The Company has accrued $500,000 as of September 30, 2012 to cover the insurance deductible for the Company’s directors and officers insurance policies.
The Company accrues a liability for legal contingencies when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of the loss. The Company reviews these accruals and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. To the extent new information is obtained and the Company’s views on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in the Company’s accrued liabilities would be recorded in the period in which such determination is made. For the matters referenced in the paragraph below, the amount of liability is not probable or the amount cannot be reasonably estimated; and, therefore, accruals have not been made. In addition, in accordance with the relevant authoritative guidance, for matters which the likelihood of material loss is at least reasonably possible, the Company provides disclosure of the possible loss or range of loss; however, if a reasonable estimate cannot be made, the Company will provide disclosure to that effect.
In addition to the matters discussed in “Legal Proceedings” above, the Company is a defendant in various litigation matters generally arising in the normal course of business. Although it is difficult to predict the ultimate outcomes of these matters, the Company believes that it is not reasonably possible that the ultimate outcomes of these ordinary course litigation matters will materially and adversely affect its business, financial position, results of operations or cash flows.
On May 7, 2012, the Company entered into a Facility Agreement with affiliates of Deerfield Management Company, L.P. (“Deerfield”), as amended on June 28, 2012, pursuant to which Deerfield agreed to loan the Company up to $50 million, subject to the terms and conditions set forth in the Facility Agreement. Under the terms of the Facility Agreement, the Company has the flexibility, but is not required, to draw down on the Facility Agreement in $10 million increments (the “Financing Commitment”) at any time until May 15, 2013 (the “Draw Period”). The Company was not required to pay an upfront transaction fee to Deerfield under the Facility Agreement. In exchange for the Financing Commitment, on May 7, 2012, the Company issued to Deerfield warrants to purchase 275,000 shares of the Company’s common stock at an exercise price of $27.70 per share.
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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 Company’s common stock, at an exercise price equal to a 20% premium to the mean closing price of the Company’s common stock over the five trading days following receipt by Deerfield of the draw notice. If the Company, in its discretion, elects to draw down the entire $50 million available under the Facility Agreement, the Company will have issued warrants to purchase a total of 975,000 shares of its common stock, including the 275,000 warrants issued in connection with the Financing Commitment. The number of shares of common stock into which a warrant is exercisable and the exercise price of any warrant will be adjusted to reflect any stock splits, recapitalizations or similar adjustments in the number of outstanding shares of common stock. The warrants have the same dividend rights to the same extent as if the warrants were exercised into shares of common stock.
Any amounts drawn under the Facility Agreement accrue interest at a rate of 6.75% per annum and will be secured by all of the Company’s assets excluding only the Company’s intellectual property assets. Accrued interest is payable quarterly in cash. The Company has the right to prepay any amounts owed without penalty. All principal amounts outstanding under the Facility Agreement are payable on the third anniversary of each draw. If no funds have been drawn under the Facility Agreement by May 15, 2013, the Company is required to pay Deerfield a fee of $1.0 million (the “Facility Fee”). The Company is accruing the Facility Fee to expense in other income (expense), net in the condensed statement of operations through the Draw Period, or until the Company draws down under the Facility Agreement, at which time any previous expense recognized would be reversed. As of 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 Company’s 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 Company’s common stock were valued as of June 28, 2012 using a Monte Carlo simulation model with the following assumptions: expected life of 6.86 years, risk free rate of 1.05%, expected volatility of 63.54% and no expected dividend yield. The value of the Financing Commitment was determined using Level 3 inputs, or significant unobservable inputs. The value of the Financing Commitment at 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 Company’s common stock then issued and outstanding.
The holder of a warrant may exercise the warrant either for cash or on a cashless basis. In connection with certain Major Transactions, as defined in the warrant, including a change of control of the Company or the sale of more than 50% of the Company’s assets, the holder may have the option to receive, in exchange for the warrant, a number of shares of common stock equal to the Black-Scholes value of the warrant, as defined in the warrant, divided by the closing price of the common stock on the trading day before closing. In certain circumstances, a portion of such payment may be made in cash rather than in shares of common stock. In connection with certain “events of default,” as defined in the Facility Agreement, the holder may have the option to receive, in exchange for the warrant, a number of shares of common stock equal to the Black-Scholes value of the warrant, as defined in the warrant, divided by the volume weighted average price for the five trading days prior to the applicable Default Notice, as defined in the warrant.
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 Company’s 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 Company’s 2004 Stock Incentive Plan (the “2004 Plan”), its 2008 Omnibus Incentive Plan (the “2008 Plan,” and together with the 2004 Plan, the “Plans”), and its 2008 Employee Stock Purchase Plan are described in the notes to financial statements in the Form 10-K. Generally, the Company’s outstanding stock options vest over four years. Stock options granted to certain non-employee directors generally vest over one year. Continued vesting typically terminates when the employment or consulting relationship ends. Vesting generally begins on the date of grant.
The 2008 Plan contains an evergreen provision whereby the authorized shares increase on January 1st of each year in an amount equal to the least of (1) 4% of the total number of shares of the Company’s common stock outstanding on December 31st of the preceding year, (2) 2.5 million shares and (3) a number of shares determined by the Company’s Board of Directors that is lesser than (1) and (2). The number of additional shares authorized under the 2008 Plan on January 1, 2012 was approximately 1,676,000.
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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 Company’s 2008 Plan.
Activity under the Plans is summarized as follows:
| | | | | | | | | | |
(in thousands, except per share data) | | | | | Outstanding Options | |
| | Shares/Options
Available
For Grant | | Number of Options | | Weighted Average
Exercise Price | |
Balance at December 31, 2011 | | | 469 | | | 4,753 | | $ | 11.06 | |
Shares reserved | | | 1,676 | | | — | | | — | |
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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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
In this report, “MAKO Surgical,” “MAKO,” the “Company,” “we,” “us” and “our” refer to MAKO Surgical Corp.
The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and related notes appearing elsewhere in this report. This report contains forward-looking statements regarding, among other things, statements related to expectations, goals, plans, objectives and future events. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 21E of the Securities Exchange Act of 1934 and the Private Securities Reform Act of 1995. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Examples of such statements include, but are not limited to, statements about the nature, timing and number of planned new product introductions; market acceptance of MAKOplasty®, including the RIO® Robotic Arm Interactive Orthopedic system, or RIO system, and MAKO RESTORIS® family of implant systems; the future availability from third-party suppliers, including single source suppliers, of implants for and components of our RIO system; the anticipated adequacy of our capital resources to meet the needs of our business; our ability to sustain, and our goals for, sales and earnings growth, including projections regarding RIO system installations; and our success in achieving timely approval or clearance of products with domestic and foreign regulatory entities. These statements are based on the current estimates and assumptions of our management as of the date of this report and are subject to risks, uncertainties, changes in circumstances, assumptions and other factors that may cause actual results to differ materially from those indicated by forward-looking statements, many of which are beyond our ability to control or predict. Such factors, among others, may have a material adverse effect on our business, financial condition and results of operations and may include the following:
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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; | | |
• | 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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• | 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 asin 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 Company’s 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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| • 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.
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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
| | | | | | | | | | | | | | | | | | | | | | | | | |
(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 | %) |
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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.
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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.
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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.
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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.
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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.
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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:
| | |
| • | the revenue generated by sales of our current and future products; |
| | |
| • | the expenses we incur in selling and marketing our products and supporting our growth; |
| | |
| • | the costs and timing of domestic and foreign regulatory clearance or approvals for new products or upgrades or changes to our products; |
| | |
| • | the expenses we incur in complying with domestic or foreign regulatory requirements imposed on medical device companies; |
| | |
| • | the rate of progress, cost and success or failure of on-going development activities; |
| | |
| • | the emergence of competing or complementary technological developments; |
| | |
| • | the costs of filing, prosecuting, defending and enforcing any patent or license claims and other intellectual property rights, or participating in litigation related activities; |
| | |
| • | the terms and timing of any collaborative, licensing, or other arrangements that we may establish; |
| | |
| • | the impact of the United States healthcare reform legislation enacted in March 2010 on hospital spending, reimbursement, and the taxing of medical device companies; |
| | |
| • | the acquisition of businesses, products and technologies; and |
| | |
| • | general economic conditions and interest rates. |
Contractual Obligations
At 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.
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Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our exposure to market risk is confined to our cash, cash equivalents, investments and exchange rate risk on international sales. The goals of our cash investment policy are the security of the principal invested and fulfillment of liquidity needs, with the need to maximize value being an important consideration. To achieve our goals, we maintain a portfolio of cash equivalents and investments in a variety of securities including notes and bonds from U.S. government agencies and certificates of deposit. The securities in our investment portfolio are not leveraged and are classified as available-for-sale. We currently do not hedge interest rate exposure or exchange rate risk. We do not believe that a variation in market rates of interest would significantly impact the value of our investment portfolio. We do not believe that a variation in the value of the U.S. dollar relative to foreign currencies would significantly impact our results of operations.
ITEM 4. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures.
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934, or the Exchange Act, our management evaluated, with the participation of our chief executive officer and chief financial officer, or the Certifying Officers, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of 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.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May 2012, two shareholder complaints were filed in the U.S. District Court for the Southern District of Florida against the Company and certain of its officers and directors as purported class actions on behalf of all purchasers of the Company’s common stock between January 9, 2012 and May 7, 2012. The cases were filed under the captions James H. Harrison, Jr. v. MAKO Surgical Corp. et al., No. 12-cv-60875 and Brian Parker v. MAKO Surgical Corp. et al., No. 12-cv-60954. The 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 Company’s financial guidance for 2012 that artificially inflated the Company’s 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 Company’s 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 Company’s 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 MAKO’s 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 MAKO’s 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.
ITEM 1A. RISK FACTORS.
There have been no material changes in our risk factors from those disclosed in our Form 10-K for the year ended December 31, 2011.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
(c) Issuer Purchases of Equity Securities
The following table summarizes the surrenders of the Company’s common stock during the three month period ended September 30, 2012:
| | | | | | | | | | | | | |
| | Total Number of
Shares Purchased(1) | | Average Price Paid
per Share(1) | | Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs | | Maximum Dollar
Value of Shares that
May Yet be
Purchased Under the
Plans or Programs | |
Period | | | | | | | | | | | | | |
July 1 to 31, 2012 | | | — | | $ | — | | | — | | $ | — | |
August 1 to 31, 2012 | | | 10,846 | | | 15.71 | | | — | | | — | |
September 1 to 30, 2012 | | | — | | | — | | | — | | | — | |
| | | 10,846 | | $ | 15.71 | | | — | | $ | — | |
| |
(1) | Represents the surrender of shares of common stock of the Company to pay the exercise price associated with the exercise of warrants. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION.
Not applicable
ITEM 6. EXHIBITS.
| |
Exhibit
No. | Description |
| |
4.1 | Subscription Agreement, dated November 7, 2012, by and between MAKO Surgical Corp. and Pipeline Biomedical Holdings, Inc. |
4.2 | 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 Company’s Form 8-K as filed on November 7, 2012) |
10.1 | 2012 MAKOplasty Bonus Plan for Ivan Delevic (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K as filed on October 3, 2012) |
10.2 | Form of Incentive Stock Option Agreement related to the 2008 Omnibus Incentive Plan |
10.3 | Form of Non-Qualified Stock Option Agreement related to the 2008 Omnibus Incentive Plan |
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act |
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act |
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. §1350 |
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. §1350 |
101 | The following materials from MAKO Surgical Corp.’s Quarterly Report on Form 10-Q for the quarter ended 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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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | |
| MAKO Surgical Corp. | | |
| | | | |
Date: November 8, 2012 | By: | /s/ Fritz L. LaPorte |
| | Fritz L. LaPorte | |
| | Senior Vice President of Finance and |
| | Administration, Chief Financial Officer and Treasurer |
| | (Principal Financial Officer and Authorized Signatory) |
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EXHIBIT INDEX
| |
Exhibit
No. | Description |
| |
4.1 | Subscription Agreement, dated November 7, 2012, by and between MAKO Surgical Corp. and Pipeline Biomedical Holdings, Inc. |
4.2 | 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 Company’s Form 8-K as filed on November 7, 2012) |
10.1 | 2012 MAKOplasty Bonus Plan for Ivan Delevic (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K as filed on October 3, 2012) |
10.2 | Form of Incentive Stock Option Agreement related to the 2008 Omnibus Incentive Plan |
10.3 | Form of Non-Qualified Stock Option Agreement related to the 2008 Omnibus Incentive Plan |
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act |
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act |
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. §1350 |
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. §1350 |
101 | The following materials from MAKO Surgical Corp.’s Quarterly Report on Form 10-Q for the quarter ended 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 |
30
