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The
$1.1 million increase in service revenue was attributable to an increase in
customer sites under maintenance contracts as our installed base of RIO systems
increases.
Revenue
was $53.0 million for the six months ended June 30, 2013, compared to $43.3
million for the six months ended June 30, 2012. The increase in revenue of $9.7
million, or 22%, was primarily due to a $6.6 million, or 27%, increase in
procedure revenue, a $676,000, or 5%, increase in system revenue and a $2.4
million, or 51%, increase in service revenue.
The
$6.6 million increase in procedure revenue was attributable to an increase in
the number of MAKOplasty procedures performed during the six months ended June
30, 2013 to 6,262 as compared to 4,887 during the six months ended June 30,
2012. The 28% 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 monthly
utilization per commercial site.
The
$676,000 increase in system revenue was attributable to the recognition of
$14.7 million of revenue from fourteen commercial unit sales of our RIO system,
including one international commercial sale, ten of which included MAKOplasty
THA applications, four MAKOplasty THA application sales to existing customers,
and recognition of two previously deferred international commercial RIO system
sales during the six months ended June 30, 2013, as compared to the recognition
of $14.1 million of revenue from fourteen commercial unit sales of our RIO
system, including one international commercial sale, eleven of which included
MAKOplasty THA applications, and eleven MAKOplasty THA application sales to
existing customers during the six months ended June 30, 2012. System revenue
for the six months ended June 30, 2013 was reduced by $1.8 million for the
deferral of system revenue primarily related to our service obligation for
maintenance, as compared to the
deferral of $2.1 million during the six months ended June 30, 2012. Revenues deferred for the service
obligation will be recognized in
service revenue over the period maintenance services are performed, which is generally twelve
months. In addition to the fourteen commercial unit sales of our RIO system
recognized during the six months ended June 30, 2013, we had one international commercial unit
sale of our RIO system, including a MAKOplasty THA application, for which we deferred revenue recognition
as all revenue recognition criteria consistent with the Companys revenue
recognition policy had not been satisfied as of June 30, 2013.
The $2.4 million increase in service revenue
was attributable to an increase in customer sites under maintenance contracts
as our installed base of RIO systems increases.
We
expect our revenue to continue to increase in future periods as the number of
MAKOplasty procedures performed increases and the installed base of RIO systems
covered under maintenance contracts increases.
Cost of Revenue and Gross Profit
Cost
of revenue was $11.4 million for the three months ended June 30, 2013, compared
to $6.4 million for the three months ended June 30, 2012. The increase in cost
of revenue of $5.1 million, or 80%, was primarily due to an increase in
MAKOplasty procedures performed during
the three months ended June 30, 2013 as compared to the three months ended June
30, 2012 and a $4.1 million inventory valuation adjustment for excess
hip implant inventory as discussed below during
the three months ended June 30, 2013.
During
the six months ended June 30, 2013, we increased our inventory reserve by $4.4
million, or $(0.09) per basic and diluted share, of which $4.1 million was
incurred in the second quarter of 2013, for excess hip implant inventory
related to our RESTORIS Trinity Cup and RESTORIS Metafix Femoral Stem implant
system and our RESTORIS Z implant system. The valuation adjustment was
primarily due to the greater than anticipated adoption of our RESTORIS PST Cup
and Tapered Femoral Stem hip implant system, or RESTORIS PST implant system,
which we commercially launched in October 2012, as a percent of total THA
procedures. In the second quarter of 2013, over 75% of our THA procedure volume
was performed with our RESTORIS PST implant system and we expect that it will
continue to grow in the future as a percentage of total THA procedures. The
inventory valuation adjustment was charged to cost of revenue procedures in
the condensed statement of operations. Depending on demand for our products,
technical obsolescence and new product introductions, future valuation
adjustments of our inventory may occur.
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Cost
of revenue was $18.0 million for the six months ended June 30, 2013, compared
to $11.9 million for the six months ended June 30, 2012. The increase in cost
of revenue of $6.1 million, or 52%, was primarily due to an increase in MAKOplasty procedures performed and a $4.4
million inventory valuation adjustment for excess hip implant inventory as
discussed above during the six months
ended June 30, 2013 as compared to the six months ended June 30, 2012.
We
expect our cost of revenue to continue to increase in future periods as the number of MAKOplasty procedures performed
increases and the installed base of
RIO systems covered under maintenance contracts increases.
Gross
profit for the three months ended June 30, 2013 was $16.8 million compared to a
gross profit of $17.3 million for the three months ended June 30, 2012. Total
gross margin for the three months ended June 30, 2013 was 59%, including a 51%
margin on procedure revenue, a 62% margin on system revenue and an 91% margin
on service revenue compared to a gross margin of 73% for the three months ended
June 30, 2012, including a 76% margin on procedure revenue, a 66% margin on
system revenue and a 82% margin on service revenue. The decrease in margin on
procedure revenue was primarily attributable to the $4.1 million inventory
valuation adjustment for excess hip implant inventory as discussed above. The
margin on system revenue for the three months ended June 30, 2013 was
relatively consistent with the margin on RIO system revenue for the three
months ended June 30, 2012. The increase in margin on service revenue was
primarily attributable to the timing of preventive maintenance costs.
Gross
profit for the six months ended June 30, 2013 was $35.1 million compared to a
gross profit of $31.5 million for the six months ended June 30, 2012. Total
gross margin for the six months ended June 30, 2013 was 66%, including a 63%
margin on procedure revenue, a 62% margin on system revenue and an 89% margin
on service revenue compared to a gross margin of 73% for the six months ended
June 30, 2012, including a 77% margin on procedure revenue, a 63% margin on
system revenue and a 82% margin on service revenue. The decrease in margin on
procedure revenue was primarily attributable to the $4.4 million inventory
valuation adjustment for excess hip implant inventory as discussed above. The
margin on system revenue for the six months ended June 30, 2013 was consistent
with the margin on RIO system revenue for the six months ended June 30, 2012. The increase in margin on service revenue
was primarily attributable to the timing
of preventive maintenance costs.
Selling, General and Administrative
Selling,
general and administrative expense for
the three and six months ended June 30, 2013 were $21.8 million and $42.0 million,
respectively, compared to $18.8 million and $38.2 million for the three and six
months ended June 30, 2012. The
increase of $3.1 million, or 16%, for the three months ended June 30,
2013 and $3.8 million, or 10%, for the six months ended June 30, 2013, was primarily due to the impact of the new medical device excise tax,
which became effective January 1, 2013, and an increase in legal costs
associated with asserting our intellectual property rights. Selling,
general and administrative expense for the three and six months ended June 30,
2013 was also impacted by an asset impairment charge for excess hip implant
instruments as discussed below.
Selling, general and administrative expense for the three and six months
ended June 30, 2013 included $2.3
million and $4.7 million, respectively, of stock-based compensation expense
compared to $2.8 million and $5.0 million for the three and six months ended
June 30, 2012. We expect our selling,
general and administrative expenses to continue to increase due to our planned
increase in the number of activities necessary to support the sales and
marketing efforts associated with the growing commercialization of our
products. 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.
During
the six months ended June 30, 2013, we incurred asset impairments of $2.3
million, or $(0.05) per basic and diluted share, of which $2.0 million was incurred in the
second quarter of 2013. The impairment charge was primarily related to excess hip implant instruments associated with
our to our RESTORIS Trinity Cup and RESTORIS Metafix Femoral Stem
implant system and our RESTORIS
Z implant system. The impairment charge was primarily due to greater than
anticipated adoption of our RESTORIS PST implant system as a percent of total
THA procedures as discussed in Cost of Revenue and Gross Profit above. The $2.3 million impairment charge was
charged to selling, general and administrative expense in the condensed
statement of operations.
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Research and Development
Research
and development expense for the three
and six months ended June 30, 2013 was $5.6 million and $10.6 million, respectively, compared to $5.2
million and $10.1 million for the three and six months ended June 30,
2012. The increase of $389,000, or 7%,
for the three months ended June
30, 2013 and $548,000, or 5%, for the six months ended June 30, 2013 were
primarily due to an increase in research and development activities associated
with on-going development of our RIO system and applications, our RESTORIS
family of implant systems, and potential future products. We expect our
research and development expense to increase as we continue to expand our research
and development activities, including the support of existing products and the
research and development of potential future products.
Depreciation and Amortization
Depreciation
and amortization expense for the three
and six months ended June 30, 2013 was $2.1 million and $4.1 million,
respectively, compared to $1.8 million and $3.5 million for the three and six months ended June 30,
2012. The increase of $332,000, or 19%,
for the three months ended June 30, 2013 and $692,000, or 20%, for the six
months ended June 30, 2013 was
primarily due to an increase in depreciation of property and equipment as a
result of purchases made during 2012 and 2013 for implant instrumentation to
support the growth in our installed base of RIO systems and purchases to
support the growth in our business and the expansion of our training facilities
in 2012 to support such growth.
Other income (expense), net
Other
income (expense), net for the three
and six months ended June 30, 2013 was $6.9 million of expense and $7.6
million of expense, respectively, compared to $33,000 of expense and $25,000 of
revenue, respectively, for the three and six months ended June 30, 2012. The
increase in expense of $6.9 million and $7.6 million for the three and six months ended June 30, 2013 was primarily due to non-cash
expense recognized on the change in fair value of our Financing Commitment as
discussed in Note 8 to the Financial Statements.
Income Taxes
No
federal income taxes were recognized
for the three and six months ended June 30, 2013 and 2012, due to net operating losses in each period. State and local
income taxes for the three and six months ended June 30, 2013 was $0 and $15,000, respectively, compared
to $14,000 and $39,000 for the three and six months ended June 30, 2012. Income taxes recognized to date have not
been significant due to net operating losses we have incurred in each period
since our inception. In addition, no deferred income taxes were recorded for
the three and six months ended June 30, 2013 and 2012, as all income tax benefits were fully offset by a valuation
allowance against our net deferred income tax assets.
Liquidity and Capital Resources
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(in thousands)
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Six Months Ended June 30,
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2013
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2012
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Change
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% of Change
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Net cash used in operating activities
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$
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(7,224
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)
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$
|
(22,083
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)
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$
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14,859
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(67
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%)
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Net cash provided by (used in) investing activities
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|
|
(35,965
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)
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|
15,234
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|
|
(51,199
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)
|
|
(336
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%)
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Net cash provided by financing activities
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|
|
1,401
|
|
|
2,848
|
|
|
(1,447
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)
|
|
(51
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%)
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Net decrease in cash and cash equivalents
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|
$
|
(41,788
|
)
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$
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(4,001
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)
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$
|
(37,787
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)
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944
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%
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We
have incurred net losses and negative cash flow from operating activities for
each period since our inception in November 2004. As of June 30, 2013, we had
an accumulated deficit of $250.9 million and have financed our net losses
principally through the sale of our equity securities.
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As
of June 30, 2013, we had $62.9 million in cash, cash equivalents and
available-for-sale investments. Our cash and investments classified as
available-for-sale 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 had the flexibility, but were not required, to draw down on the
Facility Agreement in $10 million increments at any time until May 15, 2013. No
funds were drawn under the Facility Agreement which expired on May 15, 2013. We
were required to pay Deerfield a fee of $1.0 million if no funds were drawn
under the Facility Agreement, which we paid in the second quarter of 2013.
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, non-cash changes under the credit
facility, and the inventory valuation adjustment and loss on asset impairment
discussed in Results of Operations for the three and six months ended June 30,
2013 and 2012 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 six months ended June 30, 2013 are
$2.9 million of increases to inventory necessitated by increased sales of
implants and disposable products and the commercial launch of our RESTORIS PST
implant system for use with our MAKOplasty THA application. Included in changes
in operating assets and liabilities for the six months ended June 30, 2012 are
$11.4 million of increases to inventory necessitated by the anticipated
increased sales of implants and disposable products and the commercial launch
of our MAKOplasty THA application, $2.7 million of increases to prepaid and
other current assets and $4.7 million of decreases to accrued compensation and
employee benefits. These were partially offset by $3.8 million of increases to
accounts payable and $2.4 million of increases to deferred revenue primarily
related to the first year warranty and maintenance services provided by MAKO.
Net Cash Provided
by (Used in) Investing Activities
Net
cash used by investing activities for the six months ended June 30, 2013 was
primarily attributable to the purchase of investments of $42.9 million and
purchases of property and equipment of $3.4 million primarily associated with
implant instrumentation to support the commercialization of our total hip
implant systems and computer equipment and software to support the growth in
our business, which was partially offset by proceeds of $11.3 million from
sales and maturities of investments. Net cash provided by investing activities
for the six months ended June 30, 2012 was primarily attributable to proceeds
of $22.3 million from sales and maturities of investments, which was partially
offset by the purchase of investments of $3.2 million and purchases of property
and equipment of $3.8 million primarily associated with implant instrumentation
to support the commercialization of our total hip implant systems and the
growth in our business.
Net Cash Provided
by Financing Activities
Net
cash provided by our financing activities for the six months ended June 30,
2013 and 2012 was primarily attributable to proceeds received under our
employee stock purchase plan of $874,000 and $844,000, respectively, and to
proceeds received on the exercise of stock options and warrants of $1.6 million
and $2.2 million, respectively, which was partially offset by a $1.0 million
cash payment to Deerfield under our credit facility for the six months ended
June 30, 2013.
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 approximately 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 new
and potential future applications including our MAKO-branded RESTORIS PST
implant system, which we commercially released in October 2012.
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In
executing our current business plan, we believe our cash, cash equivalents and
investment balances as of June 30, 2013, 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 modify our current
business plan. The sale of additional equity or 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 expenses we may incur
in finding additional or alternate sources of supply for any single source
suppliers in the event such suppliers are no longer able to fulfill our
supply requirements;
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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
June 30, 2013, 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 $7.3 million.
We
have a contingent obligation to make one-time payments of up to $5.6 million in
lieu of paying ongoing, periodic royalty payments under certain royalty bearing
arrangements related to our intellectual property rights. If incurred, these
contingent obligations would be recognized in the second half of 2014.
In
June 2013, we entered into a License Agreement for certain exclusive
intellectual property rights which requires minimum payments of approximately
$1.0 million annually. The initial term of the License Agreement ends in June
2016 and may be renewed for additional periods.
Other
than as described above and scheduled payments through June 30, 2013, there
have been no significant changes in our contractual obligations during the six
months ended June 30, 2013 as compared to the contractual obligations described
in our Form 10-K for the year ended December 31, 2012.
Off-Balance Sheet Arrangements
We do not have any
off-balance sheet arrangements.