Table of Contents
Each
$10 million disbursement shall be accompanied by the issuance to Deerfield
of warrants to purchase 140,000 shares of the Companys common stock, at an
exercise price equal to a 20% premium to the mean closing price of the
Companys 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 Companys assets excluding only the
Companys 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 September 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
Companys common stock at an exercise price of $27.70 per share. As of
September 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 fair value of the Financing
Commitment on September 30, 2012 was $6.8 million. The $3.1 million and $2.9
million change in the fair value of the Financing Commitment for the three and
nine months ended September 30, 2012, respectively, was recorded as income in
other income (expense), net in the condensed statement of operations.
In
addition, the Company capitalized issuance costs of $153,000 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 Companys 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 September 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 1.08%,
expected volatility of 71.77% 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. The warrants and Financing Commitment on May 7, 2012 were valued
using a methodology similar to the methodology discussed above.
12
Table of Contents
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 the Companys 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 Companys 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.
8. Stockholders Equity
Preferred
Stock
As
of September 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
September 30, 2012 and December 31, 2011, there were no shares of preferred
stock issued or outstanding.
Common
Stock
As
of September 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 September 30, 2012 and 2011, stock-based compensation
expense was $4.3 million and $2.5 million, respectively. Included within
stock-based compensation expense for the three months ended September 30, 2012
were $3.7 million related to stock option grants, $400,000 related to
restricted stock grants, and $190,000 related to employee stock purchases under
the 2008 Employee Stock Purchase Plan. Of the $3.7 million of stock-based
compensation related to stock option grants, $1.1 million was due to the
accelerated vesting of unvested stock options upon the resignation of the
Companys former Senior Vice President of Sales and Marketing in accordance
with the terms of his employment agreement. During the nine months ended
September 30, 2012 and 2011, stock-based compensation expense was $10.4 million
and $7.4 million, respectively. Included within stock-based compensation
expense for the nine months ended September 30, 2012 were $8.8 million related
to stock option grants (including $1.1 million for accelerated vesting of stock
options as previously discussed), $1.2 million related to restricted stock
grants, and $463,000 related to employee stock purchases under the 2008
Employee Stock Purchase Plan.
The
Companys 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 Companys 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 Companys common stock outstanding on
December 31st of the preceding year, (2) 2.5 million shares and (3) a number of
shares determined by the Companys Board of Directors that is lesser than (1)
and (2). The number of additional shares authorized under the 2008 Plan on
January 1, 2012 was approximately 1,676,000.
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Table of Contents
Under
the terms of the Plans, the maximum term of options intended to be incentive
stock options granted to persons who own at least 10% of the voting power of
all outstanding stock on the date of grant is 5 years. The maximum term of
all other options is 10 years. Options issued under the 2008 Plan that are
forfeited or expire will again be made available for issuing grants under the
2008 Plan. Options issued under the 2004 Plan that are forfeited or expire will
not be made available for issuing grants under the 2008 Plan. All future equity
awards will be made under the Companys 2008 Plan.
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
|
|
|
|
|
|
|
|
Restricted stock issued
|
|
|
(6
|
)
|
|
|
|
|
|
|
Net shares settled under the 2008 Plan
|
|
|
8
|
|
|
|
|
|
|
|
Options granted
|
|
|
(1,230
|
)
|
|
1,230
|
|
|
34.85
|
|
Options exercised
|
|
|
|
|
|
(466
|
)
|
|
9.18
|
|
Options forfeited under the 2004 Plan
|
|
|
|
|
|
(1
|
)
|
|
11.12
|
|
Options forfeited under the 2008 Plan
|
|
|
120
|
|
|
(120
|
)
|
|
18.54
|
|
Balance at September 30, 2012
|
|
|
1,037
|
|
|
5,396
|
|
$
|
16.48
|
|
The
Company records stock-based compensation expense on a straight-line basis over
the vesting period. As of September 30, 2012, there was total unrecognized
compensation cost of $23.8 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 2.7 years as of
September 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:
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2012
|
|
2011
|
|
Risk-free
interest rate
|
|
|
0.91% - 1.40
|
%
|
|
1.34% - 2.92
|
%
|
Expected
life
|
|
|
6.25 years
|
|
|
6.25 years
|
|
Expected
dividends
|
|
|
|
|
|
|
|
Expected
volatility
|
|
|
47.52% - 48.62
|
%
|
|
48.55% - 50.12
|
%
|
During
the nine months ended September 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 September 30, 2012, 1,062,109 shares of restricted stock granted
to the CEO were issued and outstanding.
14
Table of Contents
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 September 30, 2012, 194,059 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 September 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 September 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 September 30, 2012, all warrants were
outstanding and exercisable.
9. 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.
10. Subsequent Event
On November 7, 2012, the Company entered into the Second Amendment
to Strategic Alliance Agreement (the “Second Amendment”) with Pipeline Biomedical Holdings, Inc. (“Pipeline”).
In connection with the execution of the Second Amendment, the Company entered into a Subscription Agreement with Pipeline under
which the Company will issue and deliver to Pipeline unregistered shares of the Company’s common stock on or about November
12, 2012 (the “Closing Date”) as an investment in Pipeline. The number of shares of common stock the Company will
deliver on the Closing Date will have an aggregate fair market value equal to $7,000,000 based on the average closing price of
MAKO’s common stock for the five trading days up to and including the Closing Date. In exchange for its investment in Pipeline,
the Company received a credit pursuant to the commercial arrangement between the parties and shares of Pipeline common stock that
are subject to redemption and conversion into an exclusive, limited distribution rights agreement for certain Pipeline technology
in certain instances.
15
Table of Contents
I
TEM 2. MANAGEMENTS 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:
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|
|
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;
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|
unanticipated changes in
the timing of the sales cycle for our products or the vetting process
undertaken by prospective customers;
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|
changes in competitive
conditions and prices in our markets;
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delays in our product development cycles;
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unanticipated issues
relating to intended product launches;
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|
decreases in sales of our
principal product lines;
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|
decreases in utilization
of our principal product lines or in procedure volume;
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the effects of Hurricane
Sandy;
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|
increases in expenditures
related to increased or changing governmental regulation or taxation of our
business, both nationally and internationally;
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|
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;
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|
the impact of the United
States healthcare reform legislation enacted in March 2010 on hospital
spending, reimbursement, and the taxing of medical device companies;
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16
Table of Contents
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the potential impact of
the informal Securities and Exchange Commission inquiry and the findings of
that inquiry;
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|
any unanticipated impact
arising out of the securities class actions, shareholder derivative actions,
or any other litigation brought against us;
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loss of key management and
other personnel or the inability to attract such management and other
personnel; and
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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 September
30, 2012, we had an accumulated deficit of $215.8 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:
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|
|
During the nine month period ended September 30, 2012, we sold 30 RIO
systems, comprised of 28 domestic commercial sales, one international
commercial sale and one international demonstration sale, and fourteen
MAKOplasty THA applications to existing customers. We deferred recognition of
the international demonstration sale as all revenue recognition criteria
consistent with the Companys revenue recognition policy had not been
satisfied as of September 30, 2012. As of September 30, 2012, our worldwide
commercial installed base was 141 systems and our domestic commercial
installed base was 138 systems, of which 85 systems, or 60% of our worldwide
commercial installed base, have the MAKOplasty THA application.
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A total of 7,300 MAKOplasty procedures were performed worldwide during the
nine month period ended September 30, 2012, representing a 56% increase over
the same period in 2011.
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17
Table of Contents
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In October 2012, we announced the commercial availability of our RESTORIS PST
Cup and Tapered Femoral Stem implant system for use with our MAKOplasty THA
application.
|
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.
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
valuation adjustments for obsolete, impaired or excess inventory.
During
the quarter ended September 30, 2012, we increased our inventory reserve by
$3.1 million, or $(0.07) per basic and diluted share, for excess hip implant
inventory. The hip implant inventory consisted primarily of RESTORIS Metafix
femoral stems (an off-the-shelf hip implant system) and was reserved primarily
due to (1) a higher than anticipated volume of cup only THA procedures
performed since the commercial launch of our MAKOplasty THA application in
September 2011, or the Initial Hip Launch, and (2) based on the limited
certainty at the time of the Initial Hip Launch with respect to the timing of
commercialization of future hip implant systems we sought to ensure we had an
adequate supply of hip implant inventory available.
We
anticipate the volume of cup only THA procedures relative to all THA procedures
will decline in the future following the commercialization of our MAKO-branded
RESTORIS PST Cup and Tapered Femoral Stem implant system supplied by Pipeline
Orthopedics, which occurred in October 2012. The $3.1 million inventory
valuation adjustment was charged to cost of revenue procedures in the
condensed statement of operations.
18
Table of Contents
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 and
activities necessary to support the sales and marketing efforts associated with
the growing commercialization of MAKOplasty and an increased number of
employees and activities 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
nine months ended September 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 three
and nine months ended September 30, 2012 and 2011, respectively
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(in thousands)
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
|
2012
|
|
2011
|
|
Change
|
|
% of Change
|
|
2012
|
|
2011
|
|
Change
|
|
% of Change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Procedures
|
|
$
|
12,042
|
|
$
|
9,108
|
|
$
|
2,934
|
|
|
32
|
%
|
$
|
36,622
|
|
$
|
23,251
|
|
$
|
13,371
|
|
|
58
|
%
|
Systems
|
|
|
14,413
|
|
|
9,315
|
|
|
5,098
|
|
|
55
|
%
|
|
28,467
|
|
|
24,153
|
|
|
4,314
|
|
|
18
|
%
|
Service
|
|
|
2,722
|
|
|
1,591
|
|
|
1,131
|
|
|
71
|
%
|
|
7,402
|
|
|
4,215
|
|
|
3,187
|
|
|
76
|
%
|
Total revenue
|
|
|
29,177
|
|
|
20,014
|
|
|
9,163
|
|
|
46
|
%
|
|
72,491
|
|
|
51,619
|
|
|
20,872
|
|
|
40
|
%
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Procedures
|
|
|
6,226
|
|
|
2,484
|
|
|
3,742
|
|
|
151
|
%
|
|
12,001
|
|
|
5,998
|
|
|
6,003
|
|
|
100
|
%
|
Systems
|
|
|
5,453
|
|
|
3,973
|
|
|
1,480
|
|
|
37
|
%
|
|
10,697
|
|
|
9,499
|
|
|
1,198
|
|
|
13
|
%
|
Service
|
|
|
295
|
|
|
378
|
|
|
(83
|
)
|
|
(22
|
%)
|
|
1,127
|
|
|
911
|
|
|
216
|
|
|
24
|
%
|
Total cost of revenue
|
|
|
11,974
|
|
|
6,835
|
|
|
5,139
|
|
|
75
|
%
|
|
23,825
|
|
|
16,408
|
|
|
7,417
|
|
|
45
|
%
|
Gross profit
|
|
|
17,203
|
|
|
13,179
|
|
|
4,024
|
|
|
31
|
%
|
|
48,666
|
|
|
35,211
|
|
|
13,455
|
|
|
38
|
%
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
20,258
|
|
|
16,533
|
|
|
3,725
|
|
|
23
|
%
|
|
59,330
|
|
|
48,479
|
|
|
10,851
|
|
|
22
|
%
|
Research and development
|
|
|
4,973
|
|
|
5,054
|
|
|
(81
|
)
|
|
(2
|
%)
|
|
15,071
|
|
|
14,263
|
|
|
808
|
|
|
6
|
%
|
Depreciation and amortization
|
|
|
1,323
|
|
|
1,177
|
|
|
146
|
|
|
12
|
%
|
|
3,867
|
|
|
3,129
|
|
|
738
|
|
|
24
|
%
|
Total operating costs and expenses
|
|
|
26,554
|
|
|
22,764
|
|
|
3,790
|
|
|
17
|
%
|
|
78,268
|
|
|
65,871
|
|
|
12,397
|
|
|
19
|
%
|
Loss from operations
|
|
|
(9,351
|
)
|
|
(9,585
|
)
|
|
234
|
|
|
(2
|
%)
|
|
(29,602
|
)
|
|
(30,660
|
)
|
|
1,058
|
|
|
(3
|
%)
|
Other income (expense), net
|
|
|
2,842
|
|
|
(51
|
)
|
|
2,893
|
|
|
(5,673
|
%)
|
|
2,867
|
|
|
161
|
|
|
2,706
|
|
|
1,681
|
%
|
Loss before income taxes
|
|
|
(6,509
|
)
|
|
(9,636
|
)
|
|
3,127
|
|
|
(32
|
%)
|
|
(26,735
|
)
|
|
(30,499
|
)
|
|
3,764
|
|
|
(12
|
%)
|
Income tax expense
|
|
|
45
|
|
|
19
|
|
|
26
|
|
|
137
|
%
|
|
84
|
|
|
60
|
|
|
24
|
|
|
40
|
%
|
Net loss
|
|
$
|
(6,554
|
)
|
$
|
(9,655
|
)
|
$
|
3,101
|
|
|
(32
|
%)
|
$
|
(26,819
|
)
|
$
|
(30,559
|
)
|
$
|
3,740
|
|
|
(12
|
%)
|
19
Table of Contents
Revenue
Revenue
was $29.2 million for the three months ended September 30, 2012, compared to
$20.0 million for the three months ended September 30, 2011. The increase in
revenue of $9.2 million, or 46%, was primarily due to a $2.9 million, or 32%,
increase in procedure revenue, a $5.1 million, or 55%, increase in RIO system
revenue and a $1.1 million, or 71%, increase in service revenue.
The
$2.9 million increase in procedure revenue was attributable to an increase in
the number of MAKOplasty procedures performed during the three months ended
September 30, 2012 to 2,413 as compared to 1,813 during the three months ended
September 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.
The
$5.1 million increase in RIO system revenue was attributable to the recognition
of $14.4 million of revenue during the three months ended September 30, 2012
from fifteen commercial unit sales of our RIO system, eleven of which included
MAKOplasty THA applications, and three of which were MAKOplasty THA application
sales to existing customers, as compared to the recognition of $9.3 million of
revenue from eleven commercial unit sales of our RIO system and twelve
MAKOplasty THA application sales during the three months ended September 30,
2011. RIO system revenue for the three months ended September 30, 2012 was
reduced by $2.2 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 $774,000
during the three months ended September 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
$1.1 million increase in service revenue was attributable to an increase in the
installed base of RIO systems covered under warranty and maintenance.
Revenue
was $72.5 million for the nine months ended September 30, 2012, compared to
$51.6 million for the nine months ended September 30, 2011. The increase in
revenue of $20.9 million, or 40%, was primarily due to a $13.4 million, or 58%,
increase in procedure revenue, a $4.3 million, or 18%, increase in RIO system
revenue and a $3.2 million, or 76%, increase in service revenue.
The
$13.4 million increase in procedure revenue was attributable to an increase in
the number of MAKOplasty procedures performed during the nine months ended
September 30, 2012 to 7,300 as compared to 4,674 during the nine months ended
September 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 per system and relatively consistent average selling price per
procedure.
The
$4.3 million increase in RIO system revenue was attributable to the recognition
of $28.5 million of revenue from twenty-nine commercial unit sales of our RIO
system, including one international commercial sale and twenty-two of which
included MAKOplasty THA applications, and fourteen MAKOplasty THA application
sales to existing customers during the nine months ended September 30, 2012, as
compared to the recognition of $24.2 million of revenue from thirty commercial
unit sales of our RIO system during the nine months ended September 30, 2011,
including two international commercial sales, and twelve MAKOplasty THA
application sales to existing customers. RIO system revenue for the nine months
ended September 30, 2012 was reduced by $4.2 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 $2.2 million during the nine months ended September 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 twenty-nine commercial unit sales of our RIO
system, we had one international demonstration unit sale of our RIO system
during the nine months ended September 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.
20
Table of Contents
The
$3.2 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 $12.0 million for the three months ended September 30, 2012,
compared to $6.8 million for the three months ended September 30, 2011. The
increase in cost of revenue of $5.1 million, or 75%, was primarily due to an increase in MAKOplasty procedures
performed, an increase in the number of RIO system sales and a $3.1 million
inventory valuation adjustment of excess hip implant inventory as discussed in
Factors That May Influence Future Results of Operations above during the three months ended
September 30, 2012 as compared to the three
months ended September 30, 2011.
Cost
of revenue was $23.8 million for the nine months ended September 30, 2012,
compared to $16.4 million for the nine months ended September 30, 2011. The
increase in cost of revenue of $7.4 million, or 45%, was primarily due to an increase in MAKOplasty procedures
performed, an increase in the number of MAKOplasty THA application sales, the
$3.1 million inventory valuation adjustment of excess hip implant inventory as
discussed in Factors That May Influence Future Results of Operations above,
and 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 during the nine
months ended September 30, 2012 as
compared to the nine months ended September 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 September 30, 2012 was $17.2 million compared
to a gross profit of $13.2 million for the three months ended September 30,
2011. Total gross margin for the three months ended September 30, 2012 was 59%,
including a 48% margin on procedure revenue, a 62% margin on RIO system revenue
and an 89% margin on service revenue compared to a gross margin of 66% for the
three months ended September 30, 2011, including a 73% margin on procedure
revenue, a 57% margin on RIO system revenue and a 76% margin on service
revenue. The decrease in margin on procedure revenue was primarily attributable
to the $3.1 million inventory
valuation adjustment of excess hip implant inventory as discussed in Factors
That May Influence Future Results of Operations above, an increase in
Total Hip Arthroplasty procedures, which have a lower margin than Partial Knee
Arthroplasty procedures, and an increase in international procedures, which
have a lower margin than domestic procedures. Total Hip Arthroplasty procedures
and international procedures represented 16% of procedures performed during the
three months ended September 30, 2012 compared to 8% for the three months ended
September 30, 2011. Excluding the $3.1 million inventory valuation adjustment, the margin on
procedures would have been 74% for the three months ended September 30, 2012.
The increase in margin on RIO system revenue was primarily attributable to a
higher average selling price for RIO systems during the three months ended
September 30, 2012 as compared to the three months ended September 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.
21
Table of Contents
Gross
profit for the nine months ended September 30, 2012 was $48.7
million compared to a gross profit of $35.2 million for the nine months
ended September 30, 2011. Total gross
margin for the nine months ended September 30, 2012 was 67%, including a 67% margin on procedure revenue, a 62%
margin on RIO system revenue and an 85% margin on service revenue compared to a
gross margin of 68% for the nine months ended September 30, 2011, including a 74% margin on procedure
revenue, a 61% margin on RIO system revenue and a 78% margin on service
revenue. The decrease in margin on procedure revenue was primarily attributable
to the $3.1 million inventory valuation adjustment of excess hip implant
inventory as discussed in Factors That May Influence Future Results of
Operations above, an increase in Total Hip Arthroplasty procedures,
which have a lower margin than Partial Knee Arthroplasty procedures, and an
increase in international procedures, which have a lower margin than domestic
procedures. Excluding the $3.1 million inventory valuation adjustment, the margin on procedures would have been
76% for the nine months ended September 30, 2012. The margin on RIO system
revenue for the nine months ended September 30, 2012 was consistent with the
margin on RIO system revenue for the nine months ended September 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 nine months ended September 30, 2012 were $20.3 million and $59.3 million,
respectively, compared to $16.5 million and $48.5 million for the three
and nine months ended September 30, 2011.
The increase of $3.7 million, or 23%, for the three months ended
September 30, 2012 and $10.9 million, or 22%, for the nine months ended September 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 380 as of September
30, 2011 to 449 as of September
30, 2012. Of the 69 employee increase,
29 were in sales and marketing. Selling, general and administrative expense for
the three and nine months ended September 30, 2012 included $3.7 million and $8.7 million,
respectively, of stock-based compensation expense compared to $2.1 million and
$6.3 million for the three and nine months ended September 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 and to $1.1 million of stock-based compensation recognized
for the accelerated vesting of options occurring upon the resignation of our
Senior Vice President of Sales and Marketing on July 17, 2012. We have
historically issued annual stock option grants to our 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 nine months ended September 30, 2012 was
$5.0 million and $15.1 million, respectively, compared to $5.1 million and
$14.3 million for the three and nine months ended September 30, 2011. The decrease of $81,000, or 2%, for the three
months ended September 30, 2012 was
primarily due to timing of research and development activities. The
increase of $808,000, or 6%, for the nine
months ended September 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 nine months ended September 30, 2012 was $1.3 million and $3.9 million,
respectively, compared to $1.2 million and $3.1 million for the three and nine
months ended September 30, 2011. The increase of $146,000, or 12%, for the three months ended
September 30, 2012 and $738,000, or 24%, for
the nine months ended September 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.
22
Table of Contents
Other income
(expense), net
Other
income (expense), net for the three and nine months ended September 30, 2012
was $2.8 million of income and $2.9 million of income, respectively, compared
to $51,000 of expense and $161,000 of income for the three and nine months
ended September 30, 2011. The increase of $2.9 million and $2.7 million for the
three and nine months ended September 30, 2012, respectively, was primarily due
to non-cash income recognized under the Credit Facility as discussed in Note 6
to the Financial Statements, which was partially offset by lower interest
earned during 2012 due to lower average cash, cash equivalents and investments
balances for the three and nine months ended September 30, 2012 compared to the
same periods of 2011.
Income Taxes
No
federal income taxes were recognized for the three and nine months ended
September 30, 2012 and 2011, due to net operating losses in each period. State
and local income taxes for the three and nine months ended September 30, 2012
were $45,000 and $84,000, respectively, compared to $19,000 and $60,000 for the
three and nine months ended September 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 nine months ended September 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
Nine months ended September 30,
|
|
|
|
2012
|
|
2011
|
|
Change
|
|
% of Change
|
|
Net cash used in operating activities
|
|
$
|
(27,683
|
)
|
$
|
(22,156
|
)
|
$
|
(5,527
|
)
|
|
25
|
%
|
Net cash provided by investing activities
|
|
|
20,264
|
|
|
1,214
|
|
|
19,050
|
|
|
1,569
|
%
|
Net cash provided by financing activities
|
|
|
5,161
|
|
|
2,244
|
|
|
2,917
|
|
|
130
|
%
|
Net decrease in cash and cash equivalents
|
|
$
|
(2,258
|
)
|
$
|
(18,698
|
)
|
$
|
16,440
|
|
|
(88
|
%)
|
We
have incurred net losses and negative cash flow from operating activities for
each period since our inception in November 2004. As of September 30, 2012, we
had an accumulated deficit of $215.8 million and have financed our operations
principally through the sale of our equity securities.
As
of September 30, 2012, we had $28.4 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 September 30, 2012, we have not drawn any amounts under the
Facility Agreement.
23
Table of Contents
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 inventory valuation adjustment
as discussed in Factors That May Influence Future Results of Operations
above. Net cash used in operating activities was also affected by changes in
operating assets and liabilities. Included in changes in operating assets and liabilities
for the nine months ended September 30, 2012 are $10.6 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
and $5.3 million of decreases to accrued compensation and employee benefits,
which were partially offset by $3.2 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 nine
months ended September 30, 2011 are $9.8 million of increases to inventory
necessitated by increased sales of RIO systems and implants and disposable
products and the commercial launch of our MAKOplasty THA application and hip
implant systems, and $1.9 million of decreases to accrued compensation and
employee benefits due primarily to the payment of 2010 year-end bonuses and
commissions. This was partially offset by $3.3 million of increases to accounts
payable and $2.7 million of increases to other accrued liabilities.
Net Cash Provided by
Investing Activities
Net
cash provided by investing activities for the nine months ended September 30,
2012 was primarily attributable to proceeds of $30.8 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 $7.3
million primarily associated with implant instrumentation to support the
commercialization of our total hip implant systems and the growth in our
business. Net cash provided by investing activities for the nine months ended
September 30, 2011 was primarily attributable to proceeds of $41.2 million from
sales and maturities of investments, which was partially offset by the purchase
of investments of $30.6 million and purchases of property and equipment of $8.1
million due to the growth in our business, the expansion of our facilities and
instrumentation required for the commercial launch of the MAKOplasty THA
application and hip implant systems.
Net Cash Provided by
Financing Activities
Net
cash provided by our financing activities for the nine months ended September
30, 2012 and 2011 was primarily attributable to proceeds received under our
employee stock purchase plan of $1.3 million and $798,000, respectively, and to
proceeds received on the exercise of stock options and warrants of $4.0 million
and $2.4 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, 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 including our MAKO-branded RESTORIS PST Cup and
Tapered Femoral Stem implant system, which we commercially released in October
2012.
24
Table of Contents
In
executing our current business plan, we believe our cash, cash equivalents and
investment balances as of September 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:
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the revenue
generated by sales of our current and future products;
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the expenses
we incur in selling and marketing our products and supporting our growth;
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the costs
and timing of domestic and foreign regulatory clearance or approvals for new
products or upgrades or changes to our products;
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the expenses
we incur in complying with domestic or foreign regulatory requirements
imposed on medical device companies;
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the rate of
progress, cost and success or failure of on-going development activities;
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the
emergence of competing or complementary technological developments;
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the costs of
filing, prosecuting, defending and enforcing any patent or license claims and
other intellectual property rights, or participating in litigation related
activities;
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the terms
and timing of any collaborative, licensing, or other arrangements that we may
establish;
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the impact
of the United States healthcare reform legislation enacted in March 2010 on
hospital spending, reimbursement, and the taxing of medical device companies;
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the
acquisition of businesses, products and technologies; and
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general
economic conditions and interest rates.
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Contractual
Obligations
At
September 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 $11.3 million.
Other
than as described above and scheduled payments through September 30, 2012,
there have been no significant changes in our contractual obligations during
the nine months ended September 30, 2012 as compared to the contractual
obligations described in our Form 10-K for the year ended December 31, 2011.
25
Table of Contents
Off-Balance Sheet Arrangements
We do not have
any off-balance sheet arrangements.
I
TEM 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.
I
TEM 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
September 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 September 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 September 30, 2012 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
26
Table of Contents
P
ART II
OTHER INFORMATION
I
TEM 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 Companys 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 court consolidated the Harrison and Parker complaints and
appointed Oklahoma Firefighters Pension and Retirement System and Baltimore
County Employees Retirement System to serve as co-lead plaintiffs. In
September 2012, the co-lead plaintiffs filed an amended complaint that expanded
the proposed class period through July 9, 2012. The amended complaint alleges
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 Companys financial guidance for 2012 that
artificially inflated the Companys stock price. The amended complaint seeks an
unspecified amount of compensatory damages, interest, attorneys and expert
fees, and costs. In October 2012, the Company, Dr. Ferré, and Mr. LaPorte filed
a motion to dismiss the amended complaint in its entirety. The court has not
ruled on that motion.
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
Companys directors and certain officers violated their fiduciary duties,
wasted corporate assets and were unjustly enriched by allowing the Company to
make misrepresentations or omissions that exposed the Company to the Harrison
and Parker class actions and damaged the Companys goodwill.
Two
of the derivative 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
two other 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. On August 29,
2012, the court consolidated these two federal cases under the caption In Re
MAKO Surgical Corp.Derivative Litig., Case No. 12-61238-CIV-COHN-SELTZER and
approved the filing of a consolidated complaint. The consolidated complaint
alleges that MAKOs directors and two of its officers breached fiduciary
duties, wasted corporate assets and were unjustly enriched by issuing, or
allowing the issuance of, annual sales guidance for 2012 that they allegedly
knew lacked any reasonable basis. The consolidated complaint seeks an
unspecified amount of damages, attorneys and expert fees, costs and corporate
reforms to allegedly improve MAKOs corporate governance and internal
procedures. On October 31, 2012, MAKO and the individual defendants each filed
motions to dismiss the consolidated complaint. The court has not ruled on those
motions.
I
TEM 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.
27
Table of Contents
I
TEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS.
(c) Issuer Purchases of Equity
Securities
The
following table summarizes the surrenders of the Companys common stock during
the three month period ended September 30, 2012:
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Total Number of
Shares Purchased(1)
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Average Price Paid
per Share(1)
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Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
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Maximum Dollar
Value of Shares that
May Yet be
Purchased Under the
Plans or Programs
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Period
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July 1 to
31, 2012
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$
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$
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August 1 to
31, 2012
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10,846
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15.71
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September 1
to 30, 2012
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10,846
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$
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15.71
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$
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(1)
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Represents the surrender of
shares of common stock of the Company to pay the exercise price associated
with the exercise of warrants.
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I
TEM 3. DEFAULTS
UPON SENIOR SECURITIES
None
I
TEM 4. MINE
SAFETY DISCLOSURES
Not
applicable
I
TEM 5. OTHER
INFORMATION.
Not
applicable
I
TEM 6.
EXHIBITS.
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Exhibit
No.
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Description
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4.1
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Subscription Agreement, dated November 7, 2012, by and between MAKO Surgical
Corp. and Pipeline Biomedical Holdings, Inc.
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4.2
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Registration
Rights Agreement, dated November 7, 2012, by and between MAKO Surgical Corp.
and Pipeline Biomedical Holdings, Inc. (incorporated by reference to Exhibit 4.2
to the Companys Form 8-K as filed on November 7, 2012)
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10.1
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2012
MAKOplasty Bonus Plan for Ivan Delevic (incorporated by reference to Exhibit
10.1 to the Companys Form 8-K as filed on October 3, 2012)
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10.2
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Form of
Incentive Stock Option Agreement related to the 2008 Omnibus Incentive Plan
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10.3
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Form of
Non-Qualified Stock Option Agreement related to the 2008 Omnibus Incentive
Plan
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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 September 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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28
Table of Contents
S
IGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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MAKO
Surgical Corp.
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Date:
November 8, 2012
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By:
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/s/ Fritz L.
LaPorte
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Fritz L.
LaPorte
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Senior Vice
President of Finance and
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Administration,
Chief Financial Officer and Treasurer
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(Principal
Financial Officer and Authorized Signatory)
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29
Table of Contents
E
XHIBIT INDEX
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Exhibit
No.
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Description
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4.1
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Subscription Agreement, dated November 7, 2012, by and between MAKO Surgical
Corp. and Pipeline Biomedical Holdings, Inc.
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4.2
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Registration
Rights Agreement, dated November 7, 2012, by and between MAKO Surgical Corp.
and Pipeline Biomedical Holdings, Inc. (incorporated by reference to Exhibit
4.2 to the Companys Form 8-K as filed on November 7, 2012)
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10.1
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2012
MAKOplasty Bonus Plan for Ivan Delevic (incorporated by reference to Exhibit
10.1 to the Companys Form 8-K as filed on October 3, 2012)
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10.2
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Form of
Incentive Stock Option Agreement related to the 2008 Omnibus Incentive Plan
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10.3
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Form of
Non-Qualified Stock Option Agreement related to the 2008 Omnibus Incentive
Plan
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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 September 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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30
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