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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.
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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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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.
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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.
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