UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2012
or
☐
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________________ to ______________________________
Commission File Number:
001-33966
MAKO Surgical Corp.
(Exact name of registrant as specified in its charter)
Delaware
|
20-1901148
|
(State or Other Jurisdiction of Incorporation or Organization)
|
(I.R.S. Employer Identification No.)
|
2555 Davie Road, Fort Lauderdale, Florida 33317
(Address of Principal Executive Offices) (Zip Code)
(954) 927-2044
(Registrant’s Telephone Number, Including Area
Code)
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes
☒
No
☐
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
Yes
☒
No
☐
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
☐
Accelerated
Filer
☒
Non-accelerated Filer
☐
Smaller
reporting company
☐
Indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
☐
No
☒
Number of shares outstanding of each of the issuer’s
classes of common stock as of July 26, 2012:
Class
|
Outstanding at July 26, 2012
|
Common Stock
|
42,680,109
|
MAKO Surgical Corp.
INDEX TO FORM 10-Q
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MAKO SURGICAL CORP.
Condensed Balance Sheets
(in thousands, except share and per share data)
(Unaudited)
|
|
June 30,
2012
|
|
|
December 31,
2011
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,437
|
|
|
$
|
13,438
|
|
Short-term investments
|
|
|
25,335
|
|
|
|
36,354
|
|
Accounts receivable, net of allowances of $235 and $158, at June 30, 2012 and December 31, 2011, respectively
|
|
|
19,014
|
|
|
|
20,783
|
|
Inventory
|
|
|
28,905
|
|
|
|
19,529
|
|
Deferred cost of revenue
|
|
|
618
|
|
|
|
160
|
|
Financing commitment asset (Note 6)
|
|
|
3,672
|
|
|
|
―
|
|
Prepaid and other current assets
|
|
|
4,514
|
|
|
|
1,800
|
|
Total current assets
|
|
|
91,495
|
|
|
|
92,064
|
|
Long-term investments
|
|
|
531
|
|
|
|
8,902
|
|
Property and equipment, net
|
|
|
21,846
|
|
|
|
19,389
|
|
Intangible assets, net
|
|
|
6,510
|
|
|
|
7,284
|
|
Other assets
|
|
|
169
|
|
|
|
132
|
|
Total assets
|
|
$
|
120,551
|
|
|
$
|
127,771
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
8,007
|
|
|
$
|
4,231
|
|
Accrued compensation and employee benefits
|
|
|
2,832
|
|
|
|
7,579
|
|
Other accrued liabilities
|
|
|
9,257
|
|
|
|
10,622
|
|
Deferred revenue
|
|
|
7,092
|
|
|
|
4,826
|
|
Total current liabilities
|
|
|
27,188
|
|
|
|
27,258
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue, non-current
|
|
|
187
|
|
|
|
75
|
|
Total liabilities
|
|
|
27,375
|
|
|
|
27,333
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 27,000,000 authorized; 0 shares issued and outstanding as of June 30, 2012 and December 31, 2011
|
|
|
―
|
|
|
|
―
|
|
Common stock, $0.001 par value; 135,000,000 authorized; 42,210,451 and 41,439,057 shares issued and outstanding as of June 30, 2012 and December 31, 2011, respectively
|
|
|
42
|
|
|
|
41
|
|
Additional paid-in capital
|
|
|
302,385
|
|
|
|
289,352
|
|
Accumulated deficit
|
|
|
(209,290
|
)
|
|
|
(189,025
|
)
|
Accumulated other comprehensive gain
|
|
|
39
|
|
|
|
70
|
|
Total stockholders’ equity
|
|
|
93,176
|
|
|
|
100,438
|
|
Total liabilities and stockholders’ equity
|
|
$
|
120,551
|
|
|
$
|
127,771
|
|
See accompanying notes.
MAKO SURGICAL CORP.
Condensed Statements of Operations
(in thousands, except per share data)
(Unaudited)
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Procedures
|
|
$
|
13,018
|
|
|
$
|
7,676
|
|
|
$
|
24,580
|
|
|
$
|
14,143
|
|
Systems
|
|
|
8,183
|
|
|
|
9,474
|
|
|
|
14,054
|
|
|
|
14,838
|
|
Service
|
|
|
2,474
|
|
|
|
1,429
|
|
|
|
4,680
|
|
|
|
2,624
|
|
Total revenue
|
|
|
23,675
|
|
|
|
18,579
|
|
|
|
43,314
|
|
|
|
31,605
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Procedures
|
|
|
3,118
|
|
|
|
1,716
|
|
|
|
5,775
|
|
|
|
3,514
|
|
Systems
|
|
|
2,796
|
|
|
|
3,488
|
|
|
|
5,244
|
|
|
|
5,526
|
|
Service
|
|
|
451
|
|
|
|
274
|
|
|
|
832
|
|
|
|
533
|
|
Total cost of revenue
|
|
|
6,365
|
|
|
|
5,478
|
|
|
|
11,851
|
|
|
|
9,573
|
|
Gross profit
|
|
|
17,310
|
|
|
|
13,101
|
|
|
|
31,463
|
|
|
|
22,032
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
19,284
|
|
|
|
17,137
|
|
|
|
39,072
|
|
|
|
31,946
|
|
Research and development
|
|
|
5,244
|
|
|
|
5,015
|
|
|
|
10,098
|
|
|
|
9,209
|
|
Depreciation and amortization
|
|
|
1,270
|
|
|
|
977
|
|
|
|
2,544
|
|
|
|
1,952
|
|
Total operating costs and expenses
|
|
|
25,798
|
|
|
|
23,129
|
|
|
|
51,714
|
|
|
|
43,107
|
|
Loss from operations
|
|
|
(8,488)
|
|
|
|
(10,028
|
)
|
|
|
(20,251
|
)
|
|
|
(21,075
|
)
|
Other income (expense), net
|
|
|
(33)
|
|
|
|
120
|
|
|
|
25
|
|
|
|
212
|
|
Loss before income taxes
|
|
|
(8,521)
|
|
|
|
(9,908
|
)
|
|
|
(20,226
|
)
|
|
|
(20,863
|
)
|
Income tax expense
|
|
|
14
|
|
|
|
1
|
|
|
|
39
|
|
|
|
41
|
|
Net loss
|
|
$
|
(8,535)
|
|
|
$
|
(9,909
|
)
|
|
$
|
(20,265
|
)
|
|
$
|
(20,904
|
)
|
Net loss per share – Basic and diluted
|
|
$
|
(0.20)
|
|
|
$
|
(0.24
|
)
|
|
$
|
(0.48
|
)
|
|
$
|
(0.52
|
)
|
Weighted average common shares outstanding – Basic and diluted
|
|
|
42,161
|
|
|
|
40,605
|
|
|
|
41,927
|
|
|
|
40,358
|
|
See accompanying notes.
MAKO SURGICAL CORP.
Condensed Statements of Comprehensive Loss
(in thousands)
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,535
|
)
|
|
$
|
(9,909
|
)
|
|
$
|
(20,265
|
)
|
|
$
|
(20,904
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on available-for-sale securities
|
|
|
(28
|
)
|
|
|
51
|
|
|
|
(31
|
)
|
|
|
25
|
|
Comprehensive loss
|
|
$
|
(8,563
|
)
|
|
$
|
(9,858
|
)
|
|
$
|
(20,296
|
)
|
|
$
|
(20,879
|
)
|
See accompanying notes.
MAKO SURGICAL CORP.
Condensed Statements of Cash Flows
(in thousands, except share data)
(Unaudited)
|
|
Six months ended June 30,
|
|
|
|
2012
|
|
|
2011
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(20,265
|
)
|
|
$
|
(20,904
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
2,832
|
|
|
|
2,081
|
|
Amortization of intangible assets
|
|
|
839
|
|
|
|
640
|
|
Stock-based compensation
|
|
|
6,122
|
|
|
|
4,946
|
|
Inventory write-down
|
|
|
95
|
|
|
|
28
|
|
Amortization of premium on investment securities
|
|
|
221
|
|
|
|
195
|
|
Loss on asset impairment
|
|
|
511
|
|
|
|
148
|
|
Provision for doubtful accounts
|
|
|
77
|
|
|
|
154
|
|
Issuance of restricted stock under development agreement
|
|
|
454
|
|
|
|
1,080
|
|
Non-cash changes under credit facility
|
|
|
(62
|
)
|
|
|
―
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1,692
|
|
|
|
(612
|
)
|
Inventory
|
|
|
(11,432
|
)
|
|
|
(5,583
|
)
|
Deferred cost of revenue
|
|
|
(458
|
)
|
|
|
(97
|
)
|
Prepaid and other current assets
|
|
|
(2,714
|
)
|
|
|
(955
|
)
|
Other assets
|
|
|
(37)
|
|
|
|
33
|
|
Accounts payable
|
|
|
3,776
|
|
|
|
663
|
|
Accrued compensation and employee benefits
|
|
|
(4,747
|
)
|
|
|
(2,090
|
)
|
Other accrued liabilities
|
|
|
(1,365
|
)
|
|
|
949
|
|
Deferred revenue
|
|
|
2,378
|
|
|
|
491
|
|
Net cash used in operating activities
|
|
|
(22,083
|
)
|
|
|
(18,833
|
)
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchase of investments
|
|
|
(3,160
|
)
|
|
|
(22,703
|
)
|
Proceeds from sales and maturities of investments
|
|
|
22,298
|
|
|
|
22,820
|
|
Acquisition of property and equipment
|
|
|
(3,839
|
)
|
|
|
(2,754
|
)
|
Acquisition of intangible assets
|
|
|
(65
|
)
|
|
|
―
|
|
Net cash provided by (used in) investing activities
|
|
|
15,234
|
|
|
|
(2,637
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from employee stock purchase plan
|
|
|
844
|
|
|
|
469
|
|
Exercise of common stock options and warrants for cash
|
|
|
2,176
|
|
|
|
1,930
|
|
Payment of payroll taxes relating to vesting of restricted stock
|
|
|
(172
|
)
|
|
|
(666
|
)
|
Net cash provided by financing activities
|
|
|
2,848
|
|
|
|
1,733
|
|
Net decrease in cash and cash equivalents
|
|
|
(4,001
|
)
|
|
|
(19,737
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
13,438
|
|
|
|
27,108
|
|
Cash and cash equivalents at end of period
|
|
$
|
9,437
|
|
|
$
|
7,371
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Receipt of 4,556 and 30,585 shares of common stock delivered in payment of payroll taxes for the six months ended June 30, 2012 and 2011, respectively
|
|
$
|
172
|
|
|
$
|
666
|
|
Transfers of inventory to property and equipment
|
|
|
1,961
|
|
|
|
1,402
|
|
Issuance of restricted stock under development agreement
|
|
|
454
|
|
|
|
1,080
|
|
See accompanying notes.
MAKO SURGICAL CORP.
Notes to Condensed Financial Statements
June 30, 2012
(Unaudited)
1. Organization and Basis of Presentation
MAKO Surgical Corp. (the “Company” or “MAKO”)
is an emerging medical device company that markets its RIO® Robotic Arm Interactive Orthopedic (“RIO”) system,
joint specific applications for the knee and hip, and proprietary RESTORIS® 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 Company’s common stock trades on The NASDAQ Global Select Market under the ticker symbol “MAKO.”
Basis of Presentation
In the opinion of management, the accompanying unaudited
condensed financial statements (“condensed financial statements”) of the Company have been prepared on a basis consistent
with the Company’s December 31, 2011 audited financial statements and include all adjustments, consisting of only normal
recurring adjustments, necessary to fairly state the information set forth herein. These condensed financial statements have been
prepared in accordance with the regulations of the Securities and Exchange Commission and, therefore, omit certain information
and footnote disclosure necessary to present the statements in accordance with accounting principles generally accepted in the
United States. These quarterly condensed financial statements should be read in conjunction with the audited financial statements
and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2011 (the “Form
10-K”). The results of operations for the three and six months ended June 30, 2012 may not be indicative of the results to
be expected for the entire year or any future periods.
Liquidity and Operations
In executing its current business plan, the Company
believes its existing cash, cash equivalents and investment balances will be sufficient to meet its anticipated cash requirements
for at least the next twelve months. To the extent the Company’s 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 drawing on our available credit facility (see Note 6 for a discussion of the Facility
Agreement), or modify its current business plan. The sale of additional equity, the issuance of warrants in connection with a draw
on the Company’s credit facility or the sale of convertible debt securities may result in dilution to the Company’s
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 Company’s operations and ability
to issue 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 Company’s cash and cash equivalents are held in demand and money market accounts at four large financial
institutions. The Company’s investments are held in a variety of interest bearing instruments, including notes and bonds
from U.S. government agencies and certificates of deposit at three large financial institutions. Such deposits are generally in
excess of insured limits. The Company has not experienced any historical losses on its deposits of cash and cash equivalents.
The Company may perform credit evaluations of its customers’
financial condition and, generally, requires no collateral from its customers. The Company provides an allowance for doubtful accounts
when collections become doubtful but has not experienced any significant 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 new and established domestic and foreign government regulations and taxes, uncertainty of widespread market acceptance of
products, unanticipated changes in the timing of the sales cycle for the Company’s products or the vetting process undertaken
by prospective customers, access to credit for capital purchases by our customers, product liability and the need to obtain additional
financing. The Company’s 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 Company’s 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 Robotic Arm Interactive Orthopedic system, current and future MAKOplasty applications to the RIO system
(together with the RIO, the “RIO system”), 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 broad commercial acceptance
of MAKOplasty or obtain regulatory clearances or approvals for future products, including other orthopedic products, its revenue
would be adversely affected and the Company would not become profitable.
The Company’s current versions of its RIO system,
its MAKOplasty partial knee and total hip arthroplasty applications, and its RESTORIS® MCK multicompartmental knee implant
systems and RESTORIS total hip implant systems 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 Company’s products will receive the necessary
clearances or approvals. If the Company were to be denied any such clearance or approval or such clearance or approval were delayed,
it could have a material adverse impact on the Company.
2. Summary of Significant Accounting Policies
Revenue Recognition
Revenue is generated: from (1) unit sales of the RIO
system, including associated instrumentation, installation services and training; (2) sales of implants and disposable products
utilized in MAKOplasty procedures; and (3) sales of warranty and maintenance services. The Company recognizes revenue in accordance
with ASC 605-10,
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 Company’s 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 Company’s 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, training of at least one surgeon, which typically occurs prior to or concurrent with the RIO system installation, and customer acceptance, if required.
|
|
|
|
|
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, including extended warranty services, on the RIO system hardware are deferred and recognized ratably over the service period until no further obligation exists. Sales of the Company’s RIO system generally include a one-year warranty and maintenance obligation for services. Costs associated with providing warranty and maintenance services are expensed to cost of revenue as incurred.
|
Provisions for discounts and rebates to customers are
established as a reduction to revenue in the same period as the related sales are recorded.
A portion of the Company’s end-user customers
acquire the RIO system through a leasing arrangement with qualified third-party leasing companies. In these instances, the
Company 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 Company’s domestic 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. The Company’s domestic sales contracts generally do not provide the customer with a customer
acceptance period. If such a right is provided, all related revenues would be deferred until the customer has unconditionally
accepted the RIO system.
Sales contracts for implants and disposable products
to independent international distributors generally provide for a right of return. Accordingly, no revenue is recognized for these
sales until the right of return expires or is waived. Sales contracts for the Company’s RIO system to international distributors
generally do not provide the distributor with a right of return. If such a right is provided, all related revenues would be deferred
until such right expires or is waived. The one-year warranty for RIO system sales to international distributors is limited to replacing
parts within the warranty period and does not provide for maintenance services. The Company accrues for the estimated costs of
providing the one-year warranty for RIO system sales to international distributors upon installation as a component of cost of
revenue - systems in the statements of operations.
The Company’s RIO system includes software that
is essential to the functionality of the product. Since the RIO system’s software and non-software components function together
to deliver the RIO system’s essential functionality, they are considered one deliverable that is excluded from the software
revenue recognition guidance.
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, or best estimate of selling price (“ESP”).
The Company allocates arrangement consideration using
ESP for its RIO system, ESP for its implants and disposables and VSOE of fair value for its warranty and maintenance services.
VSOE of fair value is based on the price charged when the element is sold separately. ESP is established by determining 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 products
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.
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.
Deferred Revenue and Deferred Cost of Revenue
Deferred revenue consists of deferred service revenue,
deferred system revenue and deferred procedure revenue. Deferred service revenue results from the advance payment for services
to be delivered over a period of time, usually in one-year increments. Deferred system revenue arises from timing differences between
the installation of RIO systems and satisfaction of all revenue recognition criteria consistent with the Company’s revenue
recognition policy. Deferred procedure revenue arises from sales to independent international distributors which provide for a
right of return. No revenue is recognized for these sales until the right of return expires or is waived. Deferred revenue expected
to be realized within one year is classified as a current liability. Deferred cost of revenue consists of the direct costs associated
with the manufacture of RIO systems and implants and disposable products for which the revenue has been deferred in accordance
with the Company’s revenue recognition policy. The deferred revenue balance as of June 30, 2012 consisted primarily of deferred
service revenue for warranty and maintenance services on the RIO system hardware.
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.
Net Loss Per Share
The Company calculates 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 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 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)
|
|
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
Stock options outstanding
|
|
|
5,531
|
|
|
|
4,922
|
|
Warrants to purchase common stock
|
|
|
1,268
|
|
|
|
1,849
|
|
Unvested restricted stock
|
|
|
444
|
|
|
|
509
|
|
Total
|
|
|
7,243
|
|
|
|
7,280
|
|
Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board
issued new accounting guidance related to the presentation of comprehensive income that increases comparability between U.S. generally
accepted accounting principles and International Financial Reporting Standards. This guidance will require companies to present
the components of net income and other comprehensive income (“OCI”) either as one continuous statement or as two consecutive
statements, eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’
equity. This guidance became effective for the Company’s interim and annual periods beginning January 1, 2012. The Company
early adopted this guidance in 2011 and reports OCI in a separate statement.
3. Investments
The Company’s 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 gain
(loss) within stockholders’ 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 other income (expense), net. During the six months ended June 30, 2012 and 2011, 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 June 30, 2012
(in thousands)
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
10,758
|
|
|
$
|
21
|
|
|
$
|
(10
|
)
|
|
$
|
10,769
|
|
Certificates of deposit
|
|
|
14,542
|
|
|
|
86
|
|
|
|
(62
|
)
|
|
|
14,566
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
|
527
|
|
|
|
4
|
|
|
|
―
|
|
|
|
531
|
|
Total investments
|
|
$
|
25,827
|
|
|
$
|
111
|
|
|
$
|
(72
|
)
|
|
$
|
25,866
|
|
As of December 31, 2011
(in thousands)
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
19,733
|
|
|
$
|
23
|
|
|
$
|
(3
|
)
|
|
$
|
19,753
|
|
Certificates of deposit
|
|
|
16,588
|
|
|
|
24
|
|
|
|
(11
|
)
|
|
|
16,601
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
|
3,761
|
|
|
|
21
|
|
|
|
―
|
|
|
|
3,782
|
|
Certificates of deposit
|
|
|
5,104
|
|
|
|
18
|
|
|
|
(2
|
)
|
|
|
5,120
|
|
Total investments
|
|
$
|
45,186
|
|
|
$
|
86
|
|
|
$
|
(16
|
)
|
|
$
|
45,256
|
|
As of June 30, 2012 and December 31, 2011, all short-term
investments had maturity dates of less than one year. As of June 30, 2012 and December 31, 2011, all long-term investments had
maturity dates between one and two years.
The fair values of the Company’s investments
based on the level of inputs are summarized below:
(in thousands)
|
|
|
|
|
Fair Value Measurements at the Reporting Date Using
|
|
|
|
June 30, 2012
|
|
|
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
|
|
$
|
10,769
|
|
|
$
|
4,012
|
|
|
$
|
6,757
|
|
|
$
|
―
|
|
Certificates of deposit
|
|
|
14,566
|
|
|
|
―
|
|
|
|
14,566
|
|
|
|
―
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
Certificates of deposit
|
|
|
531
|
|
|
|
―
|
|
|
|
531
|
|
|
|
―
|
|
Total investments
|
|
$
|
25,866
|
|
|
$
|
4,012
|
|
|
$
|
21,854
|
|
|
$
|
―
|
|
Level 2 securities are priced using quoted market prices
and other observable market inputs for similar securities or discounted cash flow techniques. There have been no transfers between
Level 1 and Level 2 measurements during the six months ended June, 2012. No investments measured at fair value on a recurring basis
used Level 3 or significant unobservable inputs for the six months ended June 30, 2012.
Carrying amounts of certain of the Company’s
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.
4. Inventory
Inventory consisted of the following:
(in thousands)
|
|
June 30,
2012
|
|
|
December 31,
2011
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
4,250
|
|
|
$
|
3,051
|
|
Work-in-process
|
|
|
1,709
|
|
|
|
866
|
|
Finished goods
|
|
|
22,946
|
|
|
|
15,612
|
|
Total inventory
|
|
$
|
28,905
|
|
|
$
|
19,529
|
|
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 Company’s
products and technical obsolescence, future write-offs of the Company’s inventory may occur.
5. Commitments and Contingencies
Purchase Commitments
At June 30, 2012, the Company was committed to make
future purchases for inventory and other items that occur in the ordinary course of business under various purchase arrangements
with fixed purchase provisions aggregating $14.0 million.
Legal Proceedings
In May 2012, two shareholder complaints were filed
in the U.S. District Court for the Southern District of Florida against the Company and certain of its officers and directors as
purported class actions on behalf of all purchasers of the Company’s common stock between January 9, 2012 and May 7, 2012.
The cases were filed under the captions
James H. Harrison, Jr. v. MAKO Surgical Corp. et al.
, No. 12-cv-60875 and
Brian
Parker v. MAKO Surgical Corp. et al.
, No. 12-cv-60954. The complaints allege the Company, its Chief Executive Officer, President
and Chairman, Maurice R. Ferré, M.D., and its Chief Financial Officer, Fritz L. LaPorte, violated federal securities laws
by making misrepresentations and omissions during the proposed class period about the sales of the Company’s RIO system and
the Company’s financial guidance for 2012 that artificially inflated the Company's stock price. The complaints seek an unspecified
amount of compensatory damages, interest, attorneys’ fees, and costs. On August 1, 2012, the court appointed Oklahoma Firefighters Pension and Retirement System
and Baltimore County Employees’ Retirement System as lead plaintiff, consolidated the
Harrison
and
Parker
complaints,
granted the lead plaintiff an extension to file the amended and consolidated complaint on or before August 29, 2012, and denied
as moot a motion previously filed by the Company, Dr. Ferré, and Mr. LaPorte to dismiss the
Harrison
complaint.
Additionally, in June and July 2012, four shareholder
derivative complaints were filed against the Company, as nominal defendant, and its board of directors, as well as Dr. Ferré
and, in two cases, Mr. LaPorte. Those complaints allege that the Company’s directors and certain officers violated their
fiduciary duties by allowing the Company to make misrepresentations or omissions that exposed the Company to the
Harrison
and
Parker
class actions. Two of the derivative actions were filed in the U.S. District Court for the Southern District
of Florida under the captions
Todd Deehl v. Ferré et al.
, No. 12-cv-61238 and
Robert Bardagy v. Ferré et
al.
, No. 12-cv-61380. The other two actions were filed in the Seventeenth Judicial Circuit in and for Broward County, Florida
and have been consolidated under the caption
In re MAKO Surgical Corporation Shareholder Derivative Litigation
, No. 12-cv-16221.
By order dated July 3, 2012, the court stayed
In re MAKO Surgical Corporation Shareholder Derivative Litigation
pending
a ruling on any motions to dismiss filed or to be filed in the
Harrison
and
Parker
class actions.
The Company has accrued $500,000 as of June 30, 2012
to cover the insurance deductible for the Company’s directors and officers insurance policies.
Contingencies
The Company accrues a liability for legal contingencies
when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of
the loss. The Company reviews these accruals and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of
legal counsel and other relevant information. To the extent new information is obtained and the Company's views on the probable
outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in the Company's accrued liabilities
would be recorded in the period in which such determination is made. For the matters referenced below, the amount of liability
is not probable or the amount cannot be reasonably estimated; and, therefore, accruals have not been made. In addition, in accordance
with the relevant authoritative guidance, for matters which the likelihood of material loss is at least reasonably possible, the
Company provides disclosure of the possible loss or range of loss; however, if a reasonable estimate cannot be made, the Company
will provide disclosure to that effect.
In addition to the matters discussed in “Legal
Proceedings” above, the Company is a defendant in various litigation matters generally arising in the normal course of business.
Although it is difficult to predict the ultimate outcomes of these matters, the Company believes that it is not reasonably possible
that the ultimate outcomes of these ordinary course litigation matters will materially and adversely affect its business, financial
position, results of operations or cash flows.
6. Credit Facility
On May 7, 2012, the Company entered into a Facility
Agreement with affiliates of Deerfield Management Company, L.P. (“Deerfield”), as amended on June 28, 2012, pursuant
to which Deerfield agreed to loan the Company up to $50 million, subject to the terms and conditions set forth in the Facility
Agreement. Under the terms of the Facility Agreement, the Company has the flexibility, but is not required, to draw down on the
Facility Agreement in $10 million increments (the “Financing Commitment”) at any time until May 15, 2013 (the
“Draw Period”). The Company was not required to pay an upfront transaction fee to Deerfield under the Facility Agreement.
In exchange for the Financing Commitment, on May 7, 2012, the Company issued to Deerfield warrants to purchase 275,000 shares of
the Company’s common stock at an exercise price of $27.70 per share.
Each $10 million disbursement shall be accompanied
by the issuance to Deerfield of warrants to purchase 140,000 shares of the Company’s common stock, at an exercise price equal
to a 20% premium to the mean closing price of the Company’s common stock over the five trading days following receipt by
Deerfield of the draw notice. If the Company, in its discretion, elects to draw down the entire $50 million available under
the Facility Agreement, the Company will have issued warrants to purchase a total of 975,000 shares of its common stock, including
the 275,000 warrants issued in connection with the Financing Commitment. The number of shares of common stock into which a warrant
is exercisable and the exercise price of any warrant will be adjusted to reflect any stock splits, recapitalizations or similar
adjustments in the number of outstanding shares of common stock. The warrants have the same dividend rights to the same extent
as if the warrants were exercised into shares of common stock.
Any amounts drawn under the Facility Agreement accrue
interest at a rate of 6.75% per annum and will be secured by all of the Company’s assets excluding only the Company’s
intellectual property assets. Accrued interest is payable quarterly in cash. The Company has the right to prepay any amounts owed
without penalty. All principal amounts outstanding under the Facility Agreement are payable on the third anniversary of each draw.
If no funds have been drawn under the Facility Agreement by May 15, 2013, the Company is required to pay Deerfield a fee of $1.0
million (the “Facility Fee”). The Company is accruing the Facility Fee to expense in other income (expense), net in
the condensed statement of operations through the Draw Period, or until the Company draws down under the Facility Agreement, at
which time any previous expense recognized would be reversed. As of June 30, 2012, the Company has not drawn any amounts under
the Facility Agreement.
Additionally, any amounts drawn under the Facility
Agreement may become immediately due and payable upon (i) an “event of default,” as defined in the Facility Agreement,
in which case Deerfield would have the right to require the Company to repay 100% of the principal amount of the loan, plus any
accrued and unpaid interest thereon, or (ii) the consummation of certain change of control transactions, in which case Deerfield
would have the right to require the Company to repay the outstanding principal amount of the loan, plus any accrued and unpaid
interest thereon.
As noted above, in exchange for the Financing Commitment,
on May 7, 2012, the Company issued to Deerfield warrants to purchase 275,000 shares of the Company’s common stock at an exercise
price of $27.70 per share. As of June 30, 2012, all 275,000 warrants were outstanding and exercisable. Prior to the amendment of
the Facility Agreement on June 28, 2012, the warrants were considered a derivative due to certain provisions in the Facility Agreement.
As amended, the warrants qualified for permanent treatment as equity and are classified as additional paid-in capital on the condensed
balance sheet. The initial fair value of the warrants on May 7, 2012, was $3.9 million and the value of the warrants on June 28,
2012 was $3.6 million. The $325,000 change in the fair value of the warrants from May 7, 2012 to June 28, 2012 was recorded as
income in other income (expense), net in the condensed statement of operations.
The Financing Commitment is classified as a current
asset on the condensed balance sheet and is considered a derivative as the Company can put additional warrants and debt to Deerfield.
The Financing Commitment will be revalued each subsequent balance sheet date until the Draw Period expires or all amounts have
been drawn under the Facility Agreement, with any changes in the fair value between reporting periods recorded in other income
(expense), net in the condensed statement of operations. The initial fair value of the Financing Commitment on May 7, 2012, was
$3.9 million and the value of the Financing Commitment on June 30, 2012 was $3.7 million. The $262,000 change in the fair value
of the Financing Commitment from May 7, 2012 to June 30, 2012 was recorded as expense in other income (expense), net in the condensed
statement of operations.
In addition, the Company capitalized issuance costs
of $110,000 related to the Facility Agreement. These costs are being amortized to expense in other income (expense), net in the
condensed statement of operations using the straight-line method through the Draw Period.
The warrants to purchase 275,000 shares of the Company’s
common stock were valued as of June 28, 2012 using a Monte Carlo simulation model with the following assumptions: expected life
of 6.86 years, risk free rate of 1.05%, expected volatility of 63.54% and no expected dividend yield. The value of the Financing
Commitment was determined using Level 3 inputs, or significant unobservable inputs. The value of the Financing Commitment at June
30, 2012 was determined by estimating the value of being able to borrow $50 million at a 6.75% interest rate (the “Loan Value”)
net of the estimated value of the additional 700,000 warrants to be issued upon borrowing. The Loan Value was discounted using
a market yield of 20%. The estimated value of the additional warrants to be issued was valued using a Monte Carlo simulation model
with the following assumptions: expected life of 7.0 years, risk free rate of 1.12%, expected volatility of 67.20% and no expected
dividend yield. The most significant unobservable input in estimating the value of the Financing Commitment was the 20% market
yield. A 100 basis point change in the market yield input could change the value of the Financing Commitment by approximately $1.0
million dollars. The value of the warrants and Financing Commitment on May 7, 2012 were valued using a methodology similar to the
methodology discussed above.
Each warrant issued under the Facility Agreement expires
on the seventh anniversary of its issuance and contains certain limitations that prevent the holder from acquiring shares upon
exercise of a warrant that would result in the number of shares beneficially owned by it exceeding 9.985% of the total number of
shares of common stock then issued and outstanding.
The holder of a warrant may exercise the warrant either
for cash or on a cashless basis. In connection with certain Major Transactions, as defined in the warrant, including a change of
control of the Company or the sale of more than 50% of the Company’s assets, the holder may have the option to receive, in
exchange for the warrant, a number of shares of common stock equal to the Black-Scholes value of the warrant, as defined in the
warrant, divided by the closing price of the common stock on the trading day before closing. In certain circumstances, a portion
of such payment may be made in cash rather than in shares of common stock. In connection with certain “events of default,”
as defined in the Facility Agreement, the holder may have the option to receive, in exchange for the warrant, a number of shares
of common stock equal to the Black-Scholes value of the warrant, as defined in the warrant, divided by the volume weighted average
price for the five trading days prior to the applicable Default Notice, as defined in the warrant.
7. Stockholders’ Equity
Preferred Stock
As of June 30, 2012 and December 31, 2011, the Company
was authorized to issue 27,000,000 shares of $0.001 par value preferred stock. As of June 30, 2012 and December 31, 2011,
there were no shares of preferred stock issued or outstanding.
Common Stock
As of June 30, 2012 and December 31, 2011, 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.
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 three months ended June 30, 2012 and 2011,
stock-based compensation expense was $3.4 million and $2.6 million, respectively. Included within stock-based compensation expense
for the three months ended June 30, 2012 were $2.9 million related to stock option grants, $386,000 related to restricted stock
granted to the Company’s CEO at various dates from 2009 through 2011, and $148,000 related to employee stock purchases under
the 2008 Employee Stock Purchase Plan. During the six months ended June 30, 2012 and 2011, stock-based compensation expense was
$6.1 million and $4.9 million, respectively. Included within stock-based compensation expense for the six months ended June 30,
2012 were $5.1 million related to stock option grants, $772,000 related to restricted stock granted to the Company’s CEO
at various dates from 2009 through 2011, and $273,000 related to employee stock purchases under the 2008 Employee Stock Purchase
Plan.
The Company’s 2004 Stock Incentive Plan (the
“2004 Plan”), its 2008 Omnibus Incentive Plan (the “2008 Plan,” and together with the 2004 Plan, the “Plans”),
and its 2008 Employee Stock Purchase Plan are described in the notes to financial statements in the Form 10-K. Generally, the Company’s
outstanding stock options vest over four years. Stock options granted to certain non-employee directors 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) 4% of the total number of shares
of the Company’s common stock outstanding on December 31st of the preceding year, (2) 2.5 million shares and (3) a number
of shares determined by the Company’s Board of Directors that is lesser than (1) and (2). The number of additional shares
authorized under the 2008 Plan on January 1, 2012 was approximately 1,676,000.
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 Company’s 2008 Plan.
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, 2011
|
|
|
469
|
|
|
|
4,753
|
|
|
$
|
11.06
|
|
Shares reserved
|
|
|
1,676
|
|
|
|
―
|
|
|
|
―
|
|
Net shares settled under the 2008 Plan
|
|
|
8
|
|
|
|
―
|
|
|
|
―
|
|
Options granted
|
|
|
(1,164
|
)
|
|
|
1,164
|
|
|
|
36.05
|
|
Options exercised
|
|
|
―
|
|
|
|
(295
|
)
|
|
|
8.32
|
|
Options forfeited under the 2004 Plan
|
|
|
―
|
|
|
|
(1
|
)
|
|
|
11.12
|
|
Options forfeited under the 2008 Plan
|
|
|
90
|
|
|
|
(90
|
)
|
|
|
16.71
|
|
Balance at June 30, 2012
|
|
|
1,079
|
|
|
|
5,531
|
|
|
|
16.38
|
|
The Company records stock-based compensation expense
on a straight-line basis over the vesting period. As of June 30, 2012, there was total unrecognized compensation cost of $29.1
million, net of estimated forfeitures, related to non-vested stock-based payments (including stock option grants, restricted stock
grants and compensation expense relating to shares issued under the 2008 Employee Stock Purchase Plan). The unrecognized compensation
cost will be adjusted for future changes in estimated forfeitures, and is expected to be recognized over a remaining weighted average
period of 2.8 years as of June 30, 2012.
The estimated grant date fair values of the employee
stock options were calculated using the Black-Scholes valuation model, based on the following assumptions:
|
Six Months Ended June 30,
|
|
2012
|
|
2011
|
Risk-free interest rate
|
1.05% - 1.40%
|
|
2.22% - 2.92%
|
Expected life
|
6.25 years
|
|
6.25 years
|
Expected dividends
|
―
|
|
―
|
Expected volatility
|
48.23% - 48.62%
|
|
49.22% - 50.12%
|
During the six months ended June 30, 2012, 4,556 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 CEO. As of June 30, 2012, 1,062,109 shares of restricted stock granted to the CEO
were issued and outstanding.
Warrants
In December 2004, the Company issued warrants to purchase
462,716 shares of common stock at a purchase price of $0.03 per share. The warrants were immediately exercisable at an exercise
price of $3.00 per share, with the exercise period expiring in December 2014. As of June 30, 2012, 250,872 warrants were outstanding
and exercisable.
In October 2008, the Company issued warrants to purchase
1,290,323 shares of common stock at a purchase price of $0.125 per share 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 June 30, 2012, 598,741 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 share 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 June 30, 2012, 143,157 warrants were outstanding and
exercisable.
In May 2012, the Company issued warrants to purchase
275,000 shares of common stock at an exercise price of $27.70 per share. These warrants became exercisable on May 7, 2012 and have
a seven-year term. As of June 30, 2012, all warrants were outstanding and exercisable.
8. 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.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
In this report, “MAKO Surgical,” “MAKO,”
the “Company,” “we,” “us” and “our” refer to MAKO Surgical Corp.
The following discussion and analysis of our financial
condition and results of operations should be read together with our financial statements and related notes appearing elsewhere
in this report. This report contains forward-looking statements regarding, among other things, statements related to expectations,
goals, plans, objectives and future events. We intend such forward-looking statements to be covered by the safe harbor provisions
for forward-looking statements contained in Section 21E of the Securities Exchange Act of 1934 and the Private Securities Reform
Act of 1995. In some cases, you can identify forward-looking statements by the following words: “may,” “will,”
“could,” “would,” “should,” “expect,” “intend,” “plan,”
“anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,”
“continue,” “ongoing” or the negative of these terms or other comparable terminology, although not all
forward-looking statements contain these words. Examples of such statements include, but are not limited to, statements about the
nature, timing and number of planned new product introductions; market acceptance of MAKOplasty®, including the RIO® Robotic
Arm Interactive Orthopedic system, or RIO system, and MAKO RESTORIS® family of implant systems; the future availability from
third-party suppliers, including single source suppliers, of implants for and components of our RIO system; the anticipated adequacy
of our capital resources to meet the needs of our business; our ability to sustain, and our goals for, sales and earnings growth,
including projections regarding RIO system installations; and our success in achieving timely approval or clearance of products
with domestic and foreign regulatory entities. These statements are based on the current estimates and assumptions of our management
as of the date of this report and are subject to risks, uncertainties, changes in circumstances, assumptions and other factors
that may cause actual results to differ materially from those indicated by forward-looking statements, many of which are beyond
our ability to control or predict. Such factors, among others, may have a material adverse effect on our business, financial condition
and results of operations and may include the following:
|
·
|
the potentially significant impact of a continued economic downturn or delayed economic recovery on the ability of our customers
to secure adequate funding, including access to credit, for the purchase of our products or cause our customers to delay a purchasing
decision;
|
|
·
|
unanticipated changes in the timing of the sales cycle for our products or the vetting process undertaken by prospective customers;
|
|
·
|
changes in competitive conditions and prices in our markets;
|
|
·
|
unanticipated issues relating to intended product launches;
|
|
·
|
decreases in sales of our principal product lines;
|
|
·
|
decreases in utilization of our principal product lines or in procedure volume;
|
|
·
|
increases in expenditures related to increased or changing governmental regulation or taxation of our business, both nationally
and internationally;
|
|
·
|
unanticipated issues in complying with domestic or foreign regulatory requirements related to our current products, including
Medical Device Reporting requirements and other required reporting to the United States Food and Drug Administration, or securing
regulatory clearance or approvals for new products or upgrades or changes to our current products;
|
|
·
|
the impact of the United States healthcare reform legislation enacted in March 2010 on hospital spending, reimbursement, and
the taxing of medical device companies;
|
|
·
|
the potential impact of the informal Securities and Exchange Commission inquiry and the findings of that inquiry;
|
|
·
|
any unanticipated impact arising out of the securities class actions, shareholder derivative actions, or any other litigation
brought against us;
|
|
·
|
loss of key management and other personnel or the inability to attract such management and other personnel; and
|
|
·
|
unanticipated intellectual property expenditures required to develop, market, and defend our products.
|
These and other risks are described in greater detail under Item 1A, Risk
Factors, contained in our Annual Report on Form 10-K for the year ended December 31, 2011. Given these uncertainties, you should
not place undue reliance on these forward-looking statements. We do not undertake any obligation to release any revisions to these
forward-looking statements publicly to reflect events or circumstances after the date of this report or to reflect the occurrence
of unanticipated events.
We have received or applied for trademark registration
of and/or claim trademark rights, including in the following marks: “MAKOplasty
®
,” “RIO
®
”
and “RESTORIS
®
,” as well as in the MAKO Surgical Corp. “MAKO” logo, whether standing alone
or in connection with the words “MAKO Surgical Corp.”
Overview
We are an emerging medical device company that markets
our RIO Robotic-Arm Interactive Orthopedic system, joint specific applications for the knee and hip, and proprietary RESTORIS implants
for orthopedic procedures. We offer MAKOplasty, an innovative, restorative surgical solution that enables orthopedic surgeons
to consistently, reproducibly and precisely treat patient specific osteoarthritic disease. Our common stock trades on The NASDAQ
Global Select Market under the ticker symbol “MAKO.”
We have incurred net losses in each year since our
inception and, as of June 30, 2012, we had an accumulated deficit of $209.3 million. We expect to continue to incur significant
operating losses as we increase our sales and marketing activities and otherwise continue to invest capital in the development
and expansion of our products and our business generally. We expect that our general and administrative expenses will continue
to increase to support the sales and marketing efforts associated with the growing commercialization of MAKOplasty, including our
MAKOplasty total hip arthroplasty application, or MAKOplasty THA application, that we commercially launched in September 2011,
and to support our continued growth in operations. We also expect our research and development expenses 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.
Recent business events and key milestones in the development
of our business include the following:
·
During
the six month period ended June 30, 2012, we sold fifteen RIO systems, comprised of thirteen domestic commercial sales, one international
commercial sale and one international demonstration sale, and eleven MAKOplasty THA applications to existing customers. We deferred
recognition of the international demonstration sale as all revenue recognition criteria consistent with the Company’s revenue
recognition policy had not been satisfied as of June 30, 2012. As of June 30, 2012, our worldwide commercial installed base was
126 systems and our domestic commercial installed base was 123 systems, of which 71 systems, or 58% of our domestic commercial
installed base, have the MAKOplasty THA application.
·
A
total of 4,887 MAKOplasty procedures were performed worldwide during the six month period ended June 30, 2012, representing a 71%
increase over the same period in 2011.
We believe that the keys to continuing to grow our
business are expanding the acceptance and application of MAKOplasty for partial knee resurfacing procedures, gaining market acceptance
for our MAKOplasty THA application and associated implant systems and introducing other potential future applications. To successfully
commercialize our products and continue to grow our business, we must gain broad market acceptance for MAKOplasty procedures.
Factors That May Influence Future Results of Operations
The following is a description of factors that may
influence our future results of operations, including significant trends and challenges that we believe are important to an understanding
of our business and results of operations.
Revenue
Revenue is generated from: (1) RIO system sales and
applications (2) sales of implants and disposable products utilized in MAKOplasty procedures; and (3) sales of warranty and maintenance
services on the RIO system hardware. Future revenue from sales of our products is difficult to predict and we expect that it will
only modestly reduce our continuing losses resulting from selling, general and administrative expenses, research and development
expenses and other activities for at least the next two years. Our future revenue may also be adversely affected by the current
general economic conditions and the resulting tightening of the credit markets, which may cause purchasing decisions to be delayed
or cause our customers to experience difficulties in securing adequate funding to buy our products.
The generation of recurring revenue through sales of
our implants, disposable products and warranty service contracts is an important part of the MAKOplasty business model. We anticipate
that recurring revenue will constitute an increasing percentage of our total revenue as we leverage each new installation of our
RIO system to generate recurring sales of implants and disposable products and as we expand our RIO applications and implant product
offerings, including our MAKOplasty THA application that we commercially launched in September 2011.
Cost of Revenue
Cost of revenue primarily consists of the direct costs
associated with the manufacture of RIO systems, implants and disposable products for which revenue has been recognized in accordance
with our revenue recognition policy. Costs associated with providing services are expensed as incurred. Cost of revenue also includes
the allocation of manufacturing overhead costs, freight, royalties related to the sale of products covered by licensing arrangements
and write-offs of obsolete, impaired or excess inventory.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist
primarily of expenses relating to compensation, including stock-based compensation and benefits, and compensation for sales, marketing,
training, clinical research, operations, regulatory, quality, finance, legal, executive, and administrative personnel. Other significant
expenses include costs associated with sales and marketing activities, marketing and advertising materials, training, insurance,
professional fees for legal and accounting services, consulting fees, travel expenses, facility and related operating costs, depreciation
on loaned implant instrumentation to customers, and recruiting and other human resources expenses. Our selling, general and administrative
expenses are expected to continue to increase due to the planned increase in the number of employees necessary to support the sales
and marketing efforts associated with the growing commercialization of MAKOplasty and an increased number of employees necessary
to support our continued growth in operations. In addition, we expect to incur additional costs associated with securing and protecting
our intellectual property rights as necessary to support our current and future product offerings.
Research and Development Expenses
Costs related to research, design and development of
products are charged to research and development expense as incurred. These costs include direct salary and benefit costs for research
and development employees including stock-based compensation, cost for materials used in research and development activities and
costs for outside services. 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 and development of potential future products.
Critical Accounting Policies
There have been no significant changes in our critical
accounting policies during the six months ended June 30, 2012 as compared to the critical accounting policies described in our
Form 10-K for the year ended December 31, 2011.
Results of Operations for the six and three months ended June 30, 2012
and 2011, respectively
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
% of
Change
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
% of
Change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Procedures
|
|
$
|
13,018
|
|
|
$
|
7,676
|
|
|
$
|
5,342
|
|
|
|
70
|
%
|
|
$
|
24,580
|
|
|
$
|
14,143
|
|
|
$
|
10,437
|
|
|
|
74
|
%
|
Systems
|
|
|
8,183
|
|
|
|
9,474
|
|
|
|
(1,291
|
)
|
|
|
(14
|
%)
|
|
|
14,054
|
|
|
|
14,838
|
|
|
|
(784
|
)
|
|
|
(5
|
%)
|
Service
|
|
|
2,474
|
|
|
|
1,429
|
|
|
|
1,045
|
|
|
|
73
|
%
|
|
|
4,680
|
|
|
|
2,624
|
|
|
|
2,056
|
|
|
|
78
|
%
|
Total revenue
|
|
|
23,675
|
|
|
|
18,579
|
|
|
|
5,096
|
|
|
|
27
|
%
|
|
|
43,314
|
|
|
|
31,605
|
|
|
|
11,709
|
|
|
|
37
|
%
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Procedures
|
|
|
3,118
|
|
|
|
1,716
|
|
|
|
1,402
|
|
|
|
82
|
%
|
|
|
5,775
|
|
|
|
3,514
|
|
|
|
2,261
|
|
|
|
64
|
%
|
Systems
|
|
|
2,796
|
|
|
|
3,488
|
|
|
|
(692
|
)
|
|
|
(20
|
%)
|
|
|
5,244
|
|
|
|
5,526
|
|
|
|
(282
|
)
|
|
|
(5
|
%)
|
Service
|
|
|
451
|
|
|
|
274
|
|
|
|
177
|
|
|
|
65
|
%
|
|
|
832
|
|
|
|
533
|
|
|
|
299
|
|
|
|
56
|
%
|
Total cost of revenue
|
|
|
6,365
|
|
|
|
5,478
|
|
|
|
887
|
|
|
|
16
|
%
|
|
|
11,851
|
|
|
|
9,573
|
|
|
|
2,278
|
|
|
|
24
|
%
|
Gross profit
|
|
|
17,310
|
|
|
|
13,101
|
|
|
|
4,209
|
|
|
|
32
|
%
|
|
|
31,463
|
|
|
|
22,032
|
|
|
|
9,431
|
|
|
|
43
|
%
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative
|
|
|
19,284
|
|
|
|
17,137
|
|
|
|
2,147
|
|
|
|
13
|
%
|
|
|
39,072
|
|
|
|
31,946
|
|
|
|
7,126
|
|
|
|
22
|
%
|
Research and development
|
|
|
5,244
|
|
|
|
5,015
|
|
|
|
229
|
|
|
|
5
|
%
|
|
|
10,098
|
|
|
|
9,209
|
|
|
|
889
|
|
|
|
10
|
%
|
Depreciation and amortization
|
|
|
1,270
|
|
|
|
977
|
|
|
|
293
|
|
|
|
30
|
%
|
|
|
2,544
|
|
|
|
1,952
|
|
|
|
592
|
|
|
|
30
|
%
|
Total operating costs and expenses
|
|
|
25,798
|
|
|
|
23,129
|
|
|
|
2,669
|
|
|
|
12
|
%
|
|
|
51,714
|
|
|
|
43,107
|
|
|
|
8,607
|
|
|
|
20
|
%
|
Loss from operations
|
|
|
(8,488
|
)
|
|
|
(10,028
|
)
|
|
|
1,540
|
|
|
|
(15
|
%)
|
|
|
(20,251
|
)
|
|
|
(21,075
|
)
|
|
|
824
|
|
|
|
(4
|
%)
|
Other income (expense), net
|
|
|
(33
|
)
|
|
|
120
|
|
|
|
(153
|
)
|
|
|
(128
|
%)
|
|
|
25
|
|
|
|
212
|
|
|
|
(187
|
)
|
|
|
(88
|
%)
|
Loss before income taxes
|
|
|
(8,521
|
)
|
|
|
(9,908
|
)
|
|
|
1,387
|
|
|
|
(14
|
%)
|
|
|
(20,226
|
)
|
|
|
(20,863
|
)
|
|
|
637
|
|
|
|
(3
|
%)
|
Income tax expense
|
|
|
14
|
|
|
|
1
|
|
|
|
13
|
|
|
|
1,300
|
%
|
|
|
39
|
|
|
|
41
|
|
|
|
(2
|
)
|
|
|
(5
|
%)
|
Net loss
|
|
$
|
(8,535
|
)
|
|
|
(9,909
|
)
|
|
|
1,374
|
|
|
|
(14
|
%)
|
|
|
(20,265
|
)
|
|
|
(20,904
|
)
|
|
|
639
|
|
|
|
(3
|
%)
|
Revenue
Revenue was $23.7 million for the three months ended
June 30, 2012, compared to $18.6 million for the three months ended June 30, 2011. The increase in revenue of $5.1 million, or
27%, was primarily due to a $5.3 million, or 70%, increase in procedure revenue and a $1.0 million, or 73%, increase in service
revenue, which was partially offset by a $1.3 million, or 14%, decrease in RIO system revenue. The $5.3 million increase in procedure
revenue was attributable to an increase in the number of MAKOplasty procedures performed during the three months ended June 30,
2012 to 2,590 as compared to 1,557 during the three months ended June 30, 2011. The increase in MAKOplasty procedures performed
was primarily due to the continued adoption of MAKOplasty, driven by the growth of our commercial installed base of RIO systems
and relatively consistent average selling price per procedure and a higher average monthly utilization of 7.2 in the second quarter
of 2012 compared to 6.4 in the second quarter of 2011.
The $1.3 million decrease in RIO system revenue was
attributable to the recognition of $8.2 million of revenue from nine commercial unit sales of our RIO system, including one international
commercial sale, seven of which included MAKOplasty THA applications, and two MAKOplasty THA application sales to existing customers
during the three months ended June 30, 2012, as compared to the recognition of $9.5 million of revenue from twelve commercial unit
sales of our RIO system during the three months ended June 30, 2011, including two international commercial sales. RIO system revenue
for the three months ended June 30, 2012 was reduced by $1.4 million for the deferral of system revenue primarily related to the
first year warranty and maintenance services provided by MAKO, as compared to the deferral of $822,000 during the three months
ended June 30, 2011. This deferred revenue will be recognized in accordance with our revenue recognition policy. Revenues deferred
for warranty and maintenance services will be recognized in service revenue over the period warranty and maintenance services are
performed, which is generally twelve months.
The $1.0 million increase in service revenue was attributable
to an increase in the installed base of RIO systems covered under warranty and maintenance.
Revenue was $43.3 million for the six months ended
June 30, 2012, compared to $31.6 million for the six months ended June 30, 2011. The increase in revenue of $11.7 million, or 37%,
was primarily due to a $10.4 million, or 74%, increase in procedure revenue and a $2.1 million, or 78%, increase in service revenue,
which was partially offset by a $784,000, or 5%, decrease in RIO system revenue. The $10.4 million increase in procedure revenue
was attributable to an increase in the number of MAKOplasty procedures performed during the six months ended June 30, 2012 to 4,887
as compared to 2,861 during the six months ended June 30, 2011. The increase in MAKOplasty procedures performed was primarily due
to the continued adoption of MAKOplasty, driven by the growth of our commercial installed base of RIO systems, increase in average
monthly utilization and relatively consistent average selling price per procedure.
The $784,000 decrease in RIO system revenue was attributable
to the recognition of $14.1 million of revenue from fourteen commercial unit sales of our RIO system, including one international
commercial sale, eleven of which included MAKOplasty THA applications, and eleven MAKOplasty THA application sales to existing
customers during the six months ended June 30, 2012, as compared to the recognition of $14.8 million of revenue from nineteen commercial
unit sales of our RIO system during the six months ended June 30, 2011, including two international commercial sales. RIO system
revenue for the six months ended June 30, 2012 was reduced by $2.1 million for the deferral of system revenue primarily related
to the first year warranty and maintenance services provided by MAKO, as compared to the deferral of $1.4 million during the six
months ended June 30, 2011. Revenues deferred for warranty and maintenance services will be recognized in service revenue over
the period warranty and maintenance services are performed, which is generally twelve months. In addition to the fourteen commercial
unit sales of our RIO system, we had one international demonstration unit sale of our RIO system during the six months ended June
30, 2012, for which we deferred revenue recognition due to a contingent obligation to reimburse the distributor for the costs it
incurs in the regulatory process should the agreement be terminated prior to the distributor obtaining regulatory approval.
The $2.1 million increase in service revenue was attributable
to an increase in the installed base of RIO systems covered under warranty and maintenance.
We expect our revenue to continue to increase in future
periods as the number of MAKOplasty procedures performed increases, the unit sales of our RIO system increase, and the installed
base of RIO systems covered under warranty and maintenance increases.
Cost of Revenue and Gross Profit
Cost of revenue was $6.4 million for the three months
ended June 30, 2012, compared to $5.5 million for the three months ended June 30, 2011. The increase in cost of revenue of $887,000,
or 16%, was primarily due to an increase in MAKOplasty procedures performed and to an increase in service cost of revenue, which
was attributable to an increase in the installed base of RIO systems covered under warranty and maintenance. This was partially
offset by the lower number of RIO system sales during the three months ended June 30, 2012 as compared to the three months ended
June 30, 2011.
Cost of revenue was $11.9 million for the six months
ended June 30, 2012, compared to $9.6 million for the six months ended June 30, 2011. The increase in cost of revenue of $2.3 million,
or 24%, was primarily due to an increase in MAKOplasty procedures performed and to an increase in service cost of revenue, which
was attributable to an increase in the installed base of RIO systems covered under warranty and maintenance. This was partially
offset by the lower number of RIO system sales during the six months ended June 30, 2012 as compared to the six months ended June
30, 2011.
We expect our cost of revenue to continue to increase
in future periods as the number of MAKOplasty procedures performed increases, the unit sales of our RIO system and applications
increase, and the installed base of RIO systems covered under warranty and maintenance increases.
Gross profit for the three months ended June 30, 2012
was $17.3 million compared to a gross profit of $13.1 million for the three months ended June 30, 2011. Total gross margin for
the three months ended June 30, 2012 was 73%, including a 76% margin on procedure revenue, a 66% margin on RIO system revenue and
a 82% margin on service revenue compared to a gross margin of 71% for the three months ended June 30, 2011, including a 78% margin
on procedure revenue, a 63% margin on RIO system revenue and a 81% margin on service revenue. The decrease in margin on procedure
revenue was primarily attributable to an increase in Total Hip Arthroplasty procedures, which have a lower margin than Partial
Knee Arthroplasty procedures, and an increase in international procedures, which also have a lower margin than domestic procedures.
Total Hip Arthroplasty procedures and international procedures represented 15% of procedures performed during the three months
ended June 30, 2012 compared to 6% for the three months ended June 30, 2011. The increase in margin on RIO system revenue was primarily
attributable to RIO systems sold with a MAKOplasty THA application, which has a higher margin. The margin on service revenue for
the second quarter of 2012 was relatively consistent with the second quarter of 2011.
Gross profit for the six months ended June 30, 2012
was $31.5 million compared to a gross profit of $22.0 million for the six months ended June 30, 2011. Total gross margin for the
six months ended June 30, 2012 was 73%, including a 77% margin on procedure revenue, a 63% margin on RIO system revenue and a 82%
margin on service revenue compared to a gross margin of 70% for the six months ended June 30, 2011, including a 75% margin on procedure
revenue, a 63% margin on RIO system revenue and a 80% margin on service revenue. The increase in margin on procedure revenue was
primarily attributable to lower material costs per procedure for our partial knee procedures. The margin on RIO system revenue
for the six months ended June 30, 2012 was consistent with the six months ended June 30, 2011. The increase in margin on service
revenue was primarily attributable to a reduction in the frequency of planned preventative maintenance visits as our RIO platform
has matured.
Selling, General and Administrative
Selling, general and administrative expense for the
three and six months ended June 30, 2012 were $19.3 million and $39.1 million, respectively, compared to $17.1 million
and $31.9 million for the three and six months ended June 30, 2011. The increase of $2.1 million, or 13%, for the three months
ended June 30, 2012 and $7.1 million, or 22%, for the six months ended June 30, 2012, was primarily due to an increase in sales,
marketing and operations costs associated with the commercialization of our products and an increase in general and administrative
costs to support our continued growth. Our total number of employees increased from 354 as of June 30, 2011 to 469 as of June 30,
2012. Of the 115 employee increase, 65 were in sales and marketing. Selling, general and administrative expense for the three and
six months ended June 30, 2012 included $2.8 million and $5.0 million, respectively, of stock-based compensation expense compared
to $2.2 million and $4.2 million for the three and six months ended June 30, 2011. The increase in stock-based compensation expense
was primarily due to additional option grants made in 2012 and 2011 combined with an increase in the price of our common stock
at the time of the respective grants. The Company has historically issued annual stock option grants to its employees during the
first quarter of the year. We expect our selling, general and administrative expenses to continue to increase substantially due
to our planned increase in the number of employees and sales and training programs necessary to support the sales and marketing
efforts associated with the growing commercialization of our products, and an increased number of employees, facilities and operating
costs necessary to support our continued growth in operations. In addition, we expect to incur additional costs associated with
securing and protecting our intellectual property rights as necessary to support our current and future product offerings.
Research and Development
Research and development expense for the three and
six months ended June 30, 2012 were $5.2 million and $10.1 million, respectively, compared to $5.0 million and $9.2 million
for the three and six months ended June 30, 2011. The increase of $229,000, or 5%, for the three months ended June 30, 2012 and
$889,000, or 10%, for the six months ended June 30, 2012 was primarily due to an increase in research and development activities
associated with on-going development of our RIO system and applications, our RESTORIS family of implant systems, and potential
future products. 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 and development of potential future products.
Depreciation and Amortization
Depreciation and amortization expense for the three
and six months ended June 30, 2012 were $1.3 million and $2.5 million, respectively, compared to $977,000 and $2.0 million for
the three and six months ended June 30, 2011. The increase of $293,000, or 30%, for the three months ended June 30, 2012 and $592,000,
or 30%, for the six months ended June 30, 2012 was primarily due to an increase in depreciation of property and equipment as a
result of purchases made during 2011 and 2012 due to the growth in our business and operational activities necessary to support
such growth.
Other income (expense), net
Other income (expense), net for the three and six months
ended June 30, 2012 was $33,000 of expense and $25,000 of income, respectively, compared to $120,000 of income and $212,000
of income for the three and six months ended June 30, 2011. The decrease of $153,000 and $187,000 for the three and six months
ended June 30, 2012 and 2011, respectively, was primarily due to (i) expense recognized under
the Credit Facility as discussed in Note 6 to the Financial Statements and (ii) lower interest earned during 2012 due to lower
average cash, cash equivalents and investments balances for the three and six months ended June 30, 2012 compared to the same periods
of 2011.
Income Taxes
No federal income taxes were recognized for the three
and six months ended June 30, 2012 and 2011, due to net operating losses in each period. State and local income taxes for the three
and six months ended June 30, 2012 were $14,000 and $39,000, respectively, compared to $1,000 and $41,000 for the three and six
months ended June 30, 2011. Income taxes recognized to date have not been significant due to net operating losses we have incurred
in each period since our inception. In addition, no deferred income taxes were recorded for the three and six months ended June
30, 2012 and 2011, as all income tax benefits were fully offset by a valuation allowance against our net deferred income tax assets.
Liquidity and Capital Resources
|
|
Six Months Ended June 30,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
% of
Change
|
|
Net cash used in operating activities
|
|
$
|
(22,083
|
)
|
|
$
|
(18,833
|
)
|
|
$
|
(3,250
|
)
|
|
|
17
|
%
|
Net cash provided by (used in) investing activities
|
|
|
15,234
|
|
|
|
(2,637
|
)
|
|
|
17,871
|
|
|
|
(678
|
%)
|
Net cash provided by financing activities
|
|
|
2,848
|
|
|
|
1,733
|
|
|
|
1,115
|
|
|
|
64
|
%
|
Net decrease in cash and cash equivalents
|
|
$
|
(4,001
|
)
|
|
$
|
(19,737
|
)
|
|
$
|
15,736
|
|
|
|
(80
|
%)
|
We have incurred net losses and negative cash flow
from operating activities for each period since our inception in November 2004. As of June 30, 2012, we had an accumulated deficit
of $209.3 million and have financed our operations principally through the sale of our equity securities.
As of June 30, 2012, we had $35.3 million in cash,
cash equivalents and investments. Our cash and investment balances are held in a variety of interest bearing instruments, including
notes and bonds from U.S. government agencies and certificates of deposit.
On May 7, 2012, we entered into a Facility Agreement
with affiliates of Deerfield Management Company, L.P., or Deerfield, as amended on June 28, 2012, pursuant to which Deerfield agreed
to loan us up to $50 million, subject to the terms and conditions set forth in the Facility Agreement. Under the terms of
the agreement, we have the flexibility, but are not required, to draw down on the Facility Agreement in $10 million increments
at any time until May 15, 2013. We were not required to pay an upfront transaction fee to Deerfield under the Facility Agreement.
Any amounts drawn under the Facility Agreement accrue
interest at a rate of 6.75% per annum and will be secured by all of our assets excluding only our intellectual property assets.
Accrued interest is payable quarterly in cash. We have the right to prepay any amounts owed without penalty. All principal amounts
outstanding under the Facility Agreement are payable on the third anniversary of each draw. If no funds have been drawn under the
Facility Agreement by May 15, 2013, we are required to pay Deerfield a fee of $1.0 million. As of June 30, 2012, we have not drawn
any amounts under the Facility Agreement.
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 non-cash items, such as depreciation and amortization, stock-based
compensation and the recognition of research and development expense associated with stock issued under the Strategic Alliance
Agreement with Pipeline Biomedical Holding, LLC. Net cash used in operating activities was also affected by changes in operating assets and liabilities. Included in
changes in operating assets and liabilities for the six months ended June 30, 2012 are $11.4 million of increases to inventory
necessitated by the anticipated increased sales of implants and disposable products and the commercial launch of our MAKOplasty
THA application, $2.7 million of increases to prepaid and other current assets and $4.7 million of decreases to accrued compensation
and employee benefits. These were partially offset by $3.8 million of increases to accounts payable and $2.4 million of increases
to deferred revenue primarily related to the first year warranty and maintenance services provided by MAKO. Included in changes
in operating assets and liabilities for the six months ended June 30, 2011 are $5.6 million of increases to inventory necessitated
by the anticipated increased sales of implants and disposable products and preparation for the launch of our MAKOplasty THA application
in September 2011, and $2.1 million of decreases to accrued compensation and employee benefits due primarily to the payment of
year-end bonuses and commissions.
Net Cash Provided by (Used in) Investing Activities
Net cash provided by investing activities for the six
months ended June 30, 2012 was primarily attributable to proceeds of $22.3 million from sales and maturities of investments, which
was partially offset by the purchase of investments of $3.2 million and purchases of property and equipment of $3.8 million primarily
associated with implant instrumentation to support the commercialization of our total hip implant systems and the growth in our
business. Net cash used in investing activities for the six months ended June 30, 2011 was primarily attributable to the purchase
of investments of $22.7 million and purchases of property and equipment of $2.8 million primarily associated with implant instrumentation,
which was partially offset by proceeds of $22.8 million from sales and maturities of investments.
Net Cash Provided by Financing Activities
Net cash provided by our financing activities for the
six months ended June 30, 2012 and 2011 was primarily attributable to proceeds received under our employee stock purchase plan
of $844,000 and $469,000, respectively, and to proceeds received on the exercise of stock options and warrants of $2.2 million
and $1.9 million, respectively.
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 years as we expand our sales and marketing capabilities
in the orthopedic products market, continue to commercialize our RIO system and MAKOplasty applications, including our MAKOplasty
THA application that we commercially launched in September 2011, and our implant systems, continue research and development of
existing and future products, and continue development of the corporate infrastructure required to sell and market our products
and support operations. We also expect to experience increased cash requirements for inventory and property and equipment in conjunction
with the continued commercialization of our RIO system and implant systems, and introducing other potential future applications.
In executing our current business plan, we believe
our cash, cash equivalents and investment balances as of June 30, 2012, 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 drawing on our available credit facility, or modify
our current business plan. The sale of additional equity, the issuance of warrants in connection with a draw on our credit facility
or the sale of 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 ability to issue 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 and supporting our growth;
|
|
|
·
|
the costs and timing of domestic and foreign regulatory clearance or approvals for new products or upgrades or changes to our
products;
|
|
|
·
|
the expenses we incur in complying with domestic or foreign regulatory requirements imposed on medical device companies;
|
|
|
·
|
the rate of progress, cost and success or failure of on-going 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 terms and timing of any collaborative, licensing, or other arrangements that we may establish;
|
|
|
·
|
the impact of the United States healthcare reform legislation enacted in March 2010 on hospital spending, reimbursement, and
the taxing of medical device companies;
|
|
|
·
|
the acquisition of businesses, products and technologies; and
|
|
|
·
|
general economic conditions and interest rates.
|
Contractual Obligations
At June 30, 2012, we were committed to make future
purchases for inventory and other items that occur in the ordinary course of business under various purchase arrangements with
fixed purchase provisions aggregating $14.0 million.
Other than as described above and scheduled payments
through June 30, 2012, there have been no significant changes in our contractual obligations during the six months ended June 30,
2012 as compared to the contractual obligations described in our Form 10-K for the year ended December 31, 2011.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
ITEM 3. 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 and certificates of deposit. 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.
ITEM 4. CONTROLS AND PROCEDURES.
Disclosure Controls and
Procedures.
In accordance with Rule 13a-15(b)
of the Securities Exchange Act of 1934, or the Exchange Act, our management evaluated, with the participation of our chief executive
officer and chief financial officer, or the Certifying Officers, the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of June 30, 2012. Based upon their evaluation
of these disclosure controls and procedures, our Certifying Officers concluded that the disclosure controls and procedures were
effective as of June 30, 2012 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 rules
and forms of the Securities and Exchange Commission, 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.
Changes in Internal Control over Financial Reporting.
There have been no changes in our internal control
over financial reporting during the quarter ended June 30, 2012 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May 2012, two shareholder
complaints were filed in the U.S. District Court for the Southern District of Florida against the Company and certain of its
officers and directors as purported class actions on behalf of all purchasers of the Company’s common stock between
January 9, 2012 and May 7, 2012. The cases were filed under the captions
James H. Harrison, Jr. v. MAKO Surgical Corp. et
al.
, No. 12-cv-60875 and
Brian Parker v. MAKO Surgical Corp. et al.
, No. 12-cv-60954. The complaints allege the
Company, its Chief Executive Officer, President and Chairman, Maurice R. Ferré, M.D., and its Chief Financial Officer,
Fritz L. LaPorte, violated federal securities laws by making misrepresentations and omissions during the proposed class
period about the sales of the Company’s RIO system and the Company’s financial guidance for 2012 that
artificially inflated the Company's stock price. The complaints seek an unspecified amount of compensatory damages, interest,
attorneys’ fees, and costs. On August 1, 2012, the court appointed Oklahoma Firefighters Pension and Retirement
System and Baltimore County Employees’ Retirement System as lead plaintiff, consolidated the
Harrison
and
Parker
complaints, granted the lead plaintiff an extension to file the amended and consolidated complaint on or before August 29,
2012, and denied as moot a motion previously filed by the Company, Dr. Ferré, and Mr. LaPorte to dismiss the
Harrison
complaint.
Additionally, in June and July
2012, four shareholder derivative complaints were filed against the Company, as nominal defendant, and its board of directors,
as well as Dr. Ferré and, in two cases, Mr. LaPorte. Those complaints allege that the Company’s directors and certain
officers violated their fiduciary duties by allowing the Company to make misrepresentations or omissions that exposed the Company
to the
Harrison
and
Parker
class actions. Two of the derivative actions were filed in the U.S. District Court for
the Southern District of Florida under the captions
Todd Deehl v. Ferré et al.
, No. 12-cv-61238 and
Robert Bardagy
v. Ferré et al.
, No. 12-cv-61380. The other two actions were filed in the Seventeenth Judicial Circuit in and for Broward
County, Florida and have been consolidated under the caption
In re MAKO Surgical Corporation Shareholder Derivative Litigation
,
No. 12-cv-16221. By order dated July 3, 2012, the court stayed
In re MAKO Surgical Corporation Shareholder Derivative Litigation
pending a ruling on any motions to dismiss filed or to be filed in the
Harrison
and
Parker
class actions.
ITEM 1A. RISK FACTORS.
There have been no material
changes in our risk factors from those disclosed in our Form 10-K for the year ended December 31, 2011.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
(c) Issuer Purchases of Equity Securities
The following table summarizes
the surrenders of the Company’s common stock during the three month period ended June 30, 2012:
|
|
|
Total
Number of
Shares
Purchased(1)
|
|
|
Average
Price Paid
per Share(1)
|
|
|
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
|
|
|
Maximum
Dollar Value of
Shares that May
Yet be
Purchased
Under the Plans
or Programs
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 1 to 30, 2012
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
May 1 to 31, 2012
|
|
|
|
2,278
|
|
|
|
39.67
|
|
|
|
—
|
|
|
|
—
|
|
|
June 1 to 30, 2012
|
|
|
|
6,798
|
|
|
|
25.77
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
9,076
|
|
|
$
|
29.26
|
|
|
|
—
|
|
|
$
|
—
|
|
|
(1)
|
Represents the surrender of shares of common stock of the Company to (i) pay the exercise price
associated with the exercise of stock options under the Company’s equity incentive plans and (ii) satisfy the tax withholding
obligations associated with the vesting of restricted stock under the Company’s equity incentive plans.
|
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION.
Not applicable
ITEM 6. EXHIBITS.
Exhibit
No.
|
Description
|
|
|
4.1
|
Form of Amendment to Warrant to purchase shares of common stock of MAKO Surgical Corp. (incorporated by reference to the Company’s Form 8-K as filed on July 3, 2012)
|
10.1
|
Amendment to Facility Agreement, dated May 7, 2012, by and among MAKO Surgical Corp., Deerfield Private Design Fund II, L.P. and Deerfield Private Design International II, L.P. (incorporated by reference to the Company’s Form 8-K as filed on July 3, 2012)
|
10.2
|
Amended and Restated Employment Agreement between Registrant and Ivan Delevic, effective as of July 30, 2012 (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K as filed on August 1, 2012)
|
10.3
|
Letter Agreement between MAKO Surgical Corp. and Steven J. Nunes, dated July 24, 2012 (incorporated by reference to Exhibit 10. 1 to the Company’s Form 8-K as filed on August 1, 2012)
|
10.4
|
Independent Contractor Consulting Services Agreement between MAKO Surgical Corp. and Steven J. Nunes, effective July 17, 2012 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K as filed on August 1, 2012)
|
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
|
101
|
The following materials from MAKO Surgical Corp.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Balance Sheets, (ii) Condensed Statements of Operations, (iii) Condensed Statements of Cash Flows, and (iv) Notes to Condensed Financial Statements
|
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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MAKO Surgical Corp.
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Date: August 7, 2012
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By:
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/s/ Fritz L. LaPorte
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Fritz L. LaPorte
Senior Vice President of Finance and
Administration, Chief Financial Officer and Treasurer
(Principal Financial Officer and Authorized Signatory)
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EXHIBIT INDEX
Exhibit
No.
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Description
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4.1
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Form of Amendment to Warrant to purchase shares of common stock of MAKO Surgical Corp. (incorporated by reference to the Company’s Form 8-K as filed on July 3, 2012)
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10.1
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Amendment to Facility Agreement, dated May 7, 2012, by and among MAKO Surgical Corp., Deerfield Private Design Fund II, L.P. and Deerfield Private Design International II, L.P. (incorporated by reference to the Company’s Form 8-K as filed on July 3, 2012)
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10.2
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Amended and Restated Employment Agreement between Registrant and Ivan Delevic, effective as of July 30, 2012 (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K as filed on August 1, 2012)
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10.3
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Letter Agreement between MAKO Surgical Corp. and Steven J. Nunes, dated July 24, 2012 (incorporated by reference to Exhibit 10. 1 to the Company’s Form 8-K as filed on August 1, 2012)
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10.4
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Independent Contractor Consulting Services
Agreement between MAKO Surgical Corp. and Steven J. Nunes, effective July 17, 2012 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K as filed on August 1, 2012)
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31.1
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Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act
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31.2
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Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act
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32.1
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Certification of Chief Executive Officer pursuant to 18 U.S.C. §1350
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32.2
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Certification of Chief Financial Officer pursuant to 18 U.S.C. §1350
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101
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The following materials from MAKO Surgical Corp.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Balance Sheets, (ii) Condensed Statements of Operations, (iii) Condensed Statements of Cash Flows, and (iv) Notes to Condensed Financial Statements
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