanding and exercisable, by exercise price, at December 31,
2010 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
|
|
|
233
|
|
|
|
|
$
|
0.67
|
|
|
|
|
|
233
|
|
|
|
|
$
|
0.67
|
|
|
|
|
$1.27 $2.48
|
|
|
664
|
|
|
|
|
$
|
1.75
|
|
|
|
|
|
647
|
|
|
|
|
$
|
1.73
|
|
|
|
|
$6.90 $8.06
|
|
|
1,410
|
|
|
|
|
$
|
7.94
|
|
|
|
|
|
616
|
|
|
|
|
$
|
7.96
|
|
|
|
|
$8.27 11.41
|
|
|
949
|
|
|
|
|
$
|
10.50
|
|
|
|
|
|
604
|
|
|
|
|
$
|
10.52
|
|
|
|
|
$11.95 15.12
|
|
|
1,149
|
|
|
|
|
$
|
12.44
|
|
|
|
|
|
211
|
|
|
|
|
$
|
12.39
|
|
|
|
|
|
|
|
4,405
|
|
|
7.54
|
|
$
|
8.35
|
|
$
|
30,272
|
|
|
2,311
|
|
|
6.72
|
|
$
|
6.56
|
|
$
|
20,023
|
|
|
|
|
|
(1)
|
The
aggregate intrinsic value represents the total pre-tax intrinsic value, based
on the Companys closing stock price of $15.22 on December 31, 2010, which
would have been received by the option holders had all option holders
exercised their options as of that date.
|
As
of December 31, 2010, approximately 4,308,000 options were vested and expected
to vest at a weighted average exercise price of $8.31 per share, a weighted
average contractual life of 7.5 years and aggregate intrinsic value of $29.8
million.
The
weighted average fair values of options granted were $6.48, $4.43 and $5.08 for
the years ended December 31, 2010, 2009 and 2008, respectively. The total fair
value of shares vested was approximately $4.6 million, $2.8 million and $1.3
million during the years ended December 31, 2010, 2009 and 2008,
respectively. The total intrinsic value of options exercised was $1.6 million,
$1.0 million and $491,000 for the years ended December 31, 2010, 2009 and 2008.
The
Company records stock-based compensation expense on a straight-line basis over
the vesting period. As of December 31, 2010, there was total unrecognized
compensation cost of approximately $10.5 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 2.5 years as of December 31, 2010.
106
Table of Contents
On
February 4, 2010, the Company issued 100,000 shares of restricted stock to its
CEO at a fair value of $1.2 million, or $11.95 per share, on the date of
issuance. The restricted stock will vest over a four-year period. On April 13,
2010, the Company issued 75,000 shares of restricted stock to its CEO at a fair
value of approximately $476,000 on the date of issuance. The April 13, 2010
grant is subject to performance conditions based on the achievement of certain
performance metrics. Upon satisfaction of the performance conditions, 50% of
the shares will vest on March 13, 2013 and 50% of the shares will vest on March
13, 2014. For the year ended December 31, 2010, 28,307 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, 2010, 879,723 shares of restricted stock
granted to the Companys CEO were issued and outstanding.
Restricted
stock activity for the year ended December 31, 2010 is as follows:
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
Shares
|
|
Weighted Average
Fair Value
|
|
Unvested shares at December 31, 2009
|
|
222
|
|
|
$
|
8.86
|
|
Unvested shares at December 31, 2010
|
|
300
|
|
|
$
|
7.64
|
|
Shares granted in 2010
|
|
175
|
|
|
|
9.55
|
|
Shares vested in 2010
|
|
97
|
|
|
|
10.30
|
|
As
of December 31, 2010, the remaining stock-based compensation expense for
the restricted stock awards was approximately $2.3 million, which will be
recognized on a straight line basis over a remaining weighted average period of
2.38 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.
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,
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Risk-free
interest rate
|
|
|
2.04% - 3.36%
|
|
|
1.99% - 3.53%
|
|
|
1.59% - 3.62%
|
|
Expected
life
|
|
|
6.25 years
|
|
|
6.25 years
|
|
|
6.25 years
|
|
Expected
dividends
|
|
|
―
|
|
|
―
|
|
|
―
|
|
Expected
volatility
|
|
|
50.15% - 50.74%
|
|
|
54.43% - 57.71%
|
|
|
56.36% - 58.31%
|
|
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, 2010, 2009 and 2008, as
well as the assumptions used in calculating those values are as follows:
107
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
2008 Employee Stock Purchase Plan
|
|
Year Ended
December 31,
|
|
Year Ended
December 31,
|
|
Year Ended
December 31,
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Fair Value
|
|
$
|
2.21 - $3.68
|
|
$
|
1.82 - $2.54
|
|
$
|
1.82 - $1.89
|
|
Assumptions
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
0.12% - 0.60%
|
|
|
0.60% - 3.20%
|
|
|
1.87% - 3.29%
|
|
Expected life
|
|
|
0.25 years
|
|
|
0.25 years
|
|
|
0.25 years
|
|
Expected dividends
|
|
|
―
|
|
|
―
|
|
|
―
|
|
Expected volatility
|
|
|
34.50% - 52.08%
|
|
|
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, 2010, 2009 and 2008, 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.
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, 2010 and
2009, 425,915 and 451,916 warrants were outstanding and exercisable,
respectively.
In
October 2008, the Company issued warrants 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. As of December 31, 2010, all the warrants were
outstanding and exercisable.
In
October 2008, 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. These warrants became exercisable on December 31, 2009 and have a
seven-year term. As of December 31, 2010, all the warrants were
outstanding and exercisable.
108
Table of Contents
9. Income
Taxes
The
provision for income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Years Ended
|
|
|
|
December 31,
2010
|
|
December 31,
2009
|
|
December 31,
2008
|
|
Current income taxes:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
―
|
|
$
|
―
|
|
$
|
―
|
|
State
|
|
|
68
|
|
|
56
|
|
|
―
|
|
Total current income taxes
|
|
|
68
|
|
|
56
|
|
|
―
|
|
Deferred income taxes
|
|
|
(14,184
|
)
|
|
(12,593
|
)
|
|
(13,031
|
)
|
Change in valuation allowance
|
|
|
14,184
|
|
|
12,593
|
|
|
13,031
|
|
Provision for income taxes
|
|
$
|
68
|
|
$
|
56
|
|
$
|
―
|
|
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, 2010, 2009 and 2008, 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, 2010, 2009 and 2008, the Company had federal and state net
operating loss carryforwards of approximately $129.6 million, $100.2 million
and $60 million, respectively, available to offset future taxable income. These
net operating loss carryforwards will expire in varying amounts from 2024
through 2030.
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 recent years, the
Company underwent changes in ownership for purposes of the Tax Reform Act.
109
Table of Contents
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,
|
|
|
|
2010
|
|
2009
|
|
Current deferred income tax assets:
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
1,256
|
|
$
|
212
|
|
Reserves
|
|
|
619
|
|
|
―
|
|
Accrued expenses
|
|
|
502
|
|
|
―
|
|
Total current deferred income tax assets
|
|
|
2,377
|
|
|
212
|
|
|
|
|
|
|
|
|
|
Noncurrent deferred income tax assets:
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
|
51,163
|
|
|
38,650
|
|
Amortization
|
|
|
591
|
|
|
404
|
|
Other
|
|
|
10
|
|
|
481
|
|
Total noncurrent deferred income tax assets
|
|
|
51,764
|
|
|
39,535
|
|
|
|
|
|
|
|
|
|
Current deferred income tax liabilities:
|
|
|
|
|
|
|
|
Other deferred income tax liabilities
|
|
|
―
|
|
|
(2
|
)
|
Total current deferred income tax
liabilities
|
|
|
―
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
Noncurrent deferred income tax liabilities:
|
|
|
|
|
|
|
|
Other deferred income tax liabilities
|
|
|
(213
|
)
|
|
―
|
|
Total noncurrent deferred income tax
liabilities
|
|
|
(213
|
)
|
|
―
|
|
|
|
|
|
|
|
|
|
Less valuation allowance
|
|
|
(53,928
|
)
|
|
(39,745
|
)
|
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.
110
Table of Contents
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,
2010
|
|
December 31,
2009
|
|
December 31,
2008
|
|
Tax at U.S.
statutory rate
|
|
|
(35.00
|
)%
|
|
(35.00
|
)%
|
|
(35.00
|
)%
|
State taxes,
net of federal impact
|
|
|
(4.49
|
)%
|
|
(3.28
|
)%
|
|
(3.26
|
)%
|
Non-deductible
items
|
|
|
5.46
|
%
|
|
2.92
|
%
|
|
3.13
|
%
|
Return to
provision differences
|
|
|
(2.44
|
)%
|
|
―
|
|
|
―
|
|
Change in
valuation allowance
|
|
|
36.66
|
%
|
|
35.13
|
%
|
|
35.14
|
%
|
Other, net
|
|
|
(0.19
|
)%
|
|
0.23
|
%
|
|
(0.01
|
)%
|
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 underpayment of
income taxes. The Companys primary tax jurisdictions are in the United States
and in multiple state jurisdictions. The tax years from 2005 through 2010
remain open and are subject to examination by the appropriate governmental
agencies.
10. Selected Quarterly Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
2010
|
|
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
(1)
|
|
Revenue
|
|
$
|
7,249
|
|
$
|
10,251
|
|
$
|
12,014
|
|
$
|
14,782
|
|
Gross profit
|
|
|
3,253
|
|
|
6,580
|
|
|
7,455
|
|
|
8,835
|
|
Loss from operations
|
|
|
(11,470
|
)
|
|
(8,587
|
)
|
|
(9,006
|
)
|
|
(9,873
|
)
|
Net loss attributable to common stockholders
|
|
|
(11,408
|
)
|
|
(8,524
|
)
|
|
(8,938
|
)
|
|
(9,817
|
)
|
Net loss per share basic and diluted attributable to common
stockholders
|
|
|
(0.34
|
)
|
|
(0.26
|
)
|
|
(0.27
|
)
|
|
(0.26
|
)
|
|
|
|
|
(1)
|
During the
fourth quarter of 2010, the Company determined that it had incorrectly
recognized revenue and expenses associated with the initial warranty
obligation and maintenance services included in all previous RIO system
sales. Accordingly, in the fourth quarter of 2010, the Company recorded an
adjustment to decrease revenue by $1.2 million, to reverse the accrual for
its warranty and maintenance obligation by $552,000 and to increase net loss
by $644,000, or $(0.02) per basic and diluted share. The adjustment arose
over the quarters throughout 2009 and
2010 and did not materially
affect the Companys trend in earnings. As the adjustment was related
to the correction of an error, the Company performed the analysis required by
Staff Accounting Bulletin 99,
Materiality
,
and Staff Accounting Bulletin 108,
Considering
the Effects of Prior Year Misstatements When Quantifying Misstatements in
Current Year Financial Statements
. Based on this analysis, the
Company concluded that the effect of the error was not material to the quarters and years in the two year period
ended December 31, 2010 from both a quantitative and qualitative
perspective.
|
111
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
2009
|
|
|
|
Q1
(2)
|
|
Q2
(2)
|
|
Q3
|
|
Q4
|
|
Revenue
|
|
$
|
3,727
|
|
$
|
14,904
|
|
$
|
6,726
|
|
$
|
8,851
|
|
Gross profit
|
|
|
697
|
|
|
4,685
|
|
|
2,830
|
|
|
4,542
|
|
Loss from operations
|
|
|
(9,102
|
)
|
|
(6,491
|
)
|
|
(9,447
|
)
|
|
(9,356
|
)
|
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
|
)
|
|
|
|
|
(2)
|
Revenue for
the first and second quarters 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.
|
112
Table of Contents
|
|
ITE
M 9.
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
IT
EM 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, 2010. 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, 2010 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, 2010. 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.
The
effectiveness of our internal control over financial reporting as of December
31, 2010 has been audited by our independent registered public account firm, as
stated in their report, which is included herein.
113
Table of Contents
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.
|
|
ITE
M 9B.
|
OTHER INFORMATION
|
None
114
Table of Contents
P
ART III.
|
|
ITE
M 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
2011 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
|
|
|
IT
EM 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
2011 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
|
|
|
IT
EM 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 2011
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.
|
|
ITEM
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 2011
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
|
115
Table of Contents
|
|
ITE
M 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 2011
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
|
116
Table of Contents
PAR
T IV
|
|
ITE
M 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)
|
|
|
|
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
|
|
Lease, by and between
Registrant and Westport Business Park Associates LLP, dated September 8, 2010
(1)
|
|
|
|
10.7+
|
|
Form of Incentive Stock
Option Agreement related to the 2008 Omnibus Incentive Plan (4)
|
|
|
|
10.8+
|
|
Employment Agreement
between Registrant and Duncan Moffat, effective as of April 28, 2008 (5)
|
|
|
|
10.9+
|
|
Form of Non-Qualified
Stock Option Agreement related to the 2008 Omnibus Incentive Plan (5)
|
|
|
|
10.10+
|
|
Form of Restricted Stock
Unit Agreement related to the 2008 Omnibus Incentive Plan (5)
|
|
|
|
10.11+
|
|
Form of Subscription
Agreement related to the 2008 Employee Stock Purchase Plan (12)
|
|
|
|
10.12+
|
|
Amendment to Amended
Employment Agreement by and between Registrant and Maurice R. Ferré,
M.D., effective February 13, 2009 (7)
|
117
Table of Contents
|
|
|
10.13+
|
|
Amended and Restated
Employment Agreement by and between Registrant and Fritz L. LaPorte,
effective February 13, 2009 (7)
|
|
|
|
10.14+
|
|
Amended and Restated
Employment Agreement by and between Registrant and Menashe R. Frank,
effective February 13, 2009 (7)
|
|
|
|
10.15+
|
|
Amended and Restated
Employment Agreement by and between Registrant and Steven J. Nunes, effective
February 13, 2009 (7)
|
|
|
|
10.16+
|
|
Employment Agreement by
and between Registrant and Ivan Delevic, effective April 27, 2009 (8)
|
|
|
|
10.17+
|
|
2010 Leadership Cash Bonus
Plan (9)
|
|
|
|
10.18+
|
|
2010 Performance Bonus
Plan for S. Nunes SVP of Sales & Marketing (9)
|
|
|
|
10.19+
|
|
Second Amendment to
Amended Employment Agreement by and between Registrant and Maurice R. Ferré,
M.D., effective February 17, 2010 (9)
|
|
|
|
10.20+
|
|
Employment Agreement
between Registrant and James E. Keller, effective as of March 22, 2010 (10)
|
|
|
|
10.21+
|
|
Employment Agreement
between Registrant and Richard Leparmentier, effective as of March 29, 2010
(11)
|
|
|
|
10.22+
|
|
First Amendment to
Employment Agreement between Registrant and Ivan Delevic, effective as of
April 13, 2010 (12)
|
|
|
|
10.23+
|
|
Restricted Stock Agreement
dated April 13, 2010 issued to Maurice R. Ferré (13)
|
|
|
|
10.24+
|
|
2011 Leadership Cash Bonus
Plan (14)
|
|
|
|
10.25+
|
|
Restricted Stock Agreement
dated February 3, 2011 issued to Maurice R. Ferré (14)
|
|
|
|
23
|
|
Consent of 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 to 18 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
(15)
|
|
|
(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
|
118
Table of Contents
|
|
(7)
|
Incorporated by reference
to Registrants Current Report on Form 8-K filed with the SEC on February 20,
2009
|
|
|
(8)
|
Incorporated by reference
to Registrants Current Report on Form 8-K filed with the SEC on April 28,
2009
|
|
|
(9)
|
Incorporated by reference
to Registrants Current Report on Form 8-K filed with the SEC on February 23,
2010
|
|
|
(10)
|
Incorporated by reference
to Registrants Current Report on Form 8-K filed with the SEC on March 24,
2010
|
|
|
(11)
|
Incorporated by reference
to Registrants Current Report on Form 8-K filed with the SEC on March 29,
2010
|
|
|
(12)
|
Incorporated by reference
to Registrants Quarterly Report on Form 10-Q for the quarter ended March 31,
2010 filed with the SEC on May 7, 2010
|
|
|
(13)
|
Incorporated by reference
to Registrants Current Report on Form 8-K filed with the SEC on April 15,
2010
|
|
|
(14)
|
Incorporated by reference
to Registrants Current Report on Form 8-K filed with the SEC on February 4,
2011
|
|
|
(15)
|
Incorporated by reference
to Registrants Annual Report on Form 10-K for the period ended December 31,
2009 filed with the SEC on March 10, 2010
|
|
|
+
|
Indicates management
contract or compensatory plan.
|
119
Table of Contents
SIGNA
TURES
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, 2011
|
|
|
|
|
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, 2011
|
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, 2011
|
Fritz
L. LaPorte
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ S. Morry Blumenfeld,
Ph.D.
|
|
Director
|
|
March
10, 2011
|
S. Morry Blumenfeld, Ph.D.
|
|
|
|
|
|
|
|
|
|
/s/ Christopher C. Dewey
|
|
Director
|
|
March
10, 2011
|
Christopher C. Dewey
|
|
|
|
|
|
|
|
|
|
/s/ Charles W. Federico
|
|
Director
|
|
March
10, 2011
|
Charles W. Federico
|
|
|
|
|
|
|
|
|
|
/s/ John G. Freund, M.D.
|
|
Director
|
|
March
10, 2011
|
John G. Freund, M.D.
|
|
|
|
|
|
|
|
|
|
/s/ Frederic H. Moll, M.D.
|
|
Director
|
|
March
10, 2011
|
Frederic H. Moll, M.D.
|
|
|
|
|
|
|
|
|
|
/s/
Richard R. Pettingill
|
|
Director
|
|
March
10, 2011
|
Richard
R. Pettingill
|
|
|
|
|
|
|
|
|
|
/s/ William D. Pruitt
|
|
Director
|
|
March
10, 2011
|
William D. Pruitt
|
|
|
|
|
|
|
|
|
|
/s/ John J. Savarese, M.D.
|
|
Director
|
|
March
10, 2011
|
John J.
Savarese, M.D.
|
|
|
|
|
120
Table of Contents
EXHIBIT
INDEX
|
|
|
|
Exhibit
No.
|
|
Description
|
|
10.6
|
|
Lease, by
and between Registrant and Westport Business Park Associates LLP, dated
September 8, 2010
|
|
|
|
23
|
|
Consent of
Independent Registered Public 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 to 18 U.S.C. §1350
|
|
|
|
|
32.2
|
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. §1350
|
121
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