Filed pursuant to Rule 424(b)(4)
Registration No. 333-146162
PROSPECTUS
5,100,000 Shares
MAKO Surgical Corp.
Common Stock
We are offering
5,100,000 shares of our common stock. This is our initial
public offering and no public market currently exists for our
shares. The initial public offering price of our common stock is
$10.00 per share.
Our common stock has been approved
for listing on the Nasdaq Global Market under the symbol
MAKO.
Investing
in our common stock involves risks. See Risk Factors
beginning on page 9.
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Per Share
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Total
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Initial public offering price
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$
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10.00
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$
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51,000,000
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Underwriting discounts
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$
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0.70
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$
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3,570,000
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Proceeds, before expenses, to MAKO Surgical Corp.
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$
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9.30
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$
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47,430,000
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The underwriters also may purchase
up to 698,333 additional shares of our common stock from us and
66,667 additional shares of our common stock from the selling
stockholder, on a pro rata basis, to cover over-allotments, if
any. We will not receive any of the proceeds from the shares of
common stock sold by the selling stockholder.
Neither the Securities and
Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined
if this prospectus is truthful or complete.
Any representation to the contrary is a criminal
offense.
The underwriters expect to deliver
the shares to purchasers on or about February 20, 2008.
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Cowen
and Company
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Wachovia Securities
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February 14, 2008
Developing
advanced solutions
for orthopedic surgery.
Restoring Quality of Life Through Innovation
SM
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MAKOplasty is a keyhole, restorative surgical solution made possible by an innovative
surgeon-interactive robot-assisted system.
Consistently Reproducible
Precision
Haptic robotic guidance through a keyhole incision.
HGS active 3-D visualization of bone sculpting.
Tissue sparing resurfacing knee implants.
Current version of the Haptic Guidance System (HGS) for robot-assisted surgery.
The HGS complements a surgeons existing skills and techniques.
Post-operative x-ray showing precise placement and alignment.
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TABLE OF
CONTENTS
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9
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F-1
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You should rely only on the information contained in this
prospectus and any free-writing prospectus that we authorize to
be distributed to you. We have not, and the underwriters have
not, authorized anyone to provide you with information different
from or in addition to that contained in this prospectus or any
related free-writing prospectus. If anyone provides you with
different or inconsistent information, you should not rely on
it. We are offering to sell, and are seeking offers to buy,
shares of common stock only in jurisdictions where offers and
sales are permitted. The information contained in this
prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or of any
sale of the common stock. Our business, financial conditions,
results of operations and prospects may have changed since that
date.
We have received or applied for trademark registration of
and/or
claim
trademark rights, including in the following marks that appear
in this prospectus: MAKO Surgical Corp.,
MAKOplasty
®
,
Tactile Guidance System and TGS, as well
as in the MAKO Surgical Corp. MAKO logo, whether
standing alone or in connection with the words MAKO
Surgical Corp. All other trademarks, trade names and
service marks appearing in this prospectus are the property of
their respective owners.
i
PROSPECTUS
SUMMARY
The following summary is qualified in its entirety by, and
should be read together with, the more detailed information and
financial statements and related notes thereto appearing
elsewhere in this prospectus. Before you decide to invest in our
common stock, you should read the entire prospectus carefully,
including the risk factors and the financial statements and
related notes.
Overview
We are a medical device company that markets our advanced
robotic-arm solution and implants for minimally invasive
orthopedic knee procedures. We offer MAKOplasty, an innovative,
restorative surgical solution that enables orthopedic surgeons
to consistently, reproducibly and precisely treat
patient-specific, early to mid-stage osteoarthritic knee
disease. MAKOplasty is performed using our proprietary,
U.S. Food and Drug Administration, or FDA, cleared Tactile
Guidance System. Our Tactile Guidance System includes an
interactive tactile robotic-arm platform that utilizes
tactile-guided robotic-arm technology and patient-specific
visualization to prepare the knee joint for the insertion and
alignment of our resurfacing implants through a keyhole incision
in a minimally invasive, bone-preserving and tissue-sparing
procedure. We believe MAKOplasty will empower physicians to
address the needs of the large and growing, yet underserved
population of patients with early to mid-stage osteoarthritic
knee disease who desire a restoration of quality of life and
reduction of pain, but for whom current surgical treatments are
not appropriate or desirable due to the highly invasive nature
of such procedures, the slow recovery and the substantial costs
of rehabilitation, medication and hospitalization.
Unlike conventional knee replacement surgery, which requires
extraction and replacement of the entire joint, MAKOplasty
optimizes localized resurfacing of the specific diseased
compartment of the joint by using the robotic-arm technology of
our Tactile Guidance System to achieve consistently reproducible
precision and optimal implant placement and alignment. Because
of the minimally invasive nature of the procedure, smaller
incisions are required, which lead to less tissue loss and
faster recoveries, thereby reducing the overall costs of
rehabilitation, medication and hospitalization. In addition,
because more of the patients natural anatomy is preserved
and less trauma is inflicted on the knee, we believe that
patients who undergo MAKOplasty have the potential to experience
better functionality and more natural knee movements, thereby
achieving an improved post-operative quality of life. Finally,
because our Tactile Guidance System is easy to use, we believe
that our MAKOplasty solution has the potential to lead to
greater adoption of knee resurfacing solutions for early to
mid-stage osteoarthritis of the knee.
In May 2005, we obtained 510(k) marketing clearance from the FDA
for a surgical visualization system with a robotic arm that was
an earlier version of our Tactile Guidance System. In November
2005, we obtained 510(k) marketing clearance from the FDA for
version 1.0 of our Tactile Guidance System. In
January 2008, we received 510(k) marketing clearance from
the FDA for version 1.2 of our Tactile Guidance System, which
incorporates several upgrades developed and introduced since the
commercial introduction of version 1.0. We currently estimate
that we will commercially launch version 1.2 in the first
quarter of 2008 and version 2.0 of our Tactile Guidance System
in the first half of 2009, subject to regulatory clearances or
approvals, which we may not receive. As part of the sales
contract, all existing Tactile Guidance System customers are
entitled to receive a replacement version 2.0 unit at no
additional charge, with the exception of one customer who has
the right to receive it at a discounted price. As of
January 1, 2008, we have commercially installed six Tactile
Guidance Systems and installed two additional units for research
and evaluation purposes. As of January 1, 2008, 181
MAKOplasty procedures have been performed since commercial
introduction in June 2006. To date, our customers have been
reimbursed for MAKOplasty procedures under existing
reimbursement codes for knee arthroplasty. We have an
intellectual property portfolio of more than 200 licensed or
owned patents and patent applications relating to the areas of
computer-assisted surgery, robotics, haptics and implants. Five
U.S. patents and the related foreign patents, considered
material to our intellectual property portfolio, because they
potentially enable us to exclude others from practicing the
claimed technology, will expire by the end of 2009.
To date, we have generated revenues primarily from the sale of
implants and disposable products, the majority of which is from
a single customer. Although we have generated some revenues from
sales of our
1
current version of the Tactile Guidance System, we are unable to
recognize such revenue until we have fulfilled our contractual
obligation to deliver version 2.0 of our Tactile Guidance System
to the customer.
Our
Market
According to Datamonitor, in 2006 there were approximately
15 million people in the U.S. with osteoarthritis of
the knee, a common medical condition that leads to the
degeneration of joints from aging and repetitive stresses,
resulting in a loss of the flexibility, elasticity and
shock-absorbing properties of the joints. This number is
expected to increase as the active U.S. population
continues to age and obesity rates continue to rise. To date,
arthroplasty options for treating osteoarthritis of the knee
have been limited to either total knee replacement surgery or
knee resurfacing procedures. According to Frost &
Sullivan, the U.S. market for total knee replacement and
knee resurfacing procedures was greater than $2.7 billion
in 2006, and is expected to grow at approximately 8% per year to
more than $4.6 billion by 2013.
Total knee replacement is a highly invasive surgical procedure
in which a patients diseased knee joint is removed and
replaced with a manufactured replacement knee joint comprised of
several components that attempt to mimic the normal function of
the knee joint. Total knee replacement surgery is not an ideal
option for many patients suffering from early to mid-stage,
unicompartmental or multicompartmental degeneration of the knee
for a variety of reasons. Because total knee replacement
procedures are not specifically targeted to remove only the
diseased compartment of the knee joint, total knee replacement
procedures frequently result in the loss of healthy tissue,
significant bone bleeding and extended patient recovery and
therapy time. For these reasons, many people who are eligible
for total knee replacement surgery elect not to undergo or
postpone the procedure, choosing instead to suffer significant
pain and limited mobility. According to a 2006 Duke University
survey of published literature, which was unable to
independently confirm the validity of the surveyed data, it is
estimated that approximately 92% of men and 87% of women who
were candidates for total knee replacement surgery declined to
undergo the procedure.
We believe a sizeable portion of this patient population could
benefit from unicompartmental knee resurfacing, a less invasive
arthroplasty procedure in which only the arthritic region of the
knee is removed and a small implant is inserted to resurface the
diseased compartment of the knee. Traditional unicompartmental
knee resurfacing is a potentially more desirable procedure than
total knee replacement surgery for patients suffering from early
to mid-stage degeneration of the knee because it preserves more
of the patients natural anatomy and results in less trauma
to the patient. As a result, patients experience less tissue
loss and faster recoveries. However, it has achieved only
limited adoption to date, in part as a result of the
difficulties in manually executing the procedure through the
smaller incision, which makes it difficult to insert, place and
align the knee implant properly.
We believe that the limitations of currently available surgical
options for osteoarthritis of the knee have created a sizeable,
underserved market for treatment of the large and growing
population of patients with early to mid-stage osteoarthritis of
the knee. We believe that robotics technology is the key to
enabling surgeons to perform the kind of minimally invasive knee
surgery that results in restoration of function and improved
post-operative outcomes for such patients.
The MAKO
Solution
We have designed our MAKOplasty solution to provide the
consistently reproducible precision, accuracy and dexterity
necessary for a surgeon to successfully perform minimally
invasive orthopedic arthroplasty procedures on the knee despite
a confined anatomical space that results in a limited field of
vision. Our MAKOplasty solution is composed of two critical
components: the Tactile Guidance System, which consists of the
tactile robotic arm and our patient-specific visualization
system, and the MAKO implant portfolio which is designed for
minimally invasive restoration of the diseased compartment of
the joint. By integrating robotic-arm and patient-specific
visualization technology with the touch and feel of the
surgeons skilled hand, MAKOplasty is designed to enable a
level of surgical precision and accuracy that is beyond the
scope of the typical surgeons freehand capabilities, which
we believe will result in broad adoption of our technologies by
orthopedic knee surgeons and better outcomes for patients.
2
Surgeons performing MAKOplasty move the bone-cutting instrument
at the end of the Tactile Guidance Systems robotic arm to
remove the targeted diseased compartment of the knee joint. The
robotic arm, in combination with the patient specific
visualization system, creates a tactile safety zone
that provides surgeons with tactile resistance when the safety
zone boundaries are reached so that the surgeon does not apply
the bone cutting instrument beyond the intended area of the knee
joint. MAKOplasty procedures also utilize our implants, which
are designed for insertion in a minimally invasive manner. We
currently offer an inlay knee implant system for
unicompartmental resurfacing procedures and anticipate offering
in the first quarter of 2008 an onlay knee implant system for
unicompartmental resurfacing procedures that will allow us to
accommodate a broader range of patient profiles and surgeon
preferences. We are currently developing a proprietary modular
knee implant system for use with version 2.0 of our Tactile
Guidance System, which we estimate will be commercially launched
in the first half of 2009, subject to regulatory clearances or
approvals, which we may not receive.
We believe that MAKOplasty offers the following key benefits to
patients, orthopedic knee surgeons and hospitals:
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minimally invasive targeted knee resurfacing arthroplasty, which
enables surgeons to isolate and resurface just the diseased
compartment of the knee joint;
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consistently reproducible precision, enabled by our
computer-assisted and robotics-enabled technology, which reduces
the variability of procedure outcomes and increases efficacy;
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ease of use, enabled by our patient-specific visualization
system and tactile safety zone, which decreases training time
and increases the number of physicians who are able to perform
unicompartmental resurfacing procedures;
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improved restorative post-operative outcomes, such as increased
range of motion, more natural knee movements, faster recovery
time and less visible scarring; and
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reduced costs for patients and hospitals through shortened
hospital stays and recovery times and reduced need for
rehabilitation and medication.
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Our
Strategy
Our goal is to drive sales of our Tactile Guidance System and
generate recurring revenues through the sale of implants,
disposable products and service contracts by establishing
MAKOplasty as the preferred surgical procedure for patients with
early to mid-stage, unicompartmental and multicompartmental
degeneration of the knee. We believe that we can achieve this
objective by working with hospitals to demonstrate the key
benefits of MAKOplasty. Our strategy includes the following key
elements:
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focus on key surgeons and thought leaders to encourage early
adoption of our MAKOplasty solution;
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expand the market for unicompartmental knee resurfacing;
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drive volume sales of implants and disposable products for
installed Tactile Guidance Systems;
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expand our product offerings to multicompartmental
implants; and
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demonstrate the clinical and financial value proposition of
MAKOplasty.
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Risks
Related to Our Business
We are subject to a number of risks, which you should be aware
of before you decide to buy our common stock. These risks are
discussed more fully in the Risk Factors section of
this prospectus beginning on page 9 and should be read in
their entirety. In general, we face risks associated with the
following:
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our limited operating history,
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our net losses which we have suffered in each year since our
inception and which we expect to continue as we develop our
business,
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the possibility that we may be required by the FDA to revise,
qualify or refrain from using certain terms to label and market
our products,
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our failure to comply with rigorous FDA and other government
regulations applicable to us, including certain FDA reporting
requirements, pursuant to which we reported two procedures that
were intended as MAKOplasty procedures but concluded as total
knee replacements when a component of our Tactile Guidance
System failed to perform as intended or was improperly operated
during surgery, and one procedure that resulted in a
post-operative fracture at the insertion site of the bone pins,
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our ability to penetrate our market and gain market acceptance
for MAKOplasty,
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our ability to establish relationships with surgeons, hospitals
and distributors,
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our ability to grow our business and become profitable,
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our reliance on intellectual property licensed from third
parties,
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an inability of our customers to obtain sufficient third-party
reimbursement for MAKOplasty, and
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potential conflicts of interest that certain of our directors,
executive officers and key employees may face as a result of
their equity and financial interests in Z-KAT, Inc. and the
CEOs potential membership on the Z-KAT board.
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Corporate
Information
We were incorporated in Delaware in November 2004 under the name
MAKO Surgical Corp. The address of our principal executive
office is 2555 Davie Road, Ft. Lauderdale, Florida 33317,
and our telephone number is
(954) 927-2044.
Our website address is www.makosurgical.com. We do not
incorporate the information on our website into this prospectus,
and you should not consider it part of this prospectus. As used
in this prospectus, references to we,
our, us, Company and
MAKO refer to MAKO Surgical Corp. unless the context
requires otherwise.
4
Summary
of the Offering
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Common stock offered by us
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5,100,000 shares
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Common stock to be outstanding after this offering
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18,438,284 shares
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Over-allotment option
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698,333 from us and 66,667 shares from the selling stockholder.
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Use of proceeds
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We intend to use the net proceeds of this offering as follows:
approximately $14.0 million - $20.0 million
for expansion of our sales and marketing activities;
approximately $12.0 million - $18.0 million
for continuation of our research and development activities;
approximately $4.0 million to IBM, as required upon the
initial public offering of our common stock under the terms of
our licensing agreement with IBM; and the remainder to fund
working capital and other general corporate purposes. We will
not receive any of the proceeds from the sale of shares by the
selling stockholder if the underwriters exercise their
over-allotment option. See Use of Proceeds.
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Nasdaq Global Market symbol
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MAKO
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The number of shares of common stock that will be outstanding
immediately after this offering is based on
13,338,284 shares of common stock outstanding as of
January 1, 2008 and excludes:
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1,916,464 shares of our common stock issuable upon the
exercise of outstanding stock options with a weighted average
exercise price of $4.81 per share;
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1,084,703 shares of our common stock reserved for issuance under
our 2008 Omnibus Incentive Plan, as well as any automatic
increases in the number of shares of our common stock reserved
for future issuance under the plan, and 625,000 shares available
under our 2008 Employee Stock Purchase Plan; and
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462,716 shares of our common stock issuable upon the
exercise of outstanding warrants, with an exercise price of
$3.00 per share.
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Except as otherwise indicated, all information in this
prospectus gives effect to a one-for-3.03 reverse stock split of
our common stock effected on February 8, 2008 and assumes:
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the conversion of all our outstanding shares of redeemable
convertible preferred stock into 10,945,081 shares of
common stock upon the completion of this offering;
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the filing of our third amended and restated certificate of
incorporation and the adoption of our third amended and restated
bylaws, which will occur immediately prior to the closing of
this offering;
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the initial public offering price of our common stock of $10.00
per share; and
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no exercise of the underwriters over-allotment option.
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5
Summary
Financial Data
The following tables present our summary historical financial
information. You should read this information together with the
financial statements and related notes and the information under
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this prospectus.
We were formed in November 2004 to be the successor of Z-KAT,
Inc., a company founded in 1997 to develop computer-assisted
surgery technologies.
Z-KAT
is
considered to be our Predecessor. The balance sheet
and statements of operations data in this prospectus for the
periods prior to and including November 11, 2004 refer to
the Predecessor. The statements of operations data for the nine
months ended September 30, 2006 and 2007, and the balance
sheet data as of September 30, 2007, have been derived from
our unaudited financial statements included elsewhere in this
prospectus.
The statement of operations data for the period from
January 1, 2004 through November 11, 2004 have been
derived from the audited statement of operations of the
Predecessor included elsewhere in this prospectus.
The balance sheet and statements of operations data subsequent
to November 11, 2004 refer to operations subsequent to our
formation, and these periods are referred to as the Company. The
statements of operations data for the period from
November 12, 2004 to December 31, 2004, and for the
fiscal years ended December 31, 2005 and 2006, have been
derived from our audited financial statements included elsewhere
in this prospectus.
Our Predecessor incurred $250,000 of payroll and direct and
indirect expenses from October 1, 2004 through
November 11, 2004 prior to our legal formation on
November 12, 2004, which have been eliminated from our
Predecessors results of operations for the period
January 1, 2004 through November 11, 2004 and included
in our results of operations for the period November 12,
2004 through December 31, 2004.
The pro forma basic and diluted net loss per share data gives
effect to the conversion of all of our outstanding redeemable
convertible preferred stock into common stock immediately prior
to the closing of our initial public offering and adjustments to
eliminate accretion of and accrued dividends on preferred stock.
6
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Predecessor
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The Company
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Jan. 1, 2004
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Nov. 12, 2004
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Nine Months Ended
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through
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through
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Year Ended December 31,
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September 30,
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Nov. 11, 2004
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Dec. 31, 2004
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2005
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2006
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2006
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2007
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(Unaudited)
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(Unaudited)
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Statements of Operations Data:
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Revenue
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$
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1,648,342
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$
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$
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$
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62,571
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$
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34,831
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$
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355,382
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Cost of revenue
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1,085,523
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76,547
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28,800
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291,429
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Gross profit (loss)
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562,819
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(13,976
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)
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6,031
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63,953
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Operating costs and expenses:
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Selling, general and administrative
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2,642,028
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630,048
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2,735,901
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5,022,685
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3,153,989
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7,695,767
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Research and development
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1,453,685
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402,899
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2,581,828
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5,192,453
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3,324,771
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5,344,947
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Depreciation and amortization
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429,694
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5,727
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98,519
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644,082
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418,219
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915,296
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Total operating costs and expenses
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4,525,407
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1,038,674
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5,416,248
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10,859,220
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6,896,979
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13,956,010
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|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(3,962,588
|
)
|
|
|
|
(1,038,674
|
)
|
|
|
(5,416,248
|
)
|
|
|
(10,873,196
|
)
|
|
|
(6,890,948
|
)
|
|
|
(13,892,057
|
)
|
Interest and other income
|
|
|
868
|
|
|
|
|
|
|
|
|
269,231
|
|
|
|
476,578
|
|
|
|
410,531
|
|
|
|
860,019
|
|
Interest and other expense
|
|
|
(479,959
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(220,219
|
)
|
|
|
(142,664
|
)
|
|
|
(228,998
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,441,679
|
)
|
|
|
$
|
(1,038,674
|
)
|
|
$
|
(5,147,017
|
)
|
|
$
|
(10,616,837
|
)
|
|
$
|
(6,623,081
|
)
|
|
$
|
(13,261,036
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(5,221,774
|
)
|
|
|
$
|
(1,060,713
|
)
|
|
$
|
(6,288,297
|
)
|
|
$
|
(12,493,183
|
)
|
|
$
|
(8,019,297
|
)
|
|
$
|
(15,937,817
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted attributable to common stockholders(1)
|
|
$
|
(0.63
|
)
|
|
|
$
|
(2.39
|
)
|
|
$
|
(4.18
|
)
|
|
$
|
(8.03
|
)
|
|
$
|
(5.16
|
)
|
|
$
|
(10.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
8,234,560
|
|
|
|
|
443,868
|
|
|
|
1,502,761
|
|
|
|
1,555,287
|
|
|
|
1,555,068
|
|
|
|
1,581,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted (unaudited)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1.32
|
)
|
|
|
|
|
|
$
|
(1.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted (unaudited)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,040,486
|
|
|
|
|
|
|
|
11,938,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company
|
|
|
|
As of September 30, 2007
|
|
|
|
|
|
|
|
|
|
Pro Forma as
|
|
|
|
Actual
|
|
|
Pro Forma(3)
|
|
|
Adjusted(4)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
14,050,865
|
|
|
$
|
14,050,865
|
|
|
$
|
58,730,865
|
|
Short-term investments
|
|
|
6,072,925
|
|
|
|
6,072,925
|
|
|
|
6,072,925
|
|
Total assets
|
|
|
32,689,832
|
|
|
|
32,689,832
|
|
|
|
77,369,832
|
|
Redeemable convertible preferred stock
|
|
|
58,503,707
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value
|
|
|
1,830
|
|
|
|
12,775
|
|
|
|
17,875
|
|
Additional paid-in capital
|
|
|
|
|
|
|
58,492,762
|
|
|
|
103,167,662
|
|
Accumulated deficit
|
|
|
(34,942,094
|
)
|
|
|
(34,942,094
|
)
|
|
|
(34,942,094
|
)
|
Total stockholders equity (deficit)
|
|
|
(34,933,047
|
)
|
|
|
23,570,660
|
|
|
|
68,250,660
|
|
7
|
|
|
(1)
|
|
The basic and diluted net loss per share computation excludes
potential common shares upon exercise of options to purchase
common stock as their effect would be anti-dilutive. See
Note 2 to Financial Statements included elsewhere in this
prospectus for a detailed explanation of the determination of
shares used in computing basic and diluted loss per share.
|
|
(2)
|
|
Pro forma basic and diluted net loss per share is presented for
the year ended December 31, 2006 and the nine months ended
September 30, 2007 to reflect per share data assuming the
conversion of all our outstanding shares of redeemable
convertible preferred stock into 10,945,081 shares of
common stock, which will occur upon completion of this offering,
as if the conversion had taken place on the original date of
issuance and adjustments to eliminate accretion of preferred
stock and accrual of preferred stock dividends.
|
|
(3)
|
|
On a pro forma basis to reflect the conversion of all of our
outstanding shares of redeemable convertible preferred stock
into 10,945,081 shares of common stock upon the close of
this offering.
|
|
(4)
|
|
On a pro forma as adjusted basis to reflect the sale of
5,100,000 shares of our common stock in this offering at
the initial offering price to the public of $10.00 per share,
after deducting the underwriting discounts, commissions and
estimated offering expenses payable by us.
|
8
RISK
FACTORS
An investment in our common stock involves a high degree of
risk. You should carefully consider the following risks, as well
as all of the other information contained in this prospectus,
before investing in our common stock. If any of the following
possible events actually occur, our business, business
prospects, cash flow, results of operations or financial
condition could be harmed. In this case, the trading price of
our common stock could decline, and you might lose all or part
of your investment in our common stock. In assessing these
risks, you should also refer to the other information contained
in this prospectus, including our financial statements and
related notes. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair
our operations.
Risks
Related to Our Business
We are
an early-stage medical device company with a limited operating
history and our business may not become
profitable.
We are an early-stage medical device company with a limited
operating history. Our only current or planned products with
510(k) marketing clearance from the FDA are versions 1.0 and 1.2
of our Tactile Guidance System, or TGS, and inlay and onlay
implant systems for use in unicompartmental knee resurfacing
procedures. We also may not be successful in our research and
development efforts for version 2.0 of the TGS and a modular
knee implant system, which would allow multicompartmental knee
resurfacing procedures. The future success of our business
depends on our ability to develop and obtain regulatory
clearances or approvals for these products, especially version
2.0 of the TGS and the modular knee implant system, which we may
be unable to do in a timely manner, or at all. Our success and
ability to generate revenue or be profitable also depends on our
ability to establish our sales and marketing force, generate
product sales and control costs, all of which we may be unable
to do. We have a limited history of operations upon which you
can evaluate our business and our operating expenses are
increasing. Our lack of any significant operating history also
limits your ability to make a comparative evaluation of us, our
products and our prospects.
We
have incurred significant losses since our inception and
anticipate that we will continue to incur significant losses for
the foreseeable future.
We have sustained net losses in every fiscal year since our
inception in 2004, including a net loss of $10.6 million
for the year ended December 31, 2006 and a net loss of
$13.3 million for the nine months ended September 30,
2007. As of December 31, 2006 and September 30, 2007,
we had an accumulated deficit of $19.4 million and
$34.9 million, respectively. 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 of our products and our business generally. We
also expect that our general and administrative expenses will
increase due to additional operational and regulatory burdens
associated with operating as a public company. We are required
to defer revenue associated with sales of our TGS units until we
have fulfilled our contractual obligation to deliver version 2.0
of our TGS to the customer. Therefore, our deferred revenue will
be higher in the short term and we may not be able to recognize
some or any of our deferred revenue until we have satisfied all
obligations for delivery of product upgrades, which we may be
unable to do. Our losses have had and will continue to have an
adverse effect on our stockholders equity and working
capital. Any failure to achieve and maintain profitability would
continue to have an adverse effect on our stockholders
equity and working capital and could result in a decline in our
stock price or cause us to cease operations.
We
rely heavily on intellectual property that we license from
others, and if we are unable to maintain these licenses or
obtain additional licenses that we may need, our ability to
compete will be harmed.
We rely heavily on intellectual property that we license or
sublicense from others, including patented technology that is
integral to our TGS and implants. As of January 1, 2008, we
had licensed rights to 118 U.S. and 47 foreign third-party
granted patents, and we had licensed rights to 22 U.S. and
40 foreign third-party pending patent applications. The majority
of these patents and applications are either used in our current
products or relate to core technologies used in our products,
such as computer-assisted surgery, robotics,
9
haptics and implants. Nine of the licensed U.S. patents
(and three related foreign patents) will expire by the end of
2009. Two of these U.S. patents (and all three related
foreign patents) are surgical navigation patents, and three of
these U.S. patents relate to robotic technology. These five
U.S. patents (and the foreign patents) are considered
material to our intellectual property portfolio because they
potentially enable us to exclude others from practicing the
claimed technology. Our portfolio also includes 19 wholly-owned
pending U.S. patent applications, 21 pending foreign
applications and other intellectual property that is
wholly-owned by us. We are particularly dependent on our
licensing arrangements with Z-KAT, Inc., or Z-KAT, from whom we
license or sublicense, among other things, core technologies in
visualization, and haptics and robotics. We also rely on our
licensing arrangement with Stelkast (a business division of
Trigon Incorporated), pursuant to which we have specified rights
to the design of our inlay knee implant system, and our
licensing arrangement with Encore Medical, L.P., pursuant to
which we have certain rights to the design of our onlay knee
implant system. Any of these or other third parties may
terminate a license in the event that we fail to make required
payments or for other causes. In the event a third party
terminates a license agreement, we cannot assure you that we
could acquire another license to adequately replace the product,
technology or method covered by the terminated license. If we
fail to maintain our current licenses, our ability to compete in
the knee implant market will be harmed.
In addition, as we enhance our current product offerings and
develop new ones, including version 2.0 of our TGS and a modular
knee implant system, we may find it advisable or necessary to
seek additional licenses from third parties who hold patents
covering technology or methods used in these products. If we
cannot obtain these additional licenses, we could be forced to
design around those patents at additional cost or abandon the
product altogether. As a result, our ability to grow our
business and compete in the knee implant market may be harmed.
We are
currently required by the FDA to refrain from using certain
terms to label and market our products, which could harm our
ability to market and commercialize our current or future
products.
On September 28, 2007, we submitted a Special 510(k)
application to the FDA for version 1.2 of our TGS which the FDA
indicated was converted to a Traditional 510(k) application. On
November 1, 2007, the FDA provided us with a letter
requesting additional information in which the FDA, among other
things, asked us to justify our proposed use of the terms
haptic and robot in the labeling of
version 1.2 of our TGS. Through subsequent correspondence and
communications, the FDA indicated that we needed to use the term
tactile in lieu of haptic and the term
robotic-arm in lieu of robotic, as
appropriate, when these terms are used to market our products
and in order to obtain timely clearance of our 510(k) submission
for version 1.2. The FDA granted 510(k) clearance in January
2008 for version 1.2 of our TGS with those terms. Because the
FDA currently requires us to use the terms tactile
or robotic-arm, we have begun revising the
promotional and labeling materials for our existing TGS
products, and may need to consider the use of modified language
for our future products. As a result, our ability to market and
commercialize our products and our growth may be harmed.
Modifications
to our currently FDA-cleared products or the introduction of new
products may require new regulatory clearances or approvals or
require us to recall or cease marketing our current products
until clearances or approvals are obtained.
In November 2005, we obtained 510(k) marketing clearance from
the FDA for version 1.0 of our TGS for use with our FDA-cleared
inlay implant system. We were not required to obtain premarket
approval, or PMA. We were also not required to conduct any
clinical trials in support of our application for 510(k)
marketing clearance. Modifications to our products, however, may
require new regulatory approvals or clearances or require us to
recall or cease marketing the modified products until these
clearances or approvals are obtained. Any modification to one of
our 510(k)-cleared products that would constitute a major change
in its intended use, or any change that could significantly
affect the safety or effectiveness of the device would require
us to obtain clearance of a new 510(k) and may even, in some
circumstances, require the submission of a PMA, if the change
raises complex or novel scientific issues or the product has a
new intended use. The FDA requires every manufacturer to make
the determination regarding the need for a new 510(k) submission
10
in the first instance, but the FDA may review any
manufacturers decision. Since obtaining 510(k) marketing
clearance for version 1.0 of our TGS, we developed and
commercially introduced several upgrades to our TGS that we
believe did not require additional clearances or approvals. Our
Special 510(k) application for version 1.2, which the FDA
converted to a Traditional 510(k) application and cleared in
January 2008, incorporated these upgrades. We may make
additional modifications in the future to our TGS without
seeking additional clearances or approvals if we believe such
clearances or approvals are not necessary. If the FDA disagrees
and requires new clearances or approvals for the modifications,
we may be required to recall and stop marketing our products as
modified, which could cause us to redesign our products, conduct
clinical trials to support any modifications, and pay
significant regulatory fines or penalties. Any of these actions
would harm our operating results.
We may not be successful in obtaining 510(k) marketing
clearances or other required approvals for version 2.0 of our
TGS and the modular knee implant system which version 2.0 will
be designed to support. Obtaining clearances and approvals can
be a difficult and time consuming process, and we may not be
able to obtain any of these or other clearances or approvals in
a timely manner, or at all. In addition, the FDA may not approve
or clear these products for the indications that are necessary
or desirable for successful commercialization or could require
clinical trials to support any modifications. Any delay or
failure in obtaining required clearances or approvals would
adversely affect our ability to introduce new or enhanced
products in a timely manner, which in turn would harm our future
growth.
Moreover, clearances and approvals are subject to continual
review, and the later discovery of previously unknown problems
can result in product labeling restrictions or withdrawal of the
product from the market. The loss of previously received
approvals or clearances, or the failure to comply with existing
or future regulatory requirements could reduce our sales,
profitability and future growth prospects.
We
depend on the success of a single line of products for our
revenues, which could impair our ability to achieve
profitability.
We expect to derive most of our revenues from capital sales of
our TGS units, recurring sales of implants and disposable
products required for each MAKOplasty procedure, and service
plans that are sold with our TGS units. Currently, the only line
of products that has been commercially introduced or received
510(k) marketing clearance is versions 1.0 and 1.2 of our TGS
and the inlay and onlay knee implant systems for use in
unicompartmental knee resurfacing procedures. Our future growth
and success is dependent on the commercial introduction of
version 2.0 of our TGS and a modular knee implant system, which
would allow application of MAKOplasty to multicompartmental knee
resurfacing procedures. We are in the early stages of
development of these products and will need to obtain regulatory
clearances or approvals which we may be unable to do on a timely
basis, or at all. If we are unable to complete development of
these products, obtain regulatory clearances or approvals or
achieve commercial acceptance of MAKOplasty for
multicompartmental knee resurfacing procedures, our revenues
would be adversely affected and we would not become profitable.
If our
MAKOplasty solution does not gain market acceptance, we will not
be able to generate the revenues necessary to develop a
sustainable, profitable business.
Achieving patient, surgeon and hospital acceptance of MAKOplasty
as the preferred method of treating early to mid-stage
osteoarthritis of the knee is crucial to our success. We believe
MAKOplasty represents a fundamentally new way of performing
arthroplasty of the knee, employing computer-assisted
robotic-arm technology and a patient-specific visualization
system to resurface only the diseased areas of the knee joint.
The orthopedic market has been traditionally slow to adopt new
products and treatment practices. We believe that if surgeons
and hospitals do not adopt the concept of computer-assisted
robotics-enabled technology and perceive such technology as
having significant advantages over conventional arthroplasty
procedures, patients will be less likely to accept or be offered
MAKOplasty and we will fail to meet our business objectives.
Surgeons and hospitals perceptions of such
technology having significant advantages are likely to be based
on a determination that, among other factors, our products are
safe, cost-effective and represent acceptable methods of
treatment. Even if we can prove the effectiveness of MAKOplasty
through clinical trials, surgeons may elect not to use our
products for any number of other reasons. For example, surgeons
may continue to
11
recommend total knee replacement surgery simply because such
surgery is already widely accepted. In addition, surgeons may be
slow to adopt our products because of the perceived liability
risks arising from the use of new products. Hospitals may not
accept MAKOplasty because the TGS is a piece of capital
equipment, representing a significant portion of a
hospitals budget. Our TGS may not be cost-efficient if
hospitals are not able to perform a significant volume of
MAKOplasty procedures. If MAKOplasty fails to achieve market
acceptance for any of these or other reasons, we will not be
able to generate the revenues necessary to develop a
sustainable, profitable business.
We
have only limited clinical data to support the safety and
efficiency of MAKOplasty, which may make patients, surgeons and
hospitals reluctant to purchase our products.
We believe that patients, surgeons and hospitals will only
accept MAKOplasty or purchase our products if they believe that
MAKOplasty is a safe and effective procedure with advantages
over competing products and conventional procedures. To date, we
have collected only limited, short-term clinical data with which
to assess MAKOplastys safety and efficacy. As of
January 1, 2008, 181 MAKOplasty procedures have been
performed since commercial introduction in 2006. Two additional
procedures were intended as MAKOplasty procedures, but in each
case, the procedure concluded as total knee replacements when
our TGS failed to perform as intended or was improperly operated
during surgery. We reported both of these incidents to the FDA
pursuant to medical device reporting regulations, or MDR. In
January 2008, we reported a third incident in which a patient
suffered a post-operative bone fracture at the insertion site of
the bone pins. See Risks Related to Regulatory
Compliance. We have not collected, and are not aware that
others have collected, any long-term clinical data regarding the
safety and efficacy of MAKOplasty. The results of short-term
studies, such as our postmarket study, do not necessarily
predict long-term clinical safety or efficacy. If longer-term or
more extensive clinical studies that may be performed by us or
others indicate that MAKOplasty is a less safe or less effective
procedure than our current data suggest, patients may choose not
to undergo and surgeons may choose not to perform MAKOplasty.
Furthermore, unsatisfactory patient outcomes or patient injury
could cause negative publicity for our products, particularly in
the early phases of product introduction. The FDA could also
rescind our marketing clearances if future results and
experience indicate that our products cause unexpected or
serious complications or other unforeseen negative effects. See
Risks Related to Regulatory Compliance. Surgeons may
be slow to adopt our products if they perceive liability risks
arising from the use of these new products. As a result,
patients, surgeons and hospitals may not accept MAKOplasty or
our products, we may fail to become profitable, and we may be
subject to significant legal liability.
We
have limited sales and marketing experience and capabilities,
which could impair our ability to achieve
profitability.
We have limited experience as a company in the sales and
marketing of our products. We may not be successful in marketing
and selling our products in the U.S. through our direct
sales force with assistance from independent orthopedic product
agents and distributors. Our sales and marketing organization is
supported by clinical and technical representatives who provide
training, clinical and technical support and other services to
our customers before and during the surgery. To reach our
revenue targets, we need to expand and strengthen our
U.S. direct sales force. Developing a sales and marketing
organization is expensive and time consuming and an inability to
develop such an organization in a timely manner could delay the
successful adoption of our products. Additionally, any sales and
marketing organization that we develop may be competing against
the experienced and well-funded sales and marketing
organizations of some of our competitors. We will face
significant challenges and risks in developing our sales and
marketing organization, including, among others:
|
|
|
|
|
our ability to recruit, train and retain adequate numbers of
qualified sales and marketing personnel;
|
|
|
|
the ability of sales personnel to obtain access to leading
surgeons and persuade adequate numbers of hospitals to purchase
our products;
|
|
|
|
costs associated with hiring, maintaining and expanding a sales
and marketing organization; and
|
|
|
|
government scrutiny with respect to promotional activities in
the healthcare industry.
|
12
If we are unable to develop and maintain these sales and
marketing capabilities, we may be unable to generate revenue and
may not become profitable.
Surgeons,
hospitals and orthopedic product agents and distributors may
have existing relationships with other medical device companies
that make it difficult for us to establish new relationships
with them, and as a result, we may not be able to sell and
market our products effectively.
We believe that to sell and market our products effectively, we
must establish relationships with key surgeons and hospitals in
the field of orthopedic knee surgery. Many of these key surgeons
and hospitals already have long-standing relationships with
large, better-known companies that dominate the medical devices
industry through collaborative research programs and other
relationships. Because of these existing relationships, some of
which may be contractually enforced, surgeons and hospitals may
be reluctant to adopt MAKOplasty, particularly if MAKOplasty
competes with or has the potential to compete with products
supported through their own collaborative research program or by
these existing relationships. Even if these surgeons and
hospitals purchase our TGS, they may be unwilling to enter into
collaborative relationships with us to promote joint marketing
programs such as the MAKOplasty Knee Center of Excellence or to
provide us with clinical and financial data.
In addition to our direct sales force, we work with a network of
independent orthopedic product agents and distributors that
primarily generate sales leads for us. If these product agents
and distributors believe that their relationship with us is less
beneficial than other relationships they may have with more
established or well-known medical device companies, they may be
unwilling to continue their relationships with us, making it
more difficult for us to sell and market our products
effectively.
Because
the markets for our products are highly competitive, customers
may choose to purchase our competitors products, resulting
in reduced revenue and harm to our financial
results.
MAKOplasty requires the use of new robotics technology, and we
face competition from large, well-known companies, principally
Zimmer Holdings, Inc., DePuy Orthopedics, Inc., a
Johnson & Johnson company, Stryker Corporation, and
Biomet, Inc., that dominate the market for orthopedic products.
Each of these companies, as well as other companies like
Smith & Nephew, Inc., which introduced the Journey
Deuce Bi-Compartmental Knee System in July 2007, offers
conventional instruments and implants for use in conventional
total and partial knee replacement surgeries as well as
unicompartmental resurfacing procedures, which may compete with
our MAKOplasty solution and negatively impact sales of our TGS.
A number of these and other companies also offer surgical
navigation systems for use in arthroplasty procedures that
provide a minimally invasive means of viewing the anatomical
site.
Currently, we are not aware of any well-known orthopedic company
that broadly offers robotics technology in combination with
surgical navigation. All of these companies, however, have the
ability to acquire and develop robotics technology that may
compete with our TGS. In addition, Biomet has a license from
Z-KAT to intellectual property rights in computer-assisted
surgical navigation, or CAS intellectual property, for use in
the field of orthopedics. The license is non-exclusive with
respect to use of CAS intellectual property in combination with
robotics technology and exclusive with respect to all other uses
within the field of orthopedics, which could enable them to
compete with us.
We also may face competition from other medical device companies
that may seek to extend robotics technology and minimally
invasive approaches and products that they have developed for
use in other parts of the human anatomy to minimally invasive
arthroplasty of the knee. Even if these other companies
currently do not have an established presence in the field of
minimally invasive surgery for the knee, they may attempt to
apply their robotics technology to the field of knee replacement
and resurfacing procedures to compete directly with us.
Many of these medical device competitors enjoy competitive
advantages over us, including:
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significantly greater name recognition;
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longer operating histories;
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established exclusive relations with healthcare professionals,
customers and third-party payors;
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established distribution networks;
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additional lines of products, and the ability to offer rebates
or bundle products to offer higher discounts or incentives to
gain a competitive advantage;
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greater experience in conducting research and development,
manufacturing, clinical trials, obtaining regulatory clearance
for products and marketing approved products; and
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greater financial and human resources for product development,
sales and marketing and patent litigation.
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Moreover, our competitors in the medical device industry make
significant investments in research and development, and
innovation is rapid and continuous. If new products or
technologies emerge that provide the same or superior benefits
as our products at equal or lesser cost, they could render our
products obsolete or unmarketable. Because our products can have
long development and regulatory clearance or approval cycles, we
must anticipate changes in the marketplace and the direction of
technological innovation and customer demands. In addition, we
face increasing competition from well-financed orthopedic
companies in our attempts to acquire such new technologies,
products and businesses. As a result, we cannot be certain that
surgeons will use our products to replace or supplement
established surgical procedures or that our products will be
competitive with current or future products and technologies
resulting in reduced revenue and harm to our financial results.
If we
do not timely achieve our development goals for new versions of
our TGS or our implants, the commercialization of these products
will be delayed and our business and financial results may be
adversely affected.
The success of our business is dependent on our ability to
develop new products, to introduce enhancements to our existing
products and to develop these new products and enhancements
within targeted time frames and budgets. We may not be
successful in our research and development efforts for version
2.0 of our TGS and a modular knee implant system, for which we
are targeting commercial introduction in the first half of 2009,
subject to regulatory clearances. The actual timing of these
product releases can vary dramatically compared to our estimates
for reasons that may or may not be within our control, including
clearance or approval to market these products by the FDA.
Customers may forego purchases of our existing products and
purchase our competitors products as a result of delays in
the introduction of our new products and enhancements or failure
by us to offer innovative products or enhancements at
competitive prices and in a timely manner. Announcements of new
products by us or by competitors may also result in a delay in
or cancellation of purchasing decisions in anticipation of such
new products. Any such losses of new customers would harm our
business and financial results. In addition, most customers who
purchase our TGS are entitled by contract to receive version 2.0
of our TGS and all interim software and hardware version
enhancements at no additional cost. Until we deliver version 2.0
of our TGS to the customer, we are required to defer all
revenues associated with the sale of the TGS. Any delay in or
failure to deliver version 2.0 of our TGS to our existing
customers could result in the loss of such accounts and a delay
or inability to recognize revenue associated with the initial
sale of the TGS to the customer.
If we
fail to develop, acquire or secure a customized bone cutting
instrument, we may not be able to develop version 2.0 of our
TGS, and as a result, our business and financial results may be
adversely affected.
A key element of our TGS is the bone cutting instrument that
attaches to the end of the robotic arm. The current version of
the bone cutting instrument is supplied by a third-party
manufacturer that supplies substantially the same instrument to
other customers for use in other parts of the anatomy. We
believe that to successfully develop and market version 2.0 of
our TGS for use in multicompartmental resurfacing procedures, we
must develop, acquire or secure a supplier for a customized bone
cutting instrument that provides greater durability and is
custom-fit for use with version 2.0 of our TGS in
multicompartmental resurfacing procedures. Alternatively, we may
need to collaborate or enter into partnerships with strategic
partners to provide us with
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such technology. We cannot assure you that we would be able to
develop, acquire or secure a supplier for a customized bone
cutting instrument or enter into collaborations or partnerships
on terms that are favorable to us, or at all. If we are not able
to do so, we may not be able to develop and commercialize
version 2.0 of our TGS and our business and financial results
will be adversely affected.
We may
not have sufficient funding to complete the development and
commercialization of our existing products.
Our operations have consumed substantial amounts of cash since
our inception. We expect to continue to spend substantial
amounts of cash on expansion of our sales and marketing
organization, research and development, and commercialization of
our products. We believe that the net proceeds from this initial
public offering, together with our future sales, existing cash
and cash equivalent balances and interest we earn on these
balances will be sufficient to meet our anticipated cash
requirements for approximately the next 16-18 months.
However, actual capital requirements may change and will depend
on many factors, including:
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the success of our research and product development efforts;
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the expenses we incur in selling and marketing our products;
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the costs and timing of regulatory clearances for upgrades or
changes to our products;
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the cash generated by sales of our products;
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the emergence of competing or complementary technological
developments;
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the costs of filing, prosecuting, defending and enforcing any
patent 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; and
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the acquisition of businesses, products and technologies.
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Any additional financing may be dilutive to stockholders or may
require us to grant a lender a security interest in our assets.
If adequate funds are not available to us, we may have to delay
development or commercialization of some of our products. We
also may have to reduce marketing, customer support or other
resources devoted to our products. Any of these factors could
harm our business and financial results.
Our
reliance on third-party suppliers, including single source
suppliers, for our implants and nearly all components of our TGS
could harm our ability to meet demand for our products in a
timely and cost effective manner.
We rely on third-party suppliers to manufacture and supply our
implants and nearly all components used in our TGS, other than
software. We currently rely on a number of sole source
suppliers, such as Stelkast (a business division of Trigon
Incorporated), for our inlay knee implant system, Encore, for
our onlay knee implant system and The Anspach Effort, Inc., for
our bone cutting instrument. We generally do not have long-term
contracts with our suppliers, other than with Encore. We have
long-term design and licensing agreements, however, with
Stelkast and Encore that provide us with certain rights to the
design and manufacture of the implants, and a long-term
agreement with Symmetry Medical, Inc., which contemplates the
manufacture, label and packaging of knee implant systems and the
development of new implant designs in the future. Because we do
not have long-term contracts, our suppliers generally are not
required to provide us with any guaranteed minimum production
levels. As a result, we cannot assure you that we will be able
to obtain sufficient quantities of key components in the future.
In addition, our reliance on third-party suppliers involves a
number of risks, including, among other things:
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suppliers may fail to comply with regulatory requirements or
make errors in manufacturing components that could negatively
affect the efficacy or safety of our products or cause delays in
shipments of our products;
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we or our suppliers may not be able to respond to unanticipated
changes in customer orders, and if orders do not match
forecasts, we or our suppliers may have excess or inadequate
inventory of materials and components;
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we may be subject to price fluctuations due to a lack of
long-term supply arrangements for key components;
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we may experience delays in delivery by our suppliers due to
changes in demand from us or their other customers;
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we or our suppliers may lose access to critical services and
components, resulting in an interruption in the manufacture,
assembly and shipment of our systems;
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fluctuations in demand for products that our suppliers
manufacture for others may affect their ability or willingness
to deliver components to us in a timely manner;
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our suppliers may wish to discontinue supplying components or
services to us for risk management reasons;
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we may not be able to find new or alternative components or
reconfigure our system and manufacturing processes in a timely
manner if the necessary components become unavailable; and
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our suppliers may encounter financial hardships unrelated to our
demand for components, which could inhibit their ability to
fulfill our orders and meet our requirements.
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If any of these risks materialize, it could significantly
increase our costs and impact our ability to meet demand for our
products. If we are unable to satisfy commercial demand for our
TGS or implants in a timely manner, our ability to generate
revenue would be impaired, market acceptance of our products
could be adversely affected, and customers may instead purchase
or use our competitors products. In addition, we could be
forced to secure new or alternative components through a
replacement supplier. Securing a replacement supplier could be
difficult, especially for complex components such as motors,
encoders, brakes and certain TGS components that are
manufactured in accordance with our custom specifications. The
introduction of new or alternative components may require design
changes to our system that are subject to FDA and other
regulatory clearances or approvals. We may also be required to
assess the new manufacturers compliance with all
applicable regulations and guidelines, which could further
impede our ability to manufacture our products in a timely
manner. As a result, we could incur increased production costs,
experience delays in deliveries of our products, suffer damage
to our reputation, and experience an adverse affect on our
business and financial results.
We
have limited experience in assembling and testing our products
and may encounter problems or delays in the assembly of our
products or fail to meet certain regulatory requirements which
could result in a material adverse effect on our business and
financial results.
We have limited experience in assembling and testing our
products, including the current version of our TGS, and no
experience in doing so on a commercial scale. The current
version of our TGS is complex and requires the integration of a
number of separate components and processes. Version 2.0 of our
TGS, if developed in the future as currently planned, is likely
to be even more complex. To become profitable, we must assemble
and test the TGS in commercial quantities in compliance with
regulatory requirements and at an acceptable cost. Increasing
our capacity to assemble and test our products on a commercial
scale will require us to improve internal efficiencies. We may
encounter a number of difficulties in increasing our assembly
and testing capacity, including:
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managing production yields;
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maintaining quality control and assurance;
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providing component and service availability;
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maintaining adequate control policies and procedures;
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hiring and retaining qualified personnel; and
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complying with state, federal and foreign regulations.
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If we are unable to satisfy commercial demand for our TGS due to
our inability to assemble and test our TGS, our business and
financial results, including our ability to generate revenue,
would be impaired, market acceptance of our products could be
materially adversely affected and customers may instead purchase
or use, our competitors products.
Any
failure in our efforts to train surgeons or hospital staff could
result in lower than expected product sales and potential
liabilities.
A critical component of our sales and marketing efforts is the
training of a sufficient number of surgeons and hospital staff
to properly use our TGS. We rely on surgeons and hospital staff
to devote adequate time to learn to use our products. Convincing
surgeons and hospital staff to dedicate the time and energy
necessary for adequate training in the use of our system is
challenging, and we cannot assure you we will be successful in
these efforts. If surgeons or hospital staff are not properly
trained, they may misuse or ineffectively use our products. If
nurses or other members of the hospital staff are not adequately
trained to assist in using our TGS, surgeons may be unable to
use our products. Insufficient training may result in
unsatisfactory patient outcomes, patient injury and related
liability or negative publicity, which could have an adverse
effect on our product sales or create substantial potential
liabilities.
We
will likely experience extended and variable sales cycles, which
together with the unit price of the TGS and our revenue
recognition policies, could cause significant variability in our
results of operations for any given quarter.
Our TGS will likely have a lengthy sales cycle because it
involves a major piece of capital equipment, the purchase of
which will generally require the approval of senior management
at hospitals, inclusion in the hospitals budget process
for capital expenditures and, in some instances, a certificate
of need from the state or other regulatory clearance. As a
result, we expect that a relatively small number of units will
be installed each quarter. Based on our limited experience, we
estimate that this sales cycle may take between seven and twelve
months from the point of initial identification and contact with
a qualified surgeon until closing of the purchase with the
hospital. Sales of TGS units may also be subject to a customer
acceptance period, during which the customer may return the TGS
unit to us subject to a penalty. Although we believe that
training can be accomplished in a relatively short period of
time, there may be situations where training of physicians and
staff may last an additional month or more after installation.
In addition, the introduction of new products could adversely
impact our sales cycle as customers take additional time to
assess the capital products. Because of the lengthy sales cycle,
the unit price of the TGS and the relatively small number of
units installed each quarter, each installation of a TGS can
represent a significant component of our revenue for a
particular quarter, particularly in the near term and during any
other periods in which our sales volume is relatively low.
Moreover, we are required to defer revenue associated with our
TGS until we have fulfilled our contractual obligation to
deliver version 2.0 of our TGS to our customers. The deferral of
revenue will result in even greater fluctuations in our
reporting of quarterly revenues. As a result, in future quarters
our operating results could fall below the expectations of
securities analysts or investors, in which event our stock price
would likely decrease. These fluctuations also mean that you
will not be able to rely upon our operating results in any
particular period as an indication of future performance.
Other factors that may contribute to fluctuations in our
operating results may include:
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timing and level of expenditures associated with new product
development activities;
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delays in shipment due, for example, to cancellations by
customers, natural disasters or labor disturbances;
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delays or unexpected difficulties in the manufacturing processes
of our suppliers or in our assembly process;
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timing of the announcement, introduction and delivery of new
products or product upgrades by us and by our competitors;
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timing and level of expenditures associated with expansion of
sales and marketing activities and our overall operations;
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disruptions in the supply or changes in the costs of raw
materials, labor, product components or transportation
services; and
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changes in third-party coverage and reimbursement, changes in
government regulation, or a change in a customers
financial condition or ability to obtain financing.
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These factors are difficult to forecast and may contribute to
substantial fluctuations in our quarterly revenues and
substantial variation from our projections, particularly during
the periods in which our sales volume is low. Moreover, many of
our expenses, such as office leases and certain personnel costs,
are relatively fixed. We may be unable to adjust spending
quickly enough to offset any unexpected revenue shortfall.
Accordingly, any shortfall in revenue may cause significant
variation in operating results in any quarter. Based on the
above factors, we believe that quarter-to-quarter comparisons of
our operating results are not a good indication of our future
performance. These and other potential fluctuations also mean
that you will not be able to rely upon our operating results in
any particular period as an indication of future performance.
If we
receive a significant number of warranty claims or our TGS units
require significant amounts of service after sale, our costs
will increase and our business and financial results will be
adversely affected.
We currently warrant each TGS against defects in materials and
workmanship for a period of approximately 12 months from
the installation of our product by a customer. We also expect to
provide technical and other services to customers beyond the
warranty period pursuant to a supplemental service plan that we
sell for our TGS. We have a limited history of commercial
placements from which to judge our rate of warranty claims. If
product returns or warranty claims are significant or exceed our
expectations, we could incur unanticipated reductions in sales
or additional expenditures for parts and service. In addition,
our reputation could be damaged and our products may not achieve
market acceptance. While we have established accruals for
liability associated with product warranties, unforeseen
warranty exposure in excess of those accruals could negatively
impact our business and financial results.
We
could become subject to product liability claims, product
recalls and other field or regulatory actions that could be
expensive, divert managements attention and harm our
business.
Our business exposes us to potential liability risks, product
recalls and other field or regulatory actions that are inherent
in the manufacturing, marketing and sale of medical device
products. We may be held liable if our TGS or implants cause
injury or death or is found otherwise unsuitable or defective
during usage. Our TGS incorporates mechanical, electrical and
optical parts, complex computer software and other sophisticated
components, any of which can contain errors or failures. Complex
computer software is particularly vulnerable to errors and
failures, especially when first introduced. In addition, new
products or enhancements to our existing products may contain
undetected errors or performance problems that, despite testing,
are discovered only after installation.
If any of our products are defective, whether due to design or
manufacturing defects, improper use of the product or other
reasons, we may be required to notify regulatory authorities
and, in some circumstances, to recall the product at our
expense. In particular, we are required to submit an MDR report
to the FDA for any incident in which our product may have caused
or contributed to a death or serious injury or in which our
product malfunctioned and, if the malfunction were to recur,
would likely cause or contribute to death or serious injury. In
2007, we submitted MDRs to the FDA reporting two procedures that
were intended as MAKOplasty procedures, but concluded as total
knee replacements when a component of our TGS failed to perform
as intended or was improperly operated during surgery. In
January 2008, we reported a third incident in which a patient
suffered a post-operative bone fracture at the insertion site of
the bone pins.
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In the future, we may experience additional events that may
require reporting to the FDA pursuant to the MDR regulations.
See Risks Related to Regulatory Compliance. A
required notification to a regulatory authority could result in
an investigation by regulatory authorities of our products,
which could in turn result in product recalls, restrictions on
the sale of the products, civil or criminal penalties, and other
field corrective action. In addition, because our products are
designed to be used to perform complex surgical procedures,
defects could result in a number of complications, some of which
could be serious and could harm or kill patients. The adverse
publicity resulting from any of these events could cause
surgeons or hospitals to review and potentially terminate their
relationships with us. Regulatory investigations or product
recalls could also result in our incurring substantial costs,
losing revenues, and implementing a change in the design,
manufacturing process or the indications for which our products
may be used, each of which would harm our business.
It is also possible that defects in the design, manufacture or
labeling of our products could result in a product liability
claim. The medical device industry has historically been subject
to extensive litigation over product liability claims. A product
liability claim, regardless of its merit or eventual outcome,
could result in significant legal defense costs. Although we
maintain product liability insurance, the coverage is subject to
deductibles and limitations, and may not be adequate to cover
future claims. Additionally, we may be unable to maintain our
existing product liability insurance in the future at
satisfactory rates or adequate amounts. A product liability
claim, regardless of its merit or eventual outcome could result
in:
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decreased demand for our products;
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injury to our reputation;
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diversion of managements attention;
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significant costs of related litigation;
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payment of substantial monetary awards by us;
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product recalls or market withdrawals;
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a change in the design, manufacturing process or the indications
for which our products may be used;
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loss of revenue; and
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an inability to commercialize our products under development.
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If
hospitals, surgeons and other healthcare providers are unable to
obtain coverage or reimbursement from third-party payors for
MAKOplasty procedures, hospitals may not purchase our TGS and
surgeons may not perform MAKOplasty, which would harm our
business and financial results.
Our ability to successfully commercialize MAKOplasty depends
significantly on the availability of coverage and reimbursement
from third-party payors, including governmental programs such as
Medicare and Medicaid as well as private insurance and private
health plans. Reimbursement is a significant factor considered
by hospitals in determining whether to acquire new capital
equipment such as our technology. Although our customers have
been successful in obtaining coverage and reimbursement, we
cannot assure you that procedures using our technology will be
covered or reimbursed by third-party payors in the future.
We anticipate that in the U.S. our products will be
purchased primarily by hospitals, which bill various third-party
payors, including governmental healthcare programs, such as
Medicare, and private insurance plans for procedures using our
technology. Ensuring adequate Medicare reimbursement can be a
lengthy and expensive endeavor and we cannot provide assurance
that we will be successful. In addition, the U.S. Congress
may pass laws that impact coverage and reimbursement for
healthcare services, including Medicare reimbursement to
physicians and hospitals. Many private payors look to
Medicares coverage and reimbursement policies in setting
their coverage policies and reimbursement amounts. If the
Centers for Medicare and Medicaid Services, the federal agency
that administers the Medicare program, or Medicare contractors
limit payments to hospitals or surgeons for MAKOplasty
procedures, private payors may similarly limit payments. In
addition, state legislatures may enact laws limiting or
otherwise affecting the level of
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Medicaid reimbursements. As a result, hospitals may not purchase
our TGS and surgeons may choose not to perform MAKOplasty, and,
as a result, our business and financial results would be
adversely affected.
Medicare pays acute care hospitals a prospectively determined
amount for inpatient operating costs under the Medicare hospital
inpatient prospective payment system, or PPS. Under the Medicare
hospital inpatient PPS, the prospective payment for a
patients stay in an acute care hospital is determined by
the patients condition and other patient data and
procedures performed during the inpatient stay using a
classification system known as diagnosis-related groups, or
DRGs. As of October 1, 2007, the Centers for Medicare and
Medicaid Services, or CMS, implemented a revised version of the
DRG system that uses 745 Medicare Severity DRGs, or MS-DRGs,
instead of the approximately 540 DRGs Medicare previously used.
The MS-DRGs are intended to account more accurately for the
patients severity of illness when assigning each
patients stay to a payment classification. Medicare pays a
fixed amount to the hospital based on the MS-DRG into which the
patients stay is assigned, regardless of the actual cost
to the hospital of furnishing the procedures, items and services
provided. Accordingly, acute care hospitals generally do not
receive direct Medicare reimbursement under PPS for the specific
costs incurred in purchasing medical devices. Rather,
reimbursement for these costs is deemed to be included within
the MS-DRG-based payments made to hospitals for the services
furnished to Medicare-eligible inpatients in which the devices
are utilized. Accordingly, a hospital must absorb the cost of
our products as part of the payment it receives for the
procedure in which the device is used. In addition, physicians
that perform procedures in hospitals are paid a set amount by
Medicare for performing such services under the Medicare
physician fee schedule. Medicare payment rates for both systems
are established annually.
At this time, we do not know the extent to which hospitals and
physicians would consider third-party reimbursement levels
adequate to cover the cost of our products. Failure by hospitals
and surgeons to receive an amount that they consider to be
adequate reimbursement for procedures in which our products are
used could deter them from purchasing or using our products and
limit our sales growth. In addition, pre-determined MS-DRG
payments or Medicare physician fee schedule payments may decline
over time, which could deter hospitals from purchasing our
products or physicians from using them. If hospitals are unable
to justify the costs of our products or physicians are not
adequately compensated for procedures in which our products are
utilized, they may refuse to purchase or use them, which would
significantly harm our business.
Notwithstanding current or future FDA clearances, if granted,
third-party payors may deny reimbursement if the payor
determines that a therapeutic medical device is unnecessary,
inappropriate, not cost-effective or experimental, or is used
for a non-approved indication. Although we are not aware of any
potential customer that has declined to purchase our TGS based
upon third-party payors reimbursement policies, cost
control measures adopted by third-party payors may have a
significant effect on surgeries performed using MAKOplasty or as
to the levels of reimbursement. All third-party payors, whether
governmental or private, whether inside the U.S. or
outside, are developing increasingly sophisticated methods of
controlling healthcare costs. These cost control methods include
prospective payment systems, capitated rates, benefit redesigns,
pre-authorization or second opinion requirements prior to major
surgery, an emphasis on wellness and healthier lifestyle
interventions and an exploration of other cost-effective methods
of delivering healthcare. These cost control methods also
potentially limit the amount which healthcare providers may be
willing to pay for medical technology which could, as a result,
adversely affect our business and financial results. In
addition, in the U.S., no uniform policy of coverage and
reimbursement for medical technology exists among all these
payors. Therefore, coverage and reimbursement for medical
technology can differ significantly from payor to payor.
There also can be no assurance that current levels of
reimbursement will not be decreased or eliminated in the future,
or that future legislation, regulation, or reimbursement
policies of third-party payors will not otherwise adversely
affect the demand for our products or our ability to sell
products on a profitable basis. Our customers are currently
using existing reimbursement codes for knee arthroplasty. Knee
arthroplasty performed in the hospital inpatient setting is
currently assigned to MS-DRG 469 (Major Joint Replacement
or Reattachment of Lower Extremity with Major Complication or
Comorbidity) and MS-DRG 470 (Major Joint Replacement
or Reattachment of Lower Extremity without Major Complication of
Comorbidity), and surgeons currently bill Current
Procedural Terminology, or CPT, code 27446 (Arthroplasty,
knee, condyle and plateau; medial OR lateral compartment)
for services performed in connection with procedures using our
technology. If unicompartmental
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and multicompartmental knee resurfacing procedures gain market
acceptance and the number of such procedures increases, CMS and
other payors may establish billing codes for unicompartmental
and multicompartmental knee resurfacing procedures that provide
for a smaller reimbursement amount than knee arthroplasty, which
could adversely affect our financial results and business.
In international markets, market acceptance of our products will
likely depend in large part on the availability of reimbursement
within prevailing healthcare payment systems. Reimbursement and
healthcare payment systems in international markets vary
significantly by country, and by region in some countries, and
include both government-sponsored healthcare and private
insurance. We may not obtain international reimbursement
approvals in a timely manner, if at all. In addition, even if we
do obtain international reimbursement approvals, the level of
reimbursement may not be enough to commercially justify
expansion of our business into the approving jurisdiction. To
the extent we or our customers are unable to obtain coverage or
reimbursement for procedures using our technology in major
international markets in which we seek to market and sell our
technology, our international revenue growth would be harmed,
and our business and results of operations would be adversely
affected.
We may
attempt to acquire new products or technologies, and if we are
unable to successfully complete these acquisitions or to
integrate acquired businesses, products, technologies or
employees, we may fail to realize expected benefits or harm our
existing business.
Our success will depend, in part, on our ability to expand our
product offerings and grow our business in response to changing
technologies, customer demands and competitive pressures. In
some circumstances, we may determine to do so through the
acquisition of complementary businesses, products or
technologies rather than through internal development. The
identification of suitable acquisition candidates can be
difficult, time consuming and costly, and we may not be able to
successfully complete identified acquisitions. Furthermore, even
if we successfully complete an acquisition, we may not be able
to successfully integrate newly acquired organizations, products
or technologies into our operations, and the process of
integration could be expensive, time consuming and may strain
our resources. Consequently, we may not achieve anticipated
benefits of the acquisitions, which could harm our existing
business. In addition, future acquisitions could result in
potentially dilutive issuances of equity securities or the
incurrence of debt, contingent liabilities or expenses, or other
charges such as in-process research and development, any of
which could harm our business and affect our financial results
or cause a reduction in the price of our common stock.
We
depend on key employees, and if we fail to attract and retain
employees with the expertise required for our business, we
cannot grow or achieve profitability.
We are highly dependent on members of our senior management and
research and development staff, in particular Maurice R.
Ferré, M.D., our President and Chief Executive
Officer, and Rony A. Abovitz, our Senior Vice President and
Chief Technology Officer. Our future success will depend in part
on our ability to retain these key employees and to identify,
hire and retain additional qualified personnel with expertise in
research and development and sales and marketing. Competition
for qualified personnel in the medical device industry is
intense, and finding and retaining qualified personnel with
experience in our industry is very difficult. We believe that
there are only a limited number of individuals with the
requisite skills to serve in many of our key positions, and we
compete for key personnel with other medical equipment and
software manufacturers and technology companies, as well as
universities and research institutions. It is increasingly
difficult to hire and retain these persons, and we may be unable
to replace key persons if they leave or fill new positions
requiring key persons with appropriate experience. A significant
portion of our compensation to our key employees is in the form
of stock option grants. A prolonged depression in our stock
price could make it difficult for us to retain our employees and
recruit additional qualified personnel.
We do not maintain, and do not currently intend to obtain, key
employee life insurance on any of our personnel other than
Dr. Ferré. Although we have obtained key-man insurance
covering Dr. Ferré in the amount of $2,000,000, this
would not fully compensate us for the loss of
Dr. Ferrés services. Dr Ferré may
terminate his employment at will at any time with 30 days notice
or immediately upon the occurrence of certain events. Each of
our other officers and key employees may terminate his or her
employment at will at
21
any time with 60 days notice or immediately upon the
occurrence of certain events. The loss of key employees, the
failure of any key employee to perform or our inability to
attract and retain skilled employees, as needed, could harm our
business.
If we
do not effectively manage our growth, we may be unable to
successfully develop, market and sell our
products.
Our future revenue and operating results will depend on our
ability to manage the anticipated growth of our business. We
have experienced significant growth in the scope of our
operations and the number of our employees since our inception.
This growth has placed significant demands on our management, as
well as our financial and operations resources. In order to
achieve our business objectives, we must continue to grow.
However, continued growth presents numerous challenges,
including:
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implementing appropriate operational and financial systems and
controls;
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expanding manufacturing and assembly capacity and increasing
production;
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developing our sales and marketing infrastructure and
capabilities;
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improving our information systems;
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identifying, attracting and retaining qualified personnel in our
areas of activity; and
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hiring, training, managing and supervising our personnel.
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We cannot be certain that our systems, controls, infrastructure
and personnel will be adequate to support our future operations.
Any failure to effectively manage our growth could impede our
ability to successfully develop, market and sell our products
and our business will be harmed.
If we
decide to market and sell MAKOplasty internationally, we would
be subject to various risks relating to our international
activities, which could adversely affect our business and
financial results.
Although currently we do not actively market or sell our
products abroad, we may actively pursue such markets in the
future. If we were to conduct business outside the U.S., we
would be exposed to risks separate and distinct from those we
face in our U.S. operations. Our international business may
be adversely affected by changing economic conditions in foreign
countries. In addition, because international sales would most
likely be denominated in the functional currency of the country
where the product is being shipped, increases or decreases in
the value of the U.S. dollar relative to foreign currencies
could affect our results of operations. Engaging in
international business inherently involves a number of other
difficulties and risks, including:
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export restrictions and controls and other government regulation
relating to technology;
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the availability and level of reimbursement within prevailing
foreign healthcare payment systems;
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pricing pressures that we may experience internationally;
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compliance with existing and changing foreign regulatory laws
and requirements;
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foreign laws and business practices favoring local companies;
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longer payment cycles;
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shipping delays;
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difficulties in enforcing agreements and collecting receivables
through certain foreign legal systems;
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political and economic instability;
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potentially adverse tax consequences, tariffs and other trade
barriers;
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international terrorism and
anti-American
sentiment;
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difficulties and costs of staffing and managing foreign
operations; and
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difficulties in enforcing intellectual property rights.
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Our exposure to each of these risks may increase our costs,
impair our ability to market and sell our products and require
significant management attention, resulting in harm to our
business and financial results.
Our
operations are currently conducted primarily at a single
location in Florida, which may be at risk from hurricanes,
storm, fire, terror attacks or other disasters.
We currently conduct all of our management activities, most of
our research and development activities and assemble all of our
products at a single location in Ft. Lauderdale, Florida.
We have taken various precautions to safeguard our facilities,
such as obtaining insurance, establishing health and safety
protocols and securing off-site storage of computer data.
However, a casualty due to a hurricane, storm or other natural
disasters, a fire, terrorist attack, or other unanticipated
problems at this location could cause substantial delays in our
operations, delay or prevent assembly of our TGS units and
shipment of our implants, damage or destroy our equipment and
inventory, and cause us to incur substantial expenses. Our
insurance does not cover losses caused by certain events such as
floods or other activities and may not be adequate to cover our
losses in any particular case. Any damage, loss or delay could
seriously harm our business and have an adverse affect on our
financial results.
Certain
of our directors, executive officers and key employees have an
interest in Z-KAT that could pose potential conflicts of
interest, which could harm our business.
Certain of our directors, executive officers and key employees
hold, in the aggregate, approximately 17% of the equity
interests in Z-KAT, Inc., the selling stockholder. We are
heavily dependent on intellectual property that we license or
sublicense from Z-KAT and have entered into various licensing
and related arrangements with Z-KAT. Each of these individuals
may face potential conflicts of interest regarding these
licensing transactions as a result of their interests in Z-KAT.
Dr. Ferré may face additional conflicts of interest
regarding these licensing and related arrangements if he serves
on the board of directors of Z-KAT. We do not have existing
arrangements to address these potential conflicts of interest,
cannot assure you that any conflicts will be resolved in our
favor, and as a result, our business could be harmed.
Risks
Related to Our Intellectual Property
If we,
or the third parties from whom we license intellectual property,
are unable to secure and maintain patent or other intellectual
property protection for the intellectual property contained in
our products, our ability to compete will be
harmed.
Our commercial success depends, in part, on obtaining patent and
other intellectual property protection for the technologies
contained in our products. The patent positions of medical
device companies, including ours, can be highly uncertain and
involve complex and evolving legal and factual questions. Our
patent position is uncertain and complex, in part, because of
our dependence on intellectual property that we license from
others. If we, or the third parties from whom we license
intellectual property, fail to obtain adequate patent or other
intellectual property protection for intellectual property
contained in our products, or if any protection is reduced or
eliminated, others could use the intellectual property contained
in our products, resulting in harm to our competitive business
position. In addition, patent and other intellectual property
protection may not provide us with a competitive advantage
against competitors that devise ways of making competitive
products without infringing any patents that we own or have
rights to.
As of January 1, 2008, our portfolio includes 19
wholly-owned pending U.S. patent applications, 21 pending
foreign applications and other intellectual property that is
wholly-owned by us. As of January 1, 2008, we had licensed
rights to 118 U.S. and 47 foreign third-party granted
patents, and we had licensed rights to 22 U.S. and 40
foreign third-party pending patent applications.
U.S. patents and patent applications may be subject to
interference proceedings and U.S. patents may be subject to
reexamination proceedings in the U.S. Patent and Trademark
Office. Foreign patents may be subject to opposition or
comparable
23
proceedings in the corresponding foreign patent offices. Any of
these proceedings could result in either loss of the patent or
denial of the patent application, or loss or reduction in the
scope of one or more of the claims of the patent or patent
application. Changes in either patent laws or in interpretations
of patent laws may also diminish the value of our intellectual
property or narrow the scope of our protection. Interference,
reexamination and opposition proceedings may be costly and
time-consuming, and we, or the third parties from whom we
license intellectual property, may be unsuccessful in defending
against such proceedings. Thus, any patents that we own or
license may provide limited or no protection against
competitors. In addition, our pending patent applications and
those we may file in the future may have claims narrowed during
prosecution or may not result in patents being issued. Even if
any of our pending or future applications are issued, they may
not provide us with adequate protection or any competitive
advantages. Our ability to develop additional patentable
technology is also uncertain.
Non-payment or delay in payment of patent fees or annuities,
whether intentional or unintentional, may also result in the
loss of patents or patent rights important to our business. Many
countries, including certain countries in Europe, have
compulsory licensing laws under which a patent owner may be
compelled to grant licenses to third parties. In addition, many
countries limit the enforceability of patents against third
parties, including government agencies or government
contractors. In these countries, the patent owner may have
limited remedies, which could materially diminish the value of
the patent. In addition, the laws of some foreign countries do
not protect intellectual property rights to the same extent as
do the laws of the U.S., particularly in the field of medical
products and procedures.
If we
are unable to prevent unauthorized use or disclosure of our
proprietary trade secrets and unpatented know-how, our ability
to compete will be harmed.
Proprietary trade secrets, copyrights, trademarks and unpatented
know-how are also very important to our business. We rely on a
combination of trade secrets, copyrights, trademarks,
confidentiality agreements and other contractual provisions and
technical security measures to protect certain aspects of our
technology, especially where we do not believe that patent
protection is appropriate or obtainable. We require our
employees and consultants to execute confidentiality agreements
in connection with their employment or consulting relationships
with us. We also require our employees and consultants to
disclose and assign to us all inventions conceived during the
term of their employment or engagement while using our property
or which relate to our business. However, these measures may not
be adequate to safeguard our proprietary intellectual property.
Our employees, consultants, contractors, outside clinical
collaborators and other advisors may unintentionally or
willfully disclose our confidential information to competitors.
In addition, confidentiality agreements may be unenforceable or
may not provide an adequate remedy in the event of unauthorized
disclosure. Enforcing a claim that a third party illegally
obtained and is using our trade secrets is expensive and time
consuming, and the outcome is unpredictable. Moreover, our
competitors may independently develop equivalent knowledge,
methods and know-how. Unauthorized parties may also attempt to
copy or reverse engineer certain aspects of our products that we
consider proprietary. As a result, third parties may be able to
use our proprietary technology or information, and our ability
to compete in the market would be harmed.
We
could become subject to patent and other intellectual property
litigation that could be costly, result in the diversion of
managements attention, require us to pay damages and force
us to discontinue selling our products.
The medical device industry is characterized by competing
intellectual property and a substantial amount of litigation
over patent and other intellectual property rights. In
particular, the fields of orthopedic implants and image-guided
surgery are well established and crowded with the intellectual
property of competitors and others. A number of companies in our
market, as well as universities and research institutions, have
issued patents and have filed patent applications which relate
to the use of surgical navigation.
Determining whether a product infringes a patent involves
complex legal and factual issues, and the outcome of a patent
litigation action is often uncertain. We have not conducted an
extensive search of patents issued to third parties, and no
assurance can be given that third-party patents containing
claims covering our
24
products, parts of our products, technology or methods do not
exist, have not been filed, or could not be filed or issued.
Because of the number of patents issued and patent applications
filed in our technical areas, our competitors or other third
parties, including third parties from whom we license
intellectual property, may assert that our products and the
methods we employ in the use of our products are covered by
U.S. or foreign patents held by them. In addition, because
patent applications can take many years to issue and because
publication schedules for pending applications vary by
jurisdiction, there may be applications now pending of which we
are unaware, and which may result in issued patents which our
current or future products infringe. Also, because the claims of
published patent applications can change between publication and
patent grant, there may be published patent applications that
may ultimately issue with claims that we infringe. There could
also be existing patents that one or more of our products or
parts may infringe and of which we are unaware. As the number of
competitors in the market for knee implants grows, and as the
number of patents issued in this area grows, the possibility of
patent infringement claims against us increases. In certain
situations, we or third parties, such as
Z-KAT
from
whom we license intellectual property may determine that it is
in our best interests or their best interests to voluntarily
challenge a third partys products or patents in litigation
or other proceedings, including patent interferences or
reexaminations. Pursuant to our licensing arrangement with
Z-KAT, we have the right to prosecute, control and maintain all
Z-KAT
patents and intellectual property rights that are licensed to us
within the field of orthopedic surgery.
Z-KAT
retains the right to prosecute, control and maintain its patent
and intellectual property rights outside the field of orthopedic
surgery, subject to certain conditions. For example,
Z-KAT
must
notify us prior to taking any action to enforce their patent or
intellectual property rights. To help ensure that
Z-KAT
has
the resources necessary for proper prosecution and defense of
any litigation arising from such enforcement action, our
agreement with
Z-KAT
also
requires that it enter into an engagement letter with competent
counsel and deposit funds into an escrow account, for use by us
to take over the litigation or action in the event
Z-KAT
is
unable or unwilling to conduct proper prosecution and defense of
such litigation or action. Despite these arrangements, we may
have no control over
Z-KATs
decisions regarding enforcement actions outside the field of
orthopedic surgery. As a result, we may become involved in
unwanted litigation that could be costly, result in diversion of
managements attention, require us to pay damages and force
us to discontinue selling our products.
On November 26, 2007, we received a letter from counsel to
SensAble Technologies, Inc. alleging that we infringed certain
of its patents and breached a confidentiality provision in the
Sublicense Agreement, dated May 24, 2006, pursuant to which
we license certain patents from SensAble. In the letter,
SensAble alleges, among other things, that we exceeded the scope
of our licensed field of computer-assisted surgery by using the
technology for, among other things, pre-operative planning and
post-operative
follow-up.
SensAble also alleges that we infringed one or more claims in
five U.S. patents that are not among the patents licensed
to us pursuant to the Sublicense Agreement. Although SensAble
has not commenced any legal action against us as of the date of
this prospectus, it may do so in the future and at this time we
cannot determine the ultimate outcome of any such legal action.
Any such legal action could result in our inability to
manufacture and sell our TGS, as currently sold, which could
have a material adverse effect on our company. See
Business Litigation.
Infringement actions and other intellectual property claims and
proceedings, whether with or without merit, may cause us to
incur substantial costs and could place a significant strain on
our financial resources, divert the attention of management from
our business and harm our reputation. Some of our competitors
may be able to sustain the costs of complex patent or
intellectual property litigation more effectively than we can
because they have substantially greater resources.
We cannot be certain that we will successfully defend against
allegations of infringement of third-party patents and
intellectual property rights. In the event that we become
subject to a patent infringement or other intellectual property
lawsuit and if the other partys patents or other
intellectual property were upheld as valid and enforceable and
we were found to infringe the other partys patents or
violate the terms of a license to which we are a party, we could
be required to pay damages. We could also be prevented from
selling our products unless we could obtain a license to use
technology or processes covered by such patents or were able to
redesign the product to avoid infringement. A license may not be
available at all or on commercially reasonable terms or we may
not be able to redesign our products to avoid infringement.
Modification of our
25
products or development of new products could require us to
conduct clinical trials and to revise our filings with the FDA
an other regulatory bodies, which would be time-consuming and
expensive. In these circumstances, we may be unable to sell our
products at competitive prices or at all, our business and
operating results could be harmed and our stock price may
decline. In addition, any uncertainties resulting from the
initiation and continuation of any litigation could have a
material adverse effect on our ability to raise the funds
necessary to continue our operations.
We may
be subject to damages resulting from claims that our employees
or we have wrongfully used or disclosed alleged trade secrets of
their former employers.
Many of our employees were previously employed at universities
or other medical device companies, including our competitors or
potential competitors. We could in the future be subject to
claims that these employees, or we, have inadvertently or
otherwise used or disclosed trade secrets or other proprietary
information of their former employers. Litigation may be
necessary to defend against these claims. If we fail in
defending against such claims, a court could order us to pay
substantial damages and prohibit us from using technologies or
features that are essential to our products and processes, if
such technologies or features are found to incorporate or be
derived from the trade secrets or other proprietary information
of the former employers. In addition, we may lose valuable
intellectual property rights or personnel. A loss of key
research personnel or their work product could hamper or prevent
our ability to commercialize certain potential products, which
could severely harm our business. Even if we are successful in
defending against these claims, such litigation could result in
substantial costs and be a distraction to management.
Risks
Related to Regulatory Compliance
If we
fail to comply with the extensive government regulations
relating to our business, we may be subject to fines,
injunctions and other penalties that could harm our
business.
Our medical device products and operations are subject to
extensive regulation by the FDA, pursuant to the Federal Food,
Drug, and Cosmetic Act, or FDCA, and various other federal,
state and foreign governmental authorities. Government
regulations and foreign requirements specific to medical devices
are wide ranging and govern, among other things:
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design, development and manufacturing;
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testing, labeling and storage;
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clinical trials;
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product safety;
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marketing, sales and distribution;
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premarket clearance or approval;
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record keeping procedures;
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advertising and promotions;
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recalls and field corrective actions;
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post-market surveillance, including reporting of deaths or
serious injuries and malfunctions that, if they were to recur,
could lead to death or serious injury; and
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product export.
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In the U.S., before we can market a new medical device, or a new
use of, or claim for, or significant modification to, an
existing product, we must first receive either premarket
clearance under Section 510(k) of the FDCA, or approval of
a PMA from the FDA, unless an exemption applies. In the 510(k)
clearance process, the FDA must determine that a proposed device
is substantially equivalent to a device legally on
the market, known as a predicate device, with
respect to intended use, technology and safety and
effectiveness, in order
26
to clear the proposed device for marketing. Clinical data is
sometimes required to support substantial equivalence. The PMA
approval pathway requires an applicant to demonstrate the safety
and effectiveness of the device based, in part, on data obtained
in clinical trials. Both of these processes can be expensive and
lengthy and entail significant user fees, unless exempt. The
FDAs 510(k) clearance process usually takes from three to
12 months, but it can last longer. The process of obtaining
PMA approval is much more costly and uncertain than the 510(k)
clearance process. It generally takes from one to three years,
or even longer, from the time the PMA application is submitted
to the FDA until an approval is obtained. There is no assurance
that we will be able to obtain FDA clearance or approval for any
of our new products on a timely basis, or at all.
The FDA, state, foreign and other governmental authorities have
broad enforcement powers. Our failure to comply with applicable
regulatory requirements could result in governmental agencies or
a court taking action, including any of the following sanctions:
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untitled letters, warning letters, fines, injunctions, consent
decrees and civil penalties;
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customer notifications or repair, replacement, refunds, recall,
detention or seizure of our products;
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operating restrictions or partial suspension or total shutdown
of production;
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refusing or delaying requests for 510(k) clearance or PMA
approvals of new products or modified products;
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withdrawing 510(k) clearances or PMA approvals that have already
been granted;
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refusal to grant export approval for our products; or
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criminal prosecution.
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Failure
to obtain regulatory approval in additional foreign
jurisdictions will prevent us from expanding the
commercialization of our products abroad.
Currently, our primary market is the U.S. market for knee
resurfacing procedures. We are, however, exploring international
markets on a limited basis and may expand our overseas sales and
marketing efforts in the future. If we were to expand our sales
and marketing efforts to foreign jurisdictions, we would have to
obtain separate regulatory approvals from those foreign
jurisdictions. The approval procedure varies among jurisdictions
and can involve substantial additional testing. Approval or
clearance by the FDA does not ensure approval by regulatory
authorities in other jurisdictions, and approval by one foreign
regulatory authority does not ensure approval by regulatory
authorities in other foreign jurisdictions or by the FDA. The
foreign regulatory approval process may include all of the risks
associated with obtaining FDA approval in addition to other
risks. In addition, the time required to obtain foreign approval
may differ from that required to obtain FDA approval, and we may
not obtain foreign regulatory approvals on a timely basis, if at
all. We may not be able to file for regulatory approvals and may
not receive necessary approvals to commercialize our products in
any foreign market, which would harm our potential for future
growth.
If we
or our third-party manufacturers or suppliers fail to comply
with the FDAs Quality System Regulations, our
manufacturing operations could be interrupted and our product
sales and operating results could suffer.
We and some of our third-party manufacturers and suppliers are
required to comply with the FDAs Quality System
Regulation, or QSR, which covers the methods and documentation
of the design, testing, production, control, quality assurance,
labeling, packaging, sterilization, storage and shipping of our
products. We and our manufacturers and suppliers are also
subject to the regulations of foreign jurisdictions regarding
the manufacturing process if we market our products overseas.
The FDA enforces the QSR through periodic and unannounced
inspections of manufacturing facilities. To date, our facilities
have not been subject to any inspections by regulatory
authorities, but we anticipate that we and certain of our
third-party manufacturers and suppliers will be subject to such
inspections in the future. If our facilities or those of our
manufacturers or
27
suppliers fail to take satisfactory corrective action in
response to an adverse QSR inspection, the FDA could take
enforcement action, including any of the following sanctions:
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untitled letters, warning letters, fines, injunctions, consent
decrees and civil penalties;
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customer notifications or repair, replacement, refunds, recall,
detention or seizure of our products;
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operating restrictions or partial suspension or total shutdown
of production;
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refusing or delaying requests for 510(k) clearance or PMA
approvals of new products or modified products;
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withdrawing 510(k) clearances or PMA approvals that have already
been granted;
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refusal to grant export approval for our products; or
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criminal prosecution.
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Any of these sections could impair our ability to produce our
products in a cost-effective and timely manner in order to meet
our customers demands. We may also be required to bear
other costs or take other actions that may have a negative
impact on our future sales and our ability to generate profits.
Our
products may in the future be subject to product recalls that
could harm our reputation, business operations and financial
results.
The FDA and similar foreign governmental authorities have the
authority to require the recall of commercialized products in
the event of material deficiencies or defects in design, or
manufacture or labeling. In the case of the FDA, the authority
to require a recall must be based on an FDA finding that there
is a reasonable probability that the device would cause serious
injury or death. In addition, foreign governmental bodies have
the authority to require the recall of our products in the event
of material deficiencies or defects in design or manufacture.
Manufacturers may, under their own initiative, recall a product
if any material deficiency in a device is found. A
government-mandated or voluntary recall by us or one of our
distributors could occur as a result of component failures,
manufacturing errors, design or labeling defects or other
deficiencies and issues. Recalls of any of our products would
divert managerial and financial resources and have an adverse
effect on our financial condition and results of operations. We
may initiate certain voluntary recalls involving our products in
the future. Companies are required to maintain certain records
of recalls, even if they are not reportable to the FDA. If we
determine that certain of those recalls do not require
notification of the FDA, the FDA may disagree with our
determinations and require us to report those actions as
recalls. A future recall announcement could harm our reputation
with customers and negatively affect our sales. In addition, the
FDA could take enforcement action, including any of the
following sanctions for failing to report the recalls when they
were conducted:
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untitled letters, warning letters, fines, injunctions, consent
decrees and civil penalties;
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customer notifications or repair, replacement, refunds, recall,
detention or seizure of our products;
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operating restrictions or partial suspension or total shutdown
of production;
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refusing or delaying our requests for 510(k) clearance or PMA
approvals of new products or modified products;
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withdrawing 510(k) clearances or PMA approvals that have already
been granted;
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refusal to grant export approval for our products; or
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criminal prosecution.
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Any of these sections could impair our ability to produce our
products in a cost-effective and timely manner in order to meet
our customers demands. We may also be required to bear
other costs or take other actions that may have a negative
impact on our future sales and our ability to generate profits.
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If our
products, or malfunction of our products, cause or contribute to
a death or a serious injury, we will be subject to medical
device reporting regulations, which can result in voluntary
corrective actions or agency enforcement actions.
Under the FDA medical device reporting regulations, or MDR, we
are required to report to the FDA any incident in which our
product may have caused or contributed to a death or serious
injury or in which our product malfunctioned and, if the
malfunction were to recur, would likely cause or contribute to
death or serious injury. In addition, all manufacturers placing
medical devices in European Union markets are legally bound to
report any serious or potentially serious incidents involving
devices they produce or sell to the relevant authority in whose
jurisdiction the incident occurred. In 2007, we submitted MDRs
to report two procedures that were intended as MAKOplasty
procedures, but concluded as total knee replacements when a
component of our TGS failed to perform as intended or was
improperly operated during surgery. In January 2008, we reported
a third incident in which a patient suffered a post-operative
bone fracture at the insertion site of the bone pins. In the
future, we may experience additional events that may require
reporting to the FDA pursuant to the MDR regulations. Any
adverse event involving our products could result in future
voluntary corrective actions, such as recalls or customer
notifications, or agency action, such as inspection, mandatory
recall or other enforcement action. Any corrective action,
whether voluntary or involuntary, as well as defending ourselves
in a lawsuit, will require the dedication of our time and
capital, distract management from operating our business, and
may harm our reputation and financial results. In addition,
failure to report such adverse events to appropriate government
authorities on a timely basis, or at all, could result in an
enforcement action against us.
We may
be subject to fines, penalties or injunctions if we are
determined to be promoting the use of our products for
unapproved or off-label uses, resulting in damage to
our reputation and business.
Our promotional materials and training methods must comply with
FDA and other applicable laws and regulations, including the
prohibition of the promotion of a medical device for a use that
has not been cleared or approved by FDA. Use of a device outside
its cleared or approved indications is known as
off-label use. We believe that the specific surgical
procedures for which our products are marketed fall within the
scope of the surgical applications that have been cleared by the
FDA. However, physicians may use our products off-label, as the
FDA does not restrict or regulate a physicians choice of
treatment within the practice of medicine. However, if the FDA
determines that our promotional materials or training
constitutes promotion of an off-label use, it could request that
we modify our training or promotional materials or subject us to
regulatory or enforcement actions, including the issuance of an
untitled letter, a warning letter, injunction, seizure, civil
fine and criminal penalties. It is also possible that other
federal, state or foreign enforcement authorities might take
action if they consider our promotional or training materials to
constitute promotion of an unapproved use, which could result in
significant fines or penalties under other statutory
authorities, such as laws prohibiting false claims for
reimbursement. In that event, our reputation could be damaged
and adoption of the products would be impaired. Although our
policy is to refrain from statements that could be considered
off-label promotion of our products, the FDA or another
regulatory agency could disagree and conclude that we have
engaged in off-label promotion. In addition, the off-label use
of our products may increase the risk of injury to patients,
and, in turn, the risk of product liability claims. Product
liability claims are expensive to defend and could divert our
managements attention and result in substantial damage
awards against us.
Federal
regulatory reforms may adversely affect our ability to sell our
products profitably.
From time to time, legislation is drafted and introduced in
Congress that could significantly change the statutory
provisions governing the clearance or approval, manufacture and
marketing of a medical device. In addition, FDA regulations and
guidance are often revised or reinterpreted by the agency in
ways that may significantly affect our business and our
products. It is impossible to predict whether legislative
changes will be enacted or FDA regulations, guidance or
interpretations changed, and what the impact of such changes, if
any, may be.
29
Without limiting the generality of the foregoing, Congress has
recently enacted, and the President has signed into law, the
Food and Drug Administration Amendments Act of 2007, or the
Amendments. This law requires, among other things, that the FDA
propose, and ultimately implement, regulations that will require
manufacturers to label medical devices with unique identifiers
unless a waiver is received from the FDA. Once implemented,
compliance with those regulations may require us to take
additional steps in the manufacture of our products and
labeling. These steps may require additional resources and could
be costly. In addition, the Amendments will require us to, among
other things, pay annual establishment registration fees to the
FDA for each of our FDA registered facilities.
We may
be subject, directly or indirectly, to federal and state
healthcare fraud and abuse laws and regulations and could face
substantial penalties if we are unable to fully comply with such
laws.
While we do not control referrals of healthcare services or bill
directly to Medicare, Medicaid or other third-party payors, many
healthcare laws and regulations apply to our business. For
example, we could be subject to healthcare fraud and abuse and
patient privacy regulation and enforcement by both the federal
government and the states in which we conduct our business. The
healthcare laws and regulations that may affect our ability to
operate include:
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the federal healthcare programs Anti-Kickback Law, which
prohibits, among other things, persons or entities from
soliciting, receiving, offering or providing remuneration,
directly or indirectly, in return for or to induce either the
referral of an individual for, or the purchase order or
recommendation of, any item or service for which payment may be
made under a federal healthcare program such as the Medicare and
Medicaid programs;
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federal false claims laws which prohibit, among other things,
individuals or entities from knowingly presenting, or causing to
be presented, claims for payment from Medicare, Medicaid, or
other third-party payors that are false or fraudulent, or are
for items or services not provided as claimed, and which may
apply to entities like us to the extent that our interactions
with customers may affect their billing or coding practices;
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the federal Health Insurance Portability and Accountability Act
of 1996, or HIPAA, which established new federal crimes for
knowingly and willfully executing a scheme to defraud any
healthcare benefit program or making false statements in
connection with the delivery of or payment for healthcare
benefits, items or services, as well as leading to regulations
imposing certain requirements relating to the privacy, security
and transmission of individually identifiable health
information; and
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state law equivalents of each of the above federal laws, such as
anti-kickback and false claims laws which may apply to items or
services reimbursed by any third-party payor, including
commercial insurers, and state laws governing the privacy of
health information in certain circumstances, many of which
differ from each other in significant ways and often are not
preempted by HIPAA, thus complicating compliance efforts.
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The orthopedic medical device industry is, and in recent years
has been, under heightened scrutiny as the subject of government
investigations and enforcement actions involving manufacturers
who allegedly offered unlawful inducements to potential or
existing customers in an attempt to procure their business,
including specifically arrangements with physician consultants.
We have arrangements with surgeons, hospitals and other entities
which may be subject to scrutiny. For example, we have
consulting agreements with orthopedic surgeons using or
considering the use of our TGS, knee implants and disposable
products, for assistance in product development, and
professional training and education, among other things. Payment
for these consulting services sometimes is in the form of stock
options or royalties rather than per hour or per diem amounts
that would require verification of time worked. In addition, we
sometimes allow hospitals a period of evaluation of our products
at no charge. If our operations are found to be in violation of
any of the laws described above or any other governmental
regulations that apply to us, we may be subject to penalties,
including civil and criminal penalties, damages, fines,
exclusion from the Medicare and Medicaid programs, and the
curtailment or restructuring of our operations. Any penalties,
damages, fines, exclusions, curtailment or restructuring of our
operations could adversely affect our ability to operate our
business and our financial
30
results. The risk of our being found in violation of these laws
is increased by the fact that many of these laws are broad and
their provisions are open to a variety of interpretations. Any
action against us for violation of these laws, even if we
successfully defend against it, could cause us to incur
significant legal expenses and divert our managements
attention from the operation of our business. If the surgeons or
other providers or entities with whom we do business are found
to be non-compliant with applicable laws, they may be subject to
sanctions, which could also have a negative impact on our
business.
Risks
Related to this Offering
An
active trading market for our common stock may not
develop.
Prior to this offering, there has been no public market for our
common stock. Although our common stock has been approved for
listing on the Nasdaq Global Market, an active trading market
for our shares may never develop or be sustained following this
offering. Accordingly, you may not be able to sell your shares
quickly or at the market price if trading in our stock is not
active. The initial public offering price for our common stock
was determined through negotiations between the underwriters and
us. The initial public offering price may vary from the market
price of our common stock after the closing of this offering.
Investors may not be able to sell their common stock at or above
the initial public offering price.
We
expect that the price of our common stock will fluctuate
substantially, which could lead to losses for stockholders,
possibly resulting in class action securities
litigation.
We expect the price of our common stock will fluctuate
substantially, as the market price for the common stock after
this offering will be affected by a number of factors, including:
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the receipt, denial or timing of regulatory clearances or
approvals of our products or competing products;
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changes in policies affecting third-party coverage and
reimbursement in the U.S. and other countries;
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ability of our products, if they receive regulatory clearance,
to achieve market success;
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the performance of third-party contract manufacturers and
component suppliers;
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our ability to develop sales and marketing capabilities;
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our ability to manufacture our products to commercial standards;
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the success of any collaborations we may undertake with other
companies;
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our ability to develop, introduce and market new or enhanced
versions of our products on a timely basis;
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actual or anticipated variations in our results of operations or
those of our competitors;
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announcements of new products, technological innovations or
product advancements by us or our competitors;
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developments with respect to patents and other intellectual
property rights;
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sales of common stock or other securities by us or our
stockholders in the future;
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additions or departures of key scientific or management
personnel;
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disputes or other developments relating to proprietary rights,
including patents, litigation matters and our ability to obtain
patent protection for our technologies;
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trading volume of our common stock;
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changes in earnings estimates or recommendations by securities
analysts, failure to obtain analyst coverage of our common stock
or our failure to achieve analyst earnings estimates;
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developments in our industry; and
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general market conditions and other factors unrelated to our
operating performance or the operating performance of our
competitors.
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In addition, the stock prices of many companies in the medical
device industry have experienced wide fluctuations that have
often been unrelated to the operating performance of these
companies. We expect our stock price to be similarly volatile.
These broad market fluctuations may continue and could harm our
stock price. Following periods of volatility in the market price
of a companys securities, stockholders have often
instituted class action securities litigation against those
companies. Class action securities litigation, if instituted
against us, could result in substantial costs and a diversion of
our management resources, which could significantly harm our
business.
Securities
analysts may not initiate coverage for our common stock or may
issue negative reports, and this may have a negative impact on
the market price of our common stock.
Securities analysts may elect not to provide research coverage
of our common stock after the completion of this offering. If
securities analysts do not cover our common stock after the
completion of this offering, the lack of research coverage may
adversely affect the market price of our common stock. The
trading market for our common stock may be affected in part by
the research and reports that industry or financial analysts
publish about us or our business. It may be difficult for
companies such as ours, with smaller market capitalizations, to
attract securities analysts that will cover our common stock. If
one or more of the analysts who elects to cover us downgrades
our stock, our stock price would likely decline rapidly. If one
or more of these analysts ceases coverage of our company, we
could lose visibility in the market, which in turn could cause
our stock price to decline. This could have a negative effect on
the market price of our stock.
Our
principal stockholders, directors and executive officers will
continue to own a large percentage of our voting stock after
this offering, which will allow them to exercise significant
influence over matters subject to stockholder
approval.
Our executive officers, directors and stockholders holding 5% or
more of our outstanding common stock will beneficially own or
control approximately 60% of the outstanding shares of our
common stock, after giving effect to the conversion of all
outstanding preferred stock and assuming no exercise of
outstanding options and warrants, following the closing of this
offering. Accordingly, these executive officers, directors and
principal stockholders, acting as a group, will have substantial
influence over the outcome of corporate actions requiring
stockholder approval, including the election of directors, any
merger, consolidation or sale of all or substantially all of our
assets or any other significant corporate transaction. These
stockholders may also delay or prevent a change of control or
otherwise discourage a potential acquirer from attempting to
obtain control of us, even if such a change of control would
benefit our other stockholders. This significant concentration
of stock ownership may adversely affect the trading price of our
common stock due to investors perception that conflicts of
interest may exist or arise.
We
have not paid dividends in the past and do not expect to pay
dividends in the future.
We have never declared or paid cash dividends on our capital
stock. We currently intend to retain all future earnings for the
operation and expansion of our business and, therefore, do not
anticipate declaring or paying cash dividends in the foreseeable
future. The payment of dividends will be at the discretion of
our board of directors and will depend on our results of
operations, capital requirements, financial condition,
prospects, contractual arrangements, any limitations on payments
of dividends present in any of our future debt agreements, and
other factors our board of directors may deem relevant. If we do
not pay dividends, a return on your investment will only occur
if our stock price appreciates.
Anti-takeover
provisions in our charter documents and Delaware law could
prevent or delay a change in control of our
company.
Provisions in our certificate of incorporation and bylaws,
effective upon the closing of this initial public offering, as
well as provisions of Delaware law, may discourage, delay or
prevent a merger, acquisition or
32
change of control. These provisions could also discourage proxy
contests and make it more difficult for stockholders to elect
directors and take other corporate actions. These provisions:
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permit our board of directors to issue up to
27,000,000 shares of preferred stock, with any rights,
preferences and privileges as they may designate, including the
right to approve an acquisition or other change in our control;
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provide that the authorized number of directors may be changed
only by resolution of the board of directors;
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provide that all vacancies, including newly created
directorships, may, except as otherwise required by law, be
filled by the affirmative vote of a majority of directors then
in office, even if less than a quorum;
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divide our board of directors into three classes;
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require that any action to be taken by our stockholders must be
effected at a duly called annual or special meeting of
stockholders and not be taken by written consent;
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provide that stockholders seeking to present proposals before a
meeting of stockholders or to nominate candidates for election
as directors at a meeting of stockholders must provide notice in
writing in a timely manner, and also specify requirements as to
the form and content of a stockholders notice;
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do not provide for cumulative voting rights (therefore allowing
the holders of a majority of the shares of common stock entitled
to vote in any election of directors to elect all of the
directors standing for election, if they should so choose);
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provide that special meetings of our stockholders may be called
only by the board of directors pursuant to a resolution adopted
by a majority of the board of directors; and
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provide that stockholders will be permitted to amend our amended
and restated bylaws only upon receiving at least 66 2/3% of
the votes entitled to be cast by holders of all outstanding
shares then entitled to vote generally in the election of
directors, voting together as a single class.
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In addition, we are subject to Section 203 of the Delaware
General Corporation Law, which generally prohibits a Delaware
corporation from engaging in any broad range of business
combinations with any stockholder who owns, or at any time in
the last three years owned, 15% or more of our outstanding
voting stock for a period of three years following the date on
which the stockholder became as interested stockholder. This
provision could have the effect of delaying or preventing a
change of control, whether or not it is desired by or beneficial
to our stockholders.
Sales
of a substantial number of shares of our common stock in the
public market after this offering, or the perception that they
may occur, may depress the market price of our common
stock.
Sales of substantial amounts of our common stock in the public
market following this offering, or the perception that
substantial sales may be made, could cause the market price of
our common stock to decline. These sales might also make it more
difficult for us to sell equity securities at a time and price
that we deem appropriate. The
lock-up
agreements delivered by our executive officers, directors and
substantially all of our stockholders and option holders provide
that J.P. Morgan Securities Inc. and Morgan
Stanley & Co. Incorporated, on behalf of the
underwriters, in their sole discretion, may release those
parties, at any time, or from time to time, and without notice,
from their obligation not to dispose of shares of common stock
for a period of 180 days after the date of this prospectus,
which period may be extended in certain limited circumstances.
J.P. Morgan Securities Inc. and Morgan Stanley &
Co. Incorporated do not have any pre-established conditions to
waiving the terms of the
lock-up
agreements, and any decision by them to waive those conditions
would depend on a number of factors, which may include market
conditions, the performance of the common stock in the market
and our financial condition at that time.
Based on the number of shares of common stock outstanding as of
January 1, 2008, upon completion of this offering,
18,438,284 shares of our common stock will be outstanding,
assuming no exercise of the
33
underwriters over-allotment option and no exercise of
options. All of the shares sold in this offering will be freely
tradable unless held by an affiliate of ours. Of the remaining
13,338,284 shares of common stock, 13,290,956 shares
are held by existing stockholders who are subject to
lock-up
agreements with the underwriters which, subject to specified
exceptions, prohibit the sale of such shares for 180 days
after the date of this prospectus, as described under
Underwriting
Lock-up
Agreements. As restrictions on resale end, the market
price could drop significantly if the holders of these
restricted shares sell them or are perceived by the market as
intending to sell them. Any substantial sale of common stock
pursuant to any resale registration statements or Rule 144
may have an adverse effect on the market price of our common
stock by creating an excessive supply.
We intend to file a registration statement on
Form S-8
to register the shares subject to outstanding options or
reserved for issuance under our stock option plans. The
registration statement will become effective when filed, and,
subject to applicable
lock-up
agreements, these shares may be resold without restriction in
the public marketplace. For a more detailed description, please
see the section of this prospectus entitled Shares
Eligible for Future Sale.
New
investors in our common stock will experience immediate and
substantial dilution after this offering.
If you purchase shares of our common stock in this offering, you
will experience immediate dilution of $6.50 per share
because the price that you pay will be substantially greater
than the adjusted pro forma net tangible book value per share of
common stock that you acquire. This dilution is due in large
part to the fact that our earlier investors paid substantially
less than the price of the shares being sold in this offering
when they purchased their shares of our capital stock. If
outstanding options to purchase our common stock are exercised,
you will experience additional dilution. See the section
entitled Dilution in this prospectus for a more
detailed description of this dilution.
As a
result of becoming a public company, we will be obligated to
develop and maintain proper and effective internal control over
financial reporting, and we may not complete our analysis of our
internal control over financial reporting in a timely manner or
these internal control may not be determined to be effective,
which may adversely affect investor confidence in our company
and, as a result, the value of our common stock.
We will be required, pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002, or Section 404, to furnish a
report by management on, among other things, the effectiveness
of our internal control over financial reporting beginning in
our second annual report on Form 10-K for the fiscal year ended
December 31, 2008. This assessment will need to include
disclosure of any material weaknesses identified by our
management in our internal control over financial reporting, as
well as a statement that our auditors have issued a report on
our internal control over financial reporting.
We are just beginning the costly and challenging process of
compiling the system and processing documentation before we
perform the evaluation needed to comply with Section 404.
We may not be able to complete our evaluation, testing and any
required remediation in a timely fashion. During the evaluation
and testing process, if we identify one or more material
weaknesses in our internal control over financial reporting, we
will be unable to assert that our internal control is effective.
If we are unable to assert that our internal control over
financial reporting is effective, or if our auditors are unable
to express an opinion on the effectiveness of our internal
control over financial reporting, we could lose investor
confidence in the accuracy and completeness of our financial
reports, which would have a material adverse effect on the price
of our common stock. Failure to comply with the new rules might
make it more difficult for us to obtain certain types of
insurance, including director and officer liability insurance,
and we might be forced to accept reduced policy limits and
coverage
and/or
incur
substantially higher costs to obtain the same or similar
coverage. The impact of these events could also make it more
difficult for us to attract and retain qualified persons to
serve on our board of directors, on committees of our board of
directors, or as executive officers.
In addition, as a public company, we will incur significant
additional legal, accounting and other expenses that we did not
incur as a private company, and our administrative staff will be
required to perform additional
34
tasks. For example, in anticipation of becoming a public
company, we have or will need to increase the size of our
accounting staff, update our accounting systems and procedures,
create or revise the roles and duties of our board committees,
adopt disclosure controls and procedures, retain a transfer
agent, adopt an insider trading policy and bear all of the
internal and external costs of preparing and distributing
periodic public reports in compliance with our obligations under
the securities laws. In addition, changing laws, regulations and
standards relating to corporate governance and public
disclosure, and related regulations implemented by the
Securities and Exchange Commission, or SEC, and the Nasdaq
Global Market, are creating uncertainty for public companies,
increasing legal and financial compliance costs and making some
activities more time consuming. These laws, regulations and
standards are subject to varying interpretations, in many cases
due to their lack of specificity, and, as a result, their
application in practice may evolve over time as new guidance is
provided by regulatory and governing bodies. We intend to invest
resources to comply with evolving laws, regulations and
standards, and this investment may result in increased general
and administrative expenses and a diversion of managements
time and attention from revenue-generating activities to
compliance activities. If our efforts to comply with new laws,
regulations and standards differ from the activities intended by
regulatory or governing bodies due to ambiguities related to
practice, regulatory authorities may initiate legal proceedings
against us and our business may be harmed.
We
have broad discretion in the use of the net proceeds from this
offering, and we may not use these proceeds
effectively.
Other than the payment of $4.0 million to IBM, as required
upon the initial public offering of our common stock under the
terms of our licensing arrangement with IBM, substantially all
of our net proceeds from this offering will be used, as
determined by management in its discretion, for sales and
marketing activities, for continuation of research and
development activities and for working capital and other general
corporate purposes. Our management will have broad discretion in
the application of the net proceeds from this offering and could
spend the proceeds in ways that do not necessarily improve our
results of operations or enhance the value of our common stock.
The failure by our management to apply these funds effectively
could result in financial losses, cause the price of our common
stock to decline or delay product development.
35
FORWARD-LOOKING
STATEMENTS
Some of the statements under the sections of this prospectus
entitled Prospectus Summary, Risk
Factors, Use of Proceeds,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and
Business and elsewhere in this prospectus contain
forward-looking statements. 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. These statements
involve known and unknown risks, uncertainties and other factors
that may cause our actual results, levels of activity,
performance or achievements to be materially different from the
information expressed or implied by these forward-looking
statements. Although we believe that we have a reasonable basis
for each forward-looking statement contained in this prospectus,
we caution you that these statements are based on a combination
of facts and factors currently known by us and our projections
of the future, about which we cannot be certain.
You should refer to the section of this prospectus entitled
Risk Factors for a discussion of important factors
that may cause our actual results to differ materially from
those expressed or implied by our forward-looking statements. As
a result of these factors, we cannot assure you that the
forward-looking statements in this prospectus will prove to be
accurate. Furthermore, if our forward-looking statements prove
to be inaccurate, the inaccuracy may be material. In light of
the significant uncertainties in these forward-looking
statements, you should not regard these statements as a
representation or warranty by us or any other person that we
will achieve our objectives and plans in any specified time
frame, or at all. We do not undertake to update any of the
forward-looking statements after the date of this prospectus,
except to the extent required by applicable securities laws.
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USE OF
PROCEEDS
We estimate that we will receive $44.7 million in net
proceeds from our sale of the 5,100,000 shares of common
stock in the offering. Our net proceeds from the offering
represent the amount we expect to receive after paying the
underwriting discounts and commissions and other expenses of the
offering payable by us. We will not receive any of the proceeds
from the sale of shares by the selling stockholder.
We currently intend to use our net proceeds from this offering
as follows:
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approximately $14.0 million $20.0 million
for the expansion of our sales and marketing activities;
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approximately $12.0 million $18.0 million
for continuation of our research and development activities;
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approximately $4.0 million payment to IBM, as required upon
the initial public offering of our common stock under the terms
of our licensing agreement with IBM; and
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the remainder to fund working capital and other general
corporate purposes.
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We may also use a portion of the proceeds for acquisitions of
products and technologies that are complementary to our
business, although we have no current understandings,
commitments or agreements to do so.
This expected use of net proceeds of this offering represents
our current intentions based upon our present plans and business
conditions. The amounts we actually expend in these areas and
the timing of our expenditures may vary significantly from our
current intentions and will depend upon a number of factors,
including the success of research and product development
efforts for version 2.0 of our TGS, our modular implants and
other products, FDA clearance for such products, changes in the
number of sales and marketing personnel necessary to achieve
sales targets, future sales growth generally, cash generated
from future operations and actual expenses to operate our
business. As of the date of this prospectus, we cannot specify
with certainty all of the particular uses for the net proceeds
to be received upon the completion of this offering.
Accordingly, our management will have broad discretion in the
application of the net proceeds, and investors will be relying
on the judgment of our management regarding the application of
the proceeds of this offering. Pending their uses, we plan to
invest the net proceeds of this offering in U.S. government
securities and other short-term, investment-grade,
interest-bearing instruments or high-grade corporate notes.
DIVIDEND
POLICY
We have never declared or paid any cash dividends on our capital
stock. We currently intend to retain all available funds and any
future earnings to support our operations and finance the growth
and development of our business. We do not intend to pay cash
dividends on our common stock for the foreseeable future. Any
future determination related to dividend policy will be made at
the discretion of our board of directors.
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CAPITALIZATION
The following table sets forth our capitalization as of
September 30, 2007:
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on an actual basis;
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on a pro forma basis to reflect:
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o
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the filing of our third amended and restated certificate of
incorporation to authorize 135,000,000 shares of common
stock and 27,000,000 shares of undesignated preferred stock;
|
|
|
o
|
the conversion of all outstanding shares of our redeemable
convertible preferred stock into 10,945,081 shares of
common stock and the elimination of previously accrued dividends
of $4,958,176; and
|
|
|
|
|
|
on a pro forma as adjusted basis to reflect the sale by us of
5,100,000 shares of common stock in this offering at the
initial offering price of $10.00 per share, after deducting
underwriting discounts and commissions and estimated offering
expenses.
|
You should read the information in this table together with our
financial statements and accompanying notes and
Managements Discussion and Analysis of Financial
Condition and Results of Operations appearing elsewhere in
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
As Adjusted
|
|
|
Total redeemable convertible preferred stock
|
|
$
|
58,503,707
|
(1)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity (deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Undesignated preferred stock, $0.001 par value: none,
27,000,000 and 27,000,000 authorized actual, pro forma and pro
forma as adjusted, respectively; none issued and outstanding for
all periods presented
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 60,000,000, 135,000,000 and
135,000,000 shares authorized actual, pro forma and pro
forma as adjusted, respectively; 1,830,346, 12,775,427 and
17,875,427 shares issued and outstanding as of
September 30, 2007 actual, pro forma, and pro forma as
adjusted, respectively(2)
|
|
|
1,830
|
|
|
|
12,775
|
|
|
|
17,875
|
|
Additional paid-in capital
|
|
|
|
|
|
|
58,492,762
|
|
|
|
103,167,662
|
|
Accumulated deficit
|
|
|
(34,942,094
|
)
|
|
|
(34,942,094
|
)
|
|
|
(34,942,094
|
)
|
Accumulated other comprehensive income
|
|
|
7,217
|
|
|
|
7,217
|
|
|
|
7,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
(34,933,047
|
)
|
|
|
23,570,660
|
|
|
|
68,250,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
23,570,660
|
|
|
$
|
23,570,660
|
|
|
$
|
68,250,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Consists of Series A, B, and C redeemable convertible
preferred stock with par values of $0.001. There are
5,000,000 shares of Series A redeemable convertible
preferred stock of which 4,498,745 shares are issued and
outstanding with a liquidation value of $4,498,745 and accrued
cumulative dividends of $958,680 as of September 30, 2007;
16,500,000 shares of Series B redeemable convertible
preferred stock of which 15,151,516 shares are issued and
outstanding with a liquidation value of $20,000,000 and accrued
cumulative dividends of $2,819,736 as of September 30,
2007; 13,600,000 shares of Series C redeemable
convertible preferred stock of which 13,513,514 shares are
issued and outstanding with a
|
38
|
|
|
|
|
liquidation value of $30,000,000 and accrued cumulative
dividends of $1,179,760 as of September 30, 2007.
|
|
|
|
(2)
|
|
Shares issued and outstanding do not include 562,857 shares
of unvested restricted common stock. See Notes 4 and 8 to
Financial Statements.
|
The outstanding share information in the table above excludes:
|
|
|
|
|
as of September 30, 2007, 1,921,139 shares of our
common stock issuable upon the exercise of outstanding stock
options with a weighted average exercise price of $4.81 per
share;
|
|
|
|
1,084,703 shares of our common stock reserved for issuance under
our 2008 Omnibus Incentive Plan, as well as any automatic
increases in the number of shares of our common stock reserved
for future issuance under the plan, and 625,000 shares
under our 2008 Employee Stock Purchase Plan; and
|
|
|
|
462,716 shares of our common stock issuable upon the
exercise of outstanding warrants, with an exercise price of
$3.00 per share.
|
We completed a one-for-3.03 reverse stock split of our common
stock on February 8, 2008. All share amounts have been
retroactively adjusted to give effect to this stock split.
39
DILUTION
Dilution
After This Offering
If you invest in our common stock in this offering, your
ownership interest will be diluted to the extent of the
difference between the initial public offering price per share
and the pro forma net tangible book value per share of our
common stock after this offering. Net tangible book value per
share is determined by dividing the number of outstanding shares
of our common stock into our total tangible assets (total assets
less intangible assets) less total liabilities and outstanding
preferred stock. The pro forma net tangible book value of our
common stock as of September 30, 2007 was approximately
$16.3 million, or approximately $1.28 per share, based on
the number of shares outstanding as of September 30, 2007,
after giving effect to the conversion of all outstanding
preferred stock into shares of common stock.
Investors participating in this offering will incur immediate,
substantial dilution. After giving effect to the sale of common
stock offered in this offering at the initial public offering
price of $10.00 per share, after deducting underwriting
discounts and commissions and estimated offering expenses
payable by us, our pro forma as adjusted net tangible book value
as of September 30, 2007 would have been approximately
$62.6 million, or approximately $3.50 per share of common
stock. This represents an immediate increase in pro forma as
adjusted net tangible book value of $2.22 per share to existing
stockholders, and an immediate dilution of $6.50 per share to
investors participating in this offering. The following table
illustrates this per share dilution:
|
|
|
|
|
|
|
Initial public offering price per share
|
|
$
|
10.00
|
|
|
|
Pro forma net tangible book value per share as of
September 30, 2007
|
|
$
|
1.28
|
|
|
|
Pro forma increase in net tangible book value per share
attributable to investors participating in this offering
|
|
|
2.22
|
|
|
|
Pro forma as adjusted net tangible book value per share after
this offering
|
|
|
3.50
|
|
|
|
Pro forma dilution per share to investors participating in this
offering
|
|
$
|
6.50
|
|
|
|
If the underwriters exercise their overallotment option in full
to purchase additional shares of common stock from us and the
selling stockholder in this offering, the pro forma as adjusted
net tangible book value per share after the offering would be
$3.72 per share, the increase in the pro forma net tangible book
value per share to existing stockholders would be $2.44 per
share and the pro forma dilution to new investors purchasing
common stock in this offering would be $6.28 per share.
Differences
Between New and Existing Investors in Number of Shares and
Amount Paid
The following table summarizes, on a pro forma basis as of
September 30, 2007, the differences between the number of
shares of common stock purchased from us, the total
consideration and the weighted average
40
price per share paid by existing stockholders and by investors
participating in this offering at the initial public offering
price of $10.00 per share, before deducting underwriting
discounts and commissions and estimated offering expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
Average Price
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Per Share
|
|
|
Existing stockholders before this offering
|
|
|
12,775,427
|
|
|
|
71.47
|
%
|
|
$
|
55,792,628
|
|
|
|
52.24
|
%
|
|
$
|
4.37
|
|
Investors participating in this offering
|
|
|
5,100,000
|
|
|
|
28.53
|
|
|
|
51,000,000
|
|
|
|
47.76
|
|
|
|
10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
17,875,427
|
|
|
|
100.00
|
%
|
|
$
|
106,792,628
|
|
|
|
100.00
|
%
|
|
$
|
5.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The number of shares of common stock outstanding in the table
above is based on the pro forma number of shares outstanding as
of September 30, 2007 and assumes no exercise of the
underwriters over-allotment option. If the
underwriters over-allotment option is exercised in full,
the number of shares of common stock held by existing
stockholders will be reduced to 68.42% of the total number of
shares of common stock to be outstanding after this offering,
and the number of shares of common stock held by investors
participating in this offering will be increased to
5,865,000 shares or 31.58% of the total number of shares of
common stock to be outstanding after this offering.
The above discussion and tables also assume no exercise of any
outstanding stock options or warrants. As of September 30,
2007, there were:
|
|
|
|
|
1,921,139 shares of common stock issuable upon the exercise
of outstanding options with a weighted average exercise price of
$4.81 per share;
|
|
|
|
1,084,703 shares of our common stock reserved for issuance under
our 2008 Omnibus Incentive Plan, as well as any automatic
increases in the number of shares of our common stock reserved
for future issuance under the plan, and 625,000 shares under our
2008 Employee Stock Purchase Plan; and
|
|
|
|
462,716 shares of common stock issuable upon the exercise
of outstanding warrants, with an exercise price of $3.00 per
share.
|
The following table summarizes, on a pro forma basis as of
September 30, 2007, after giving effect to the exercise of
all stock options and warrants outstanding as of
September 30, 2007, the differences between the number of
shares of common stock purchased from us, the total
consideration and the weighted average price per share paid by
existing stockholders and by investors participating in this
offering at the initial public offering price of $10.00 per
share, before deducting underwriting discounts and commissions
and estimated offering expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
Average Price
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Per Share
|
|
|
Existing stockholders before this offering
|
|
|
15,159,282
|
|
|
|
74.83
|
%
|
|
$
|
66,419,170
|
|
|
|
56.57
|
%
|
|
$
|
4.38
|
|
Investors participating in this offering
|
|
|
5,100,000
|
|
|
|
25.17
|
|
|
|
51,000,000
|
|
|
|
43.43
|
|
|
|
10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
20,259,282
|
|
|
|
100.00
|
%
|
|
$
|
117,419,170
|
|
|
|
100.00
|
%
|
|
$
|
5.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective upon the closing of this offering, an aggregate of
1,709,703 shares of our common stock will be reserved for
future issuance under our benefit plans. To the extent that any
of these options or warrants are exercised, new options are
issued under our benefit plans or we issue additional shares of
common stock in the future, there will be further dilution to
investors participating in this offering.
41
SELECTED
FINANCIAL DATA
The following selected financial data should be read together
with our financial statements and accompanying notes and
Managements Discussion and Analysis of Financial
Condition and Results of Operations appearing elsewhere in
this prospectus. The selected financial data in this section is
not intended to replace our financial statements and the
accompanying notes. Our historical results are not necessarily
indicative of our future results.
We were formed in November 2004 to be the successor of the
image-guided surgery and haptic robotics business of Z-KAT,
Inc., a company founded in 1997 to develop computer-assisted
surgery technologies.
Z-KAT
is
considered to be our Predecessor. The balance sheet
and statements of operations data in this prospectus for the
periods prior to and including November 11, 2004 refer to
the Predecessor. The statement of operations data for the period
from January 1, 2004 through November 11, 2004 have
been derived from the audited statement of operations of the
Predecessor included elsewhere in this prospectus. The statement
of operations data for the fiscal years ended December 31,
2002 and 2003, and the balance sheet data as of
December 31, 2002 and 2003, have been derived from the
unaudited financial statements of the Predecessor which are not
included in this prospectus.
The balance sheet and statements of operations data subsequent
to November 11, 2004 refer to operations subsequent to our
formation, and these periods are referred to as the Company. The
statements of operations data for the period from
November 12, 2004 to December 31, 2004, and for the
fiscal years ended December 31, 2005 and 2006, and the
balance sheet data as of December 31, 2005 and 2006 have
been derived from our audited financial statements included
elsewhere in this prospectus. The balance sheet data as of
December 31, 2004 has been derived from audited financial
statements not included in this prospectus. The statements of
operations data for the nine months ended September 30,
2006 and 2007, and the balance sheet data as of
September 30, 2007, have been derived from our unaudited
financial statements included elsewhere in this prospectus.
Our Predecessor incurred $250,000 of payroll and direct and
indirect expenses from October 1, 2004 through
November 11, 2004 prior to our legal formation on
November 12, 2004, which have been eliminated from the
Predecessors results of operations for the period
January 1, 2004 through November 11, 2004 and included
in our results of operations for the period November 12,
2004 through December 31, 2004.
The pro forma basic and diluted net loss per share data gives
effect to the conversion of all of our outstanding redeemable
convertible preferred stock into common stock immediately prior
to the closing of our initial public offering and adjustments to
eliminate accretion of and accrued dividends on preferred stock.
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
The Company
|
|
|
|
|
|
|
|
|
|
Jan. 1,
|
|
|
|
Nov. 12,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
through
|
|
|
|
through
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Nov. 11,
|
|
|
|
Dec. 31,
|
|
|
December 31,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,182,523
|
|
|
$
|
1,380,128
|
|
|
$
|
1,648,342
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
62,571
|
|
|
$
|
34,831
|
|
|
$
|
355,382
|
|
Cost of revenue
|
|
|
584,004
|
|
|
|
1,010,803
|
|
|
|
1,085,523
|
|
|
|
|
|
|
|
|
|
|
|
|
76,547
|
|
|
|
28,800
|
|
|
|
291,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
598,519
|
|
|
|
369,325
|
|
|
|
562,819
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,976
|
)
|
|
|
6,031
|
|
|
|
63,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
3,674,338
|
|
|
|
4,244,414
|
|
|
|
2,642,028
|
|
|
|
|
630,048
|
|
|
|
2,735,901
|
|
|
|
5,022,685
|
|
|
|
3,153,989
|
|
|
|
7,695,767
|
|
Research and development
|
|
|
2,451,278
|
|
|
|
3,530,298
|
|
|
|
1,453,685
|
|
|
|
|
402,899
|
|
|
|
2,581,828
|
|
|
|
5,192,453
|
|
|
|
3,324,771
|
|
|
|
5,344,947
|
|
Depreciation and amortization
|
|
|
536,317
|
|
|
|
564,720
|
|
|
|
429,694
|
|
|
|
|
5,727
|
|
|
|
98,519
|
|
|
|
644,082
|
|
|
|
418,219
|
|
|
|
915,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
6,661,933
|
|
|
|
8,339,432
|
|
|
|
4,525,407
|
|
|
|
|
1,038,674
|
|
|
|
5,416,248
|
|
|
|
10,859,220
|
|
|
|
6,896,979
|
|
|
|
13,956,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(6,063,414
|
)
|
|
|
(7,970,107
|
)
|
|
|
(3,962,588
|
)
|
|
|
|
(1,038,674
|
)
|
|
|
(5,416,248
|
)
|
|
|
(10,873,196
|
)
|
|
|
(6,890,948
|
)
|
|
|
(13,892,057
|
)
|
Interest and other income
|
|
|
42,679
|
|
|
|
8,682
|
|
|
|
868
|
|
|
|
|
|
|
|
|
269,231
|
|
|
|
476,578
|
|
|
|
410,531
|
|
|
|
860,019
|
|
Interest and other expense
|
|
|
(193,986
|
)
|
|
|
(17,240
|
)
|
|
|
(479,959
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(220,219
|
)
|
|
|
(142,664
|
)
|
|
|
(228,998
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,214,721
|
)
|
|
$
|
(7,978,665
|
)
|
|
$
|
(4,441,679
|
)
|
|
|
$
|
(1,038,674
|
)
|
|
$
|
(5,147,017
|
)
|
|
$
|
(10,616,837
|
)
|
|
$
|
(6,623,081
|
)
|
|
$
|
(13,261,036
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(6,794,650
|
)
|
|
$
|
(8,828,815
|
)
|
|
$
|
(5,221,774
|
)
|
|
|
$
|
(1,060,713
|
)
|
|
$
|
(6,288,297
|
)
|
|
$
|
(12,493,183
|
)
|
|
$
|
(8,019,297
|
)
|
|
$
|
(15,937,817
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
Basic and diluted attributable to common stockholders (1)
|
|
$
|
(1.25
|
)
|
|
$
|
(1.23
|
)
|
|
$
|
(0.63
|
)
|
|
|
$
|
(2.39
|
)
|
|
$
|
(4.18
|
)
|
|
$
|
(8.03
|
)
|
|
$
|
(5.16
|
)
|
|
$
|
(10.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
Basic and diluted
|
|
|
5,422,923
|
|
|
|
7,202,176
|
|
|
|
8,234,560
|
|
|
|
|
443,868
|
|
|
|
1,502,761
|
|
|
|
1,555,287
|
|
|
|
1,555,068
|
|
|
|
1,581,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted (unaudited)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1.32
|
)
|
|
|
|
|
|
$
|
(1.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma weighted average common shares outstanding: Basic and
diluted (unaudited)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,040,486
|
|
|
|
|
|
|
|
11,938,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
The Company
|
|
|
|
As of December 31,
|
|
|
|
As of December 31,
|
|
|
As of September 30,
|
|
|
|
2002
|
|
|
2003
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
239,079
|
|
|
$
|
257,939
|
|
|
|
$
|
1,959,079
|
|
|
$
|
6,145,266
|
|
|
$
|
2,108,015
|
|
|
$
|
14,050,865
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,097,020
|
|
|
|
1,399,763
|
|
|
|
6,072,925
|
|
Total assets
|
|
|
6,723,297
|
|
|
|
5,717,405
|
|
|
|
|
2,403,518
|
|
|
|
17,435,073
|
|
|
|
12,753,581
|
|
|
|
32,689,832
|
|
Long-term debt, net of current portion
|
|
|
|
|
|
|
1,021,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred stock
|
|
|
9,081,447
|
|
|
|
13,597,736
|
|
|
|
|
2,866,073
|
|
|
|
24,034,276
|
|
|
|
25,910,622
|
|
|
|
58,503,707
|
|
Accumulated deficit
|
|
|
(15,422,600
|
)
|
|
|
(23,409,631
|
)
|
|
|
|
(1,038,674
|
)
|
|
|
(6,819,675
|
)
|
|
|
(19,366,087
|
)
|
|
|
(34,942,094
|
)
|
Total stockholders deficit
|
|
|
(5,442,963
|
)
|
|
|
(12,528,142
|
)
|
|
|
|
(770,080
|
)
|
|
|
(6,887,600
|
)
|
|
|
(19,436,916
|
)
|
|
|
(34,933,047
|
)
|
43
|
|
|
(1)
|
|
The basic and diluted net loss per share computation excludes
potential common shares upon exercise of options to purchase
common stock as their effect would be anti-dilutive. See
Note 2 to Financial Statements included elsewhere in this
prospectus for a detailed explanation of the determination of
shares used in computing basic and diluted loss per share.
|
|
(2)
|
|
Pro forma basic and diluted net loss per share is presented for
the year ended December 31, 2006 and the nine months ended
September 30, 2007 to reflect per share data assuming the
conversion of all our outstanding shares of redeemable
convertible preferred stock into 10,945,081 shares of
common stock, which will occur upon completion of this offering,
as if the conversion had taken place on the original date of
issuance and adjustments to eliminate accretion of preferred
stock and accrual of preferred stock dividends.
|
44
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 prospectus. This discussion and analysis contains
forward-looking statements that involve risks, uncertainties and
assumptions. You should review the Risk Factors
section of this prospectus for a discussion of important factors
that could cause actual results to differ materially from the
results described in or implied by the forward-looking
statements described in the following discussion and
analysis.
Overview
We are a medical device company that markets our advanced
robotic-arm solution and orthopedic implants for minimally
invasive orthopedic knee procedures. We offer MAKOplasty, an
innovative, restorative surgical solution that enables
orthopedic surgeons to consistently, reproducibly and precisely
treat patient-specific, early to mid-stage osteoarthritic knee
disease.
Z-KAT, Inc. was formed in 1997 to develop and commercialize
computer-assisted surgery, or CAS, applications. Z-KAT acquired,
developed and commercialized certain CAS intellectual property
and technology assets and also acquired and developed, but did
not commercialize, certain haptic robotic intellectual property
and technology assets. At the direction of its board of
directors and shareholders, Z-KAT formed MAKO Surgical Corp. in
November 2004, initially as a wholly owned subsidiary, to
develop and commercialize unique applications combining CAS with
haptic robotics in the medical field of orthopedics. Z-KAT is
considered to be our Predecessor, and the results of operations
of Z-KAT for the years ended December 31, 2002 and 2003 and
the period from January 1, 2004 through November 11,
2004 are included in Selected Financial Data.
Through September 30, 2007, our revenue was primarily
generated from the sale of our implants and disposable products
utilized in MAKOplasty procedures. In accordance with our
revenue recognition policy, as more fully described in the
Critical Accounting Policies and Significant Judgments and
Estimates section below, upon customer acceptance of the
sale of our TGS we defer recognition of the related revenue and
cost of revenue until delivery of version 2.0 of the TGS, which
is anticipated in the first half of 2009, subject to regulatory
clearances or approvals. We have incurred net losses in each
year since our inception, and as of September 30, 2007, we
had an accumulated deficit of $34.9 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 also expect that our general and administrative expenses will
increase due to additional operational and regulatory costs and
burdens associated with operating as a public company.
Key milestones and goals in the development of our business
include the following:
|
|
|
|
|
In 2004 and 2005, we were a development stage company primarily
engaged in research and development for key aspects of our core
technology and establishment of our intellectual property
portfolio.
|
|
|
|
In May 2005, we obtained 510(k) marketing clearance from the FDA
for a surgical visualization system with a robotic arm that was
an earlier version of our TGS. In November 2005, we obtained
510(k) marketing clearance from the FDA for version 1.0 of our
TGS.
|
|
|
|
In 2006, we completed development of the first version of our
TGS and commenced the commercialization of our MAKOplasty
solution. We entered into contracts with third-party
manufacturers and suppliers for the manufacturing of key
components of our TGS and implants, and began assembly of our
products at our headquarters in Ft. Lauderdale, Florida.
Our first TGS was installed in June 2006. As of
September 30, 2007, 84 MAKOplasty procedures have been
performed since its commercial introduction in June 2006.
|
|
|
|
In January 2008, we obtained 510(k) marketing clearance from the
FDA for version 1.2 of our TGS.
|
45
|
|
|
|
|
We are currently developing version 2.0 of our TGS and modular
implants, which would allow multicompartmental knee resurfacing
procedures. We intend to commercially introduce version 2.0 of
the TGS and the modular implants in the first half of 2009,
subject to regulatory clearances or approvals. If we were to be
denied such clearances or approvals or if such clearances or
approvals were delayed, it could have a material adverse impact
on our results of operations.
|
We believe that the key to growing our business is expanding the
application of MAKOplasty to multicompartmental resurfacing
procedures employing implants that address mid-stage,
multicompartmental degeneration. To successfully commercialize
our products and grow our business, we must gain market
acceptance for MAKOplasty.
Acquisitions
of Assets from Predecessor
In December 2004, pursuant to a contribution agreement, we
acquired substantially all of Z-KATs tangible assets,
primarily furniture, office equipment and a majority of
Z-KATs CAS technology assets not required for Z-KATs
retained CAS business, and all of its haptic robotic research
and development technology inventory. We were granted a limited
license to Z-KATs CAS and haptic robotic intellectual
property portfolio for exclusive use in the field of
orthopedics, subject to a prior license to Biomet Manufacturing
Corp. to use Z-KATs CAS intellectual property, but not its
haptic robotic intellectual property, in the field of
orthopedics. Because of the prior license to Biomet and pursuant
to our license with Z-KAT, we cannot use the CAS intellectual
property on a stand-alone basis; we can only use the CAS
intellectual property in combination with robotics technology.
The contribution agreement, including the Z-KAT license, was
made in exchange for approximately 1,410,000 shares of
common stock, 1,999,000 shares of Series A redeemable
convertible preferred stock, and warrants to purchase 190,000
shares of common stock at an exercise price of $3.00 per share.
All common share and per share amounts have been retroactively
adjusted to give effect to a one-for-3.03 reverse stock split of
our common stock effected on February 8, 2008. These share
amounts were determined by Z-KATs board of directors. In
making this determination, the Z-KAT board of directors
determined the number of shares to be issued to (1) obtain
sufficient subsidiary stock for its subsequent use in redeeming
bridge note debt to its shareholders and satisfying a
substantial portion of its accounts payable and
(2) establish the capital structure of its subsidiary to
allow for the future sale of our Series A redeemable
convertible preferred stock. This acquisition was accounted for
based on the Z-KAT carrying value of the assets acquired
totaling approximately $652,000 as it was a transaction between
entities under common control. The common stock was recorded at
par and the remainder of the ascribed value was allocated to the
Series A redeemable convertible preferred stock resulting
in a discount to the potential redemption value of approximately
$1,346,000 which is being accreted over the period from the date
of issuance to the redemption date.
Pursuant to the December 2004 contribution of the Z-KAT license,
which was not assigned a value, we obtained the right to manage
and maintain the Z-KAT patent portfolio, and assumed the
obligation to pay a ratable portion (among all licensees) of all
maintenance fees, patent costs and applicable royalties to
Z-KATs licensors (except for an annual minimum royalty
payment to Z-KATs primary licensor in its retained CAS
business). Because there has only been one licensee of the Z-KAT
patent portfolio other than us, our ratable portion for the
intellectual property fees, costs and royalties has been 50%
since consummation of the Z-KAT license.
Z-KAT, through its retained business, continued the
commercialization of its CAS technology and retained its right
to use or license its CAS and haptic robotics intellectual
property portfolio outside of the field of orthopedics. In
connection with the contribution agreement, we reimbursed Z-KAT
for certain payroll and direct and indirect expenses incurred
from October 1, 2004 through November 11, 2004
relating to us prior to our legal formation on November 12,
2004. Such expenses totaled approximately $250,000 and have been
eliminated from Z-KATs results of operations for the
period from January 1, 2004 through November 11, 2004
and included in our results of operations for the period
November 12, 2004 through December 31, 2004. The
operating management team and all staff of Z-KAT were
transferred to us in connection with our formation. For a period
of time subsequent to the contribution agreement, our employees
provided limited continuing commercial services to the retained
business of Z-KAT.
46
Because, pursuant to the contribution transaction, we acquired
substantially all of Z-KATs tangible assets and all of
Z-KATs employees, including management, and received all
necessary intellectual property rights, without all of which we
could not operate, Z-KAT is considered our predecessor company.
The Financial Statements section of this prospectus
for the period from January 1, 2004 through
November 11, 2004 was prepared to present the statements of
operations, redeemable convertible preferred stock and
stockholders deficit and cash flows of Z-KAT.
In August 2006, we created a special independent committee of
our board of directors, comprised of all directors that did not
hold an interest in Z-KAT, to act on our behalf on all matters
involving Z-KAT. In December 2006, we entered into an addendum
to the contribution agreement. Under the addendum, we loaned
Z-KAT approximately $125,000 to satisfy certain accounts
payable, assumed the obligation to pay the annual minimum
royalty payable to the sole excluded CAS licensor, and purchased
certain remaining Z-KAT CAS inventory at or below historical
costs, which is applicable to our field of orthopedics (which in
2004 Z-KAT had intended to utilize in its retained CAS business)
for $30,000. Z-KAT also assigned to us its right to receive
required royalty payments from two prior third party CAS
intellectual property licensees. We secured the right and
assumed the obligation to pay the CAS minimum royalty due to the
importance of maintaining the licensed rights and Z-KATs
illiquid position in 2006. There was no change in licensed
intellectual property rights as a result of the addendum. The
liabilities assumed and the assets acquired were recorded at
Z-KATs carrying value and resulted in a net liability of
approximately $221,000. The Company recorded an offsetting
charge to reduce additional
paid-in-capital
to zero with the excess charged to accumulated deficit as Z-KAT
continued to be a significant shareholder of the Company. The
CAS minimum royalty was initially an obligation retained by
Z-KAT under the Z-KAT license as the intellectual property at
issue had greater applicability to Z-KATs retained CAS
business than our field of orthopedics. The Z-KAT note accrues
interest at a rate of 8.5% per annum, which was determined by
negotiation between Z-KAT and the special independent committee
of our board of directors, and is being repaid through
collections from ongoing sales of Z-KATs CAS products.
Factors
Which May Influence Future Results of Operations
The following is a description of factors which 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 unit sales of our TGS, including
installation services, training and upgrades and enhancements,
from sales of implants and disposable products, and by providing
extended warranty services. To date, we have generated revenue
primarily from the sale of implants and disposable products
utilized in MAKOplasty procedures, the majority of which is from
a single customer, Holy Cross Hospital, Inc. The recognition of
revenue associated with the sale of TGS units is dependent upon
the delivery of version 2.0 of our TGS, as more fully described
in the Critical Accounting Policies and Significant
Judgments and Estimates section below.
Future revenues from sales of our products are difficult to
predict and will only modestly reduce our continued and
increasing losses resulting from selling, general and
administrative expenses, research and development, and other
activities for the next several years.
The generation of recurring revenues through sales of our
implants, disposable products and service contracts are an
important part of the MAKOplasty business model. We anticipate
that recurring revenues will constitute an increasing percentage
of our total revenues as we leverage each new installation of
our TGS to generate recurring sales of implants and disposable
products and expand our implant product offering.
Cost
of Revenue
Cost of revenue primarily consists of the direct costs
associated with the manufacture of TGS units, implants and
disposable products for which revenue has been recognized in
accordance with our revenue
47
recognition policy discussed below. Costs associated with
providing services are expensed as incurred. Cost of revenue
also includes the cost associated with establishing an accrual
for the TGS standard one-year warranty liability and royalties
related to the sale of products covered by licensing
arrangements.
The cost of revenue associated with the sale of TGS units is
deferred until the recognition of the related revenue. In
addition, we expect that deferred costs of revenue associated
with the sale of TGS will be higher during the deferral period
due to the additional costs associated with providing hardware
enhancements and upgrades through and including the delivery of
version 2.0 of our TGS.
Selling,
General and Administrative Expenses
Our selling, general and administrative expenses consist
primarily of compensation, including stock-based compensation,
for sales, operations, regulatory, quality, executive, finance,
legal and administrative personnel. Other significant expenses
include costs associated with sales and marketing activities,
marketing and advertising materials, professional fees for legal
and accounting services, consulting fees, travel expenses,
facility and related operating costs, and recruiting expenses.
Our selling, general and administrative expenses are expected to
increase due to the cost associated with the expected commercial
launch of version 2.0 of our TGS, a modular implant system and
disposable products, increased headcount necessary to support
our continued growth in operations, and the additional
operational and regulatory burdens and costs associated with
operating as a publicly traded company. In addition, we expect
to incur additional costs associated with protecting our
intellectual property rights as necessary to support our 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 costs for research and
development personnel including stock-based compensation, cost
for materials used in research and development activities and
costs for outside services. Research and development expenses
are expected to increase as we develop version 2.0 of our TGS
and our modular implant system. Subject to regulatory clearances
or approvals, version 2.0 of our TGS will include enhanced
surgical planning and execution software, customized bone
cutting instruments, new industrial design, enhanced
reliability, serviceability and manufacturability, and will
enable our modular implant system.
Critical
Accounting Policies and Significant Judgments and
Estimates
Our managements discussion and analysis of our financial
condition and results of operations are based on our financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the U.S. The
preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets
and liabilities as of the date of the financial statements as
well as the reported expenses during the reporting periods. The
accounting estimates that require our most significant,
difficult and subjective judgments include revenue recognition,
allowance for doubtful accounts, inventory impairment charges,
accrual for warranty costs, valuation allowance for deferred tax
assets and liabilities, impairment of long-lived assets and the
determination of stock-based compensation. We evaluate our
estimates and judgments on an ongoing basis. Actual results may
differ materially from these estimates under different
assumptions or conditions.
While our significant accounting policies are more fully
described in Note 2 to Financial Statements included
elsewhere in this prospectus, we believe that the following
accounting policies and estimates are most critical to a full
understanding and evaluation of our reported financial results.
Revenue
Recognition
We generate revenue from unit sales of our TGS, including
installation services, training and upgrades and enhancements,
from sales of implants and disposable products, and by providing
extended warranty services. Because our TGS includes software
that is essential to the functionality of the system, we account
48
for the sale of the TGS pursuant to the American Institute of
Certified Public Accountants Statement of Position
No. 97-2,
Software Revenue Recognition
(SOP 97-2),
as amended.
We recognize product revenues for unit sales of the TGS when
there is persuasive evidence of a sales arrangement, the fee is
fixed or determinable, collection of the fee is probable and
delivery has occurred as prescribed by
SOP 97-2.
For all sales, we use either a signed agreement or a binding
purchase order as evidence of an arrangement. Such arrangements
typically require customer acceptance of the system, which is
evidenced by the receipt of a form executed by the customer
indicating their acceptance of the TGS unit. The customer
acceptance period is typically defined as a certain number of
surgical procedures over a certain period which typically does
not exceed three months. Sales arrangements contain several
elements, including elements requiring us to provide upgrades
and enhancements to the TGS unit, including related software on
a when and if available basis. Payments received upon customer
acceptance of TGS units are recognized as deferred revenue due
to the significance of the undelivered elements. The direct cost
of revenue associated with the sale of TGS units is recognized
as deferred cost of revenue. The deferred revenue and deferred
cost of revenue associated with the sale of TGS units will be
recognized in our statement of operations if and when we have
satisfied all related revenue recognition criteria, which
includes the delivery of version 2.0 of the TGS, which is
anticipated to be in the first half of 2009, subject to
regulatory clearances or approvals.
For sales arrangements with multiple elements, we allocate
arrangement consideration to TGS units, upgrades, enhancements
and services based upon vendor specific objective evidence, or
VSOE, of fair value of the respective elements. As we are in the
early stages of commercialization, VSOE of fair value does not
exist for all of the undelivered elements. Accordingly, all
revenue and cost of revenue associated with the sale of the TGS
are deferred until the earlier of (1) delivery of all
elements or (2) establishment of VSOE of fair value for all
undelivered elements.
Product revenue from the sale of implants and disposable
products is recognized as revenue in accordance with Staff
Accounting Bulletin No. 104,
Revenue
Recognition
, when persuasive evidence of an arrangement
exists, delivery has occurred or service has been rendered, the
price is fixed or determinable and collectibility is reasonably
assured. The implants and disposable products are a separate
unit of accounting from the TGS as (1) they have value to
the customer on a standalone basis, (2) objective and
reliable evidence of the fair value of the item exists and
(3) no right of return exists once the implants and
disposable products are implanted or consumed. Accordingly, as
our implants and disposable products are sold for each
procedure, the revenue and costs associated with the sale of our
implants and disposable products are recognized at the time of
sale.
Service revenue, which consists primarily of extended warranty
services for the TGS hardware, is deferred and recognized
ratably over the service period, until no further obligation
exists. Costs associated with providing services are expensed
when incurred.
Our agreements with customers do not contain product return
rights beyond the customer acceptance period which is typically
defined as a certain number of surgical procedures over a
certain period of time which typically does not exceed three
months.
For purposes of obtaining clinical and technical feedback on the
current version of our TGS, we also enter into consignment
programs with certain customers. We anticipate that our
participation in these programs will remain limited and is not
part of our long term business strategy. Under the terms of such
programs, we retain title to the TGS unit, while the customer
has use of the TGS and purchases our implants and disposable
products. We may provide unspecified upgrades to the TGS product
during the term of each program when and if available. The TGS
units associated with our consignment programs are recorded as
property and equipment and are depreciated over their estimated
useful life of two years. Depreciation and warranty expense
attributable to TGS consignment units are recorded as cost of
revenue. The revenue associated with the sale of implants and
disposable products to customers under consignment programs is
recognized as revenue when persuasive evidence of an arrangement
exists, delivery has occurred or service has been rendered, the
price is fixed or determinable and collectibility is reasonably
assured.
49
Allowance
for Doubtful Accounts
The allowance for doubtful accounts is based on our assessment
of the collectibility of customer accounts. We regularly review
the allowance by considering factors such as historical
experience, credit quality, the age of the accounts receivable
balances, and current economic conditions that may affect a
customers ability to pay. We have not experienced any
collectibility issues to date and have no allowance for doubtful
accounts, provision for doubtful accounts receivable or write
offs to date in the accompanying financial statements included
in this prospectus.
Inventory
Impairment Charges
Inventory is stated at the lower of cost or market value on a
first-in,
first-out basis. Inventory costs include direct materials and
direct labor. We review our inventory periodically to determine
net realizable value. We write down inventory, if required,
based on forecasted demand and technological obsolescence. These
factors are impacted by market and economic conditions,
technology changes and new product introductions and require
estimates that may include uncertain elements.
Accrual
for Warranty Costs
Upon installation of a TGS unit, we establish an accrual for the
estimated costs associated with providing a standard one-year
warranty for defects in materials and workmanship. Due to our
limited history of commercial placements of TGS units, the
estimation of warranty costs is subjective.
Valuation
Allowance for Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities are determined based on the
differences between financial reporting and tax bases of assets
and liabilities, using tax rates expected to be in effect when
the differences will reverse. Valuation allowances are
established when necessary to reduce the net deferred tax assets
to the amounts expected to be realized. A full valuation
allowance has been recorded in the accompanying financial
statements relating to all our net deferred tax assets.
Impairment
of Long-Lived Assets
We evaluate our long-lived assets for indicators of impairment
by comparison of the carrying amounts to future net undiscounted
cash flows expected to be generated by such assets when events
or changes in circumstances indicate the carrying amount of an
asset may not be recoverable. Should an impairment exist, the
impairment loss would be measured based on the excess carrying
value of the asset over the assets fair value or
discounted estimate of future cash flows. We have not recorded
any such impairment losses to date.
Determination
of Stock-Based Compensation
Effective January 1, 2006, we adopted the fair value
provisions of Statement of Financial Accounting Standards
No. 123 Revised,
Share-Based Payment
(SFAS 123(R)). SFAS 123(R) requires
the recognition of compensation expense, using a fair-value
based method, for costs related to all share-based payments
including stock options. SFAS 123(R) requires companies to
estimate the fair value of share-based payment awards on the
date of grant using an option-pricing model.
We adopted SFAS 123(R) using the modified retrospective
transition method, which requires the restatement of financial
statements for prior periods. Prior to the adoption of
SFAS 123(R), we accounted for stock-based compensation
arrangements by recording compensation expense based on the
estimated fair-value of stock-based awards in accordance with
Statement of Financial Accounting Standards No. 123,
Accounting for Stock Based Compensation
. The impact of
SFAS 123(R) on prior periods was not significant.
We account for stock-based compensation arrangements with
non-employees in accordance with the Emerging Issues Task Force
(EITF) Abstract
No. 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling
Goods or Services.
We record the expense of such services
based on the estimated fair value of the equity instrument using
the Black-Scholes-
50
Merton pricing model. The value of the equity instrument is
charged to expense over the term of the service agreement.
We selected the Black-Scholes-Merton pricing model to determine
the fair value of stock options. The determination of the fair
value of stock-based payment awards on the date of grant using
an option-pricing model will be affected by our stock price as
well as assumptions regarding a number of complex and subjective
variables. These variables include our expected stock price
volatility over the term of the awards, actual and projected
employee stock option exercise behaviors, risk-free interest
rates, forfeitures and expected dividends.
The expected term represents the weighted-average period that
our stock options are expected to be outstanding. The expected
term is based on the options vesting term, contractual terms and
historical exercise and vesting information used to develop
reasonable expectations about future exercise patterns and
post-vesting employment termination behavior. As we have been
operating as a private company since inception, we are unable to
use actual price volatility data. Therefore, we estimate the
volatility of our common stock based on volatility of similar
public entities. We base the risk-free interest rate that we use
in the option pricing model on U.S. Treasury zero-coupon
issues with remaining terms similar to the expected term on the
options. We do not anticipate paying any cash dividends in the
foreseeable future and therefore use an expected dividend yield
of zero in the option pricing model. We are required to estimate
forfeitures at the time of grant and revise those estimates in
subsequent periods if actual forfeitures differ from those
estimates. We use historical data to estimate pre-vesting option
forfeitures and record stock-based compensation expense only for
those awards that are expected to vest. Stock-based payment
awards are generally amortized on a straight-line basis over the
requisite service periods of the awards, which are generally the
vesting periods.
The following are measurement dates where a significant grant of
options occurred during the
18-months
ended August 31, 2007, and the related weighted average
exercise price (adjusted to give effect to our one-for-3.03
reverse stock split effected on February 8, 2008) of the
stock option grants:
|
|
|
|
|
|
|
Weighted Average
|
|
Grant Measurement Date
|
|
Exercise Price
|
|
|
March 2006
|
|
$
|
1.27
|
|
March 2007
|
|
|
2.48
|
|
August 2007
|
|
|
11.12
|
|
The weighted average exercise price above represents the
estimated fair value of the common stock on the date of grant.
The reasons for the differences in the range of weighted average
exercise prices of $1.27 to $11.12 per share during the
18 months ended August 2007 are as follows:
Factors affecting option prices in 2006:
|
|
|
|
|
We secured a license from IBM. The license agreement with
IBM provides a license, in the field of orthopedics in
combination with a robotic device, to IBMs patent
portfolio.
|
|
|
|
We achieved a significant milestone with the first clinical use
of our TGS in support of a unicompartmental knee resurfacing
procedure.
|
|
|
|
We achieved the first unit sale of our TGS, including customer
acceptance.
|
Factors affecting option prices in 2007:
|
|
|
|
|
We closed on $30.0 million of Series C redeemable
convertible preferred stock financing.
|
|
|
|
We filed significant patent applications related to our TGS.
|
|
|
|
We entered into a supply and license agreement for the supply of
and certain intellectual rights related to our inlay and onlay
implants.
|
|
|
|
We achieved a significant milestone with the fiftieth successful
MAKOplasty procedure.
|
51
|
|
|
|
|
We engaged investment bankers to initiate the process of an
initial public offering, or IPO, and began drafting a
registration statement.
|
In February 2007 and August 2007, we engaged Taylor Consulting
Group, Inc., or Taylor Consulting, an independent valuation
services firm, to evaluate the reasonableness of the fair values
of our common stock at significant option grant dates previously
determined by the board of directors, which Taylor Consulting
retrospectively determined to be reasonable. In addition, we
engaged Taylor Consulting to perform a valuation of the fair
value of our common stock as of February 28, 2007 and
August 20, 2007.
During the nine months ended September 30, 2007, we
recognized $203,000 of compensation expense relating to stock
option grants, leaving $2,863,000 to be recognized in future
periods. The total unrecognized stock-based compensation for all
employee grants through September 30, 2007 is expected to
be recognized as follows: $198,000 in the last three months of
2007, $759,000 in 2008, $737,000 in 2009, $642,000 in 2010,
$478,000 in 2011, and $49,000 in 2012.
In July 2005 and May 2006, we issued a total of
446,287 shares of restricted common stock to our CEO and
49,504 shares of unrestricted common stock to an entity
affiliated with the CEO in exchange for promissory notes from
the CEO totaling approximately $631,000 representing the fair
value of shares on the date of issuance, approximately 50% of
which were nonrecourse. The promissory notes accrued interest at
a rate of 8% per annum, with 25% of the restricted stock vesting
immediately and the remainder vesting monthly over
48 months as service is provided. The restricted stock was
pledged as collateral against the promissory notes. In March
2007, we issued 82,508 shares of restricted common stock to
our CEO at a purchase price of $2.48 per share, the estimated
fair value at the date of issuance, in exchange for a promissory
note of $205,000, 50% of which was nonrecourse and a pledge
agreement. The March 2007 restricted stock, pledge agreement and
promissory note were issued under terms substantially similar to
the July 2005 and May 2006 restricted stock issuances. Because
it was unclear as to whether the recourse portion had substance
as of the dates of issuance of the restricted stock and the
promissory notes, we determined to treat the entire amount of
the promissory notes related to the restricted stock as
nonrecourse for accounting purposes. A nonrecourse note issued
for restricted stock is in substance an option to acquire the
stock. Accordingly, we recorded compensation expense of
approximately $90,000 and $73,000 for the years ended
December 31, 2005 and 2006 under stock option accounting
guidance, and the promissory notes and the restricted stock are
not recorded in the accompanying financial statements.
On September 5, 2007, we forgave outstanding loans of
approximately $1.1 million, including accrued interest of
$113,000 to Dr. Ferré, which represents all loans
outstanding to Dr. Ferré. Of this amount, $949,000 was
associated with the issuances of the restricted stock noted
above and $200,000 was associated with employee loans. In
connection with the forgiveness of the loans, 35,244 shares
of common stock were surrendered by our CEO to us to pay for the
payroll taxes associated with the taxable income from the
forgiveness of the loans. The forgiveness resulted in a
modification to the original terms of the restricted stock based
award with a charge of approximately $395,000 recorded in the
financial statements in the third quarter of 2007. The remaining
unrecognized compensation expense of approximately $533,000
relating to the unvested restricted stock will be recorded in
the financial statements over the remaining vesting period,
along with the related vested common stock. Also on
September 5, 2007, the board of directors granted options
to Dr. Ferré to purchase 35,244 shares of common stock
at an exercise price of $11.12.
Compensation expense related to the CEO restricted stock was
approximately $490,000 for the nine months ended
September 30, 2007, of which $77,000 was incurred in the
eight months prior to the modification, $395,000 was incurred
due to the modification, and $18,000 was incurred in the month
subsequent to the modification.
All common share and per share amounts have been retroactively
adjusted to give effect to a one-for-3.03 reverse stock split of
our common stock effected on February 8, 2008.
52
Results
of Operations
The discussion of results of operations set forth below includes
a discussion of the operating results of
Z-KAT
as our
Predecessor from January 1, 2004 through November 11,
2004 and our operating results from November 12, 2004
through December 31, 2004. Z-KATs operations during
2004 involved different utilization of the CAS technology that
was contributed to our company. In light of this and because the
periods presented for 2004 are not of even duration with our
operating results for 2005, the discussion of the operating
results for our Predecessor and our company in 2004 are
presented in a non-comparative format that focuses on the
significant events that occurred during each period.
Nine
Months Ended September 30, 2006 Compared to the Nine Months
Ended September 30, 2007
Revenue.
Revenue was $35,000 for the nine
months ended September 30, 2006, compared to $355,000 for
the nine months ended September 30, 2007 and was primarily
generated from the sale of implants and disposable products
utilized in MAKOplasty procedures. The increase in revenue was
primarily due to an increase in MAKOplasty procedures performed
during the nine months ended September 30, 2007. The first
MAKOplasty procedure was performed in June 2006, and 71
procedures were performed during the nine months ended
September 30, 2007 versus 7 procedures performed during the
nine months ended September 30, 2006. We expect our revenue
to increase as the number of MAKOplasty procedures performed is
expected to increase in future periods. The deferred revenue
balance was $0 and $2.0 million as of September 30,
2006 and 2007, respectively. The increase in the deferred
revenue balance is primarily related to three unit sales of our
TGS. Deferred revenue related to unit sales of our TGS will be
recognized in our statement of operations if and when we have
satisfied all related revenue recognition criteria, which
includes the delivery of version 2.0 of the TGS, which is
anticipated to be in the first half of 2009, subject to
regulatory clearances or approvals.
Cost of Revenue.
Cost of revenue was $29,000
for the nine months ended September 30, 2006, compared to
$291,000 for the nine months ended September 30, 2007. The
increase in cost of revenue was primarily due to an increase in
MAKOplasty procedures performed, the establishment of warranty
accruals on sales of TGS units, and royalties incurred on sales
of TGS units during the nine months ended September 30,
2007. We expect our cost of revenue to increase as the number of
MAKOplasty procedures performed is expected to increase in
future periods. In addition, anticipated increases in sales of
TGS units will result in an increase in cost of sales as royalty
and warranty expense will increase correspondingly. The deferred
cost of revenue balance was $0 and $564,000 as of
September 30, 2006 and 2007, respectively. The increase in
the deferred cost of revenue balance is primarily related to
three unit sales of our TGS. Deferred cost of revenue related to
unit sales of our TGS will be recognized in our statement of
operations if and when we have satisfied all related revenue
recognition criteria, which includes the delivery of version 2.0
of the TGS, which is anticipated to be in the first half of
2009, subject to regulatory clearances or approvals.
Selling, General and Administrative.
Selling,
general and administrative expense was $3.2 million for the
nine months ended September 30, 2006, compared to
$7.7 million for the nine months ended September 30,
2007. The increase of $4.5 million, or 141%, was primarily
due to a $2.9 million increase in compensation expense
associated with increased headcount for selling, marketing, and
administrative personnel, which includes a $575,000 increase in
stock-based compensation due primarily to the modification of
the CEOs restricted stock discussed in Determination
of Stock-Based Compensation above and additional grants
made in 2007, a $1.3 million increase in general overhead
costs due to higher marketing, facility, and travel related
costs, and a $304,000 increase in professional fees. We expect
our selling, general and administrative expense to increase
substantially due to our planned increase in headcount necessary
to support the anticipated commercial launch of version 1.2 of
our TGS in the first quarter of 2008, sales and marketing costs
associated with the anticipated commercial launch of version 2.0
of our TGS in the first half of 2009, continued growth in
operations, and the costs associated with operating as a
publicly traded company.
Research and Development.
Research and
development expense was $3.3 million for the nine months
ended September 30, 2006, compared to $5.3 million for
the nine months ended September 30, 2007. The increase of
$2.0 million, or 61%, was primarily due to a
$1.5 million increase in compensation expense
53
associated with increased headcount for research and development
personnel and a $462,000 increase in material, supply and other
expenses used in research and development activities. The
increases in compensation expense, material and supplies and
outside services were related to the development of versions 1.2
and 2.0 of our TGS and our modular implant system. We expect our
research and development expense to increase as we continue to
expand our research and development activities, including the
development of version 2.0 of our TGS and our modular implant
system.
Depreciation and Amortization.
Depreciation
and amortization expense was $418,000 for the nine months ended
September 30, 2006, compared to $915,000 for the nine
months ended September 30, 2007. The increase of $497,000,
or 119%, was primarily due to a $159,000 increase in
amortization associated with the license of $5.4 million of
intangible assets from a license agreement entered into in March
2006 with IBM, and a $338,000 increase in depreciation of
property and equipment due to purchases made subsequent to
September 30, 2006. The license agreement with IBM provides
a license in our field of business to IBMs patent
portfolio and is stated net of a discount estimated at $590,000,
less accumulated amortization of the discount to date,
associated with a deferred payment of $4.0 million due upon
completion of our initial public offering.
Interest and Other Income.
Interest income was
$411,000 for the nine months ended September 30, 2006,
compared to $860,000 for the nine months ended
September 30, 2007. The increase of $449,000, or 109%, was
primarily due to an increase in short-term investments from the
net proceeds of our Series C redeemable convertible
preferred stock in February 2007. We expect our interest income
to increase as a result of the net proceeds of our initial
public offering.
Interest and Other Expense.
Interest and other
expense was $143,000 for the nine months ended
September 30, 2006, compared to $229,000 for the nine
months ended September 30, 2007. The increase of $86,000,
or 60%, was primarily due to the amortization of the $590,000
discount on the intangible assets licensed in the IBM license
agreement entered into in March 2006 as discussed above.
Income Taxes.
No income taxes were recognized
for the nine months ended September 30, 2006 and 2007, due
to net operating losses in each period. In addition, no current
or deferred income taxes were recorded for the nine months ended
September 30, 2006 and 2007, as all income tax benefits
were fully offset by a valuation allowance against our net
deferred income tax assets.
Year
Ended December 31, 2005 Compared to the Year Ended
December 31, 2006
Revenue.
Revenue was $0 for the year ended
December 31, 2005, compared to $63,000 for the year ended
December 31, 2006 and was primarily generated from the sale
of orthopedic implants and disposal products utilized in
MAKOplasty procedures. Revenue was recognized in 2006 as
performance of MAKOplasty procedures commenced in 2006. In 2006,
13 MAKOplasty procedures were performed. We expect our revenue
to increase as the number of MAKOplasty procedures performed is
expected to continue to increase.
Cost of Revenue.
Cost of revenue was $0 for
the year ended December 31, 2005, compared to $77,000 for
the year ended December 31, 2006. Cost of revenue was
recognized in 2006 as performance of MAKOplasty procedures
commenced in 2006. Cost of revenue for the year ended
December 31, 2006 also included the expense associated with
the estimated warranty costs and royalties associated with the
sales of the TGS. We expect our cost of revenue to increase as
the number of MAKOplasty procedures performed is expected to
increase primarily due to an expected increase in TGS unit
installations.
Selling, General and Administrative.
Selling,
general and administrative expense was $2.7 million for the
year ended December 31, 2005, compared to $5.0 million
for the year ended December 31, 2006. The increase of
$2.3 million, or 85%, was primarily due to a
$1.4 million increase in compensation expense associated
with increased headcount for selling, marketing, operations, and
administrative personnel, a $736,000 increase in general
overhead costs due to higher marketing, facility, and travel
related costs, a $145,000 increase in employee recruiting costs
for sales and marketing and administrative personnel, and a
$63,000 increase in legal expenses related to patent filings and
general corporate matters. Included in selling,
54
general and administrative expense during 2005 and 2006 are
$99,000 and $115,000, respectively, of stock-based compensation.
Research and Development.
Research and
development expense was $2.6 million for the year ended
December 31, 2005, compared to $5.2 million for the
year ended December 31, 2006. The increase of
$2.6 million, or 100%, was primarily due to a
$1.3 million increase in compensation expense associated
with increased headcount for research and development personnel,
a $540,000 increase in material and supplies and a $728,000
increase in outside services. The increases in compensation
expense, material and supplies and outside services were related
to the development and support of the current version of our TGS
and development efforts for version 1.2 of our TGS. Included in
research and development expense during 2005 and 2006 is $15,000
and $55,000, respectively, of stock-based compensation.
Depreciation and Amortization.
Depreciation
and amortization expense was $99,000 for the year ended
December 31, 2005, compared to $644,000 for the year ended
December 31, 2006. The increase of $545,000, or 551%, was
primarily due to a $451,000 increase in amortization associated
with the license of $5.4 million of intangible assets from
a license agreement entered into in March 2006 with IBM, and a
$94,000 increase in depreciation of property and equipment due
to purchases in 2006. The license agreement with IBM provides a
license in our field of business to IBMs patent portfolio
and is stated net of a discount estimated at $590,000 less
accumulated amortization of the discount to date associated with
a deferred payment of $4.0 million due upon completion of
our initial public offering.
Interest and Other Income.
Interest income was
$269,000 for the year ended December 31, 2005, compared to
$477,000 for the year ended December 31, 2006. The increase
of $208,000, or 77%, was primarily due to higher average
short-term investment balances during 2006 due to the net
proceeds of our $20.0 million Series B redeemable
convertible preferred stock offering in July 2005.
Interest and Other Expense.
Interest and other
expense was $0 for the year ended December 31, 2005,
compared to $220,000 for the year ended December 31, 2006.
The increase was primarily due to the amortization of the
$590,000 discount on the intangible assets licensed in the IBM
license agreement entered into in March 2006.
Income Taxes.
No income taxes were recognized
for the years ended December 31, 2005 and 2006, due to net
operating losses in each period. In addition, no current or
deferred income taxes were recorded for the years ended
December 31, 2005 and 2006, as all income tax benefits were
fully offset by a valuation allowance against our net deferred
income tax assets.
The
Period from November 12, 2004 (Inception) through
December 31, 2004
Selling, General and Administrative.
Selling,
general and administrative expense was $630,000 for the period
from November 12, 2004 through December 31, 2004.
Selling, general and administrative expense included
compensation expense of $489,000, $25,000 of expenses for
professional fees, $21,000 of expenses for recruiting costs, and
$95,000 of expenses for general overhead costs. Selling, general
and administrative expense primarily related to operating costs
associated with the support of the development of the first
generation of our TGS, and general administrative activities.
Research and Development.
Research and
development expense was $403,000 for the period from
November 12, 2004 through December 31, 2004. Research
and development expense included compensation expense of
$239,000, $129,000 of expenses for materials, supplies and other
expense and $35,000 of expenses for outside services. Research
and development expense were primarily related to the
development of the first generation of our TGS.
Income Taxes.
No income taxes were recognized
for the period from November 12, 2004 through
December 31, 2004 due to net operating losses incurred in
such period. In addition, no current or deferred income taxes
were recorded for the period from November 12, 2004 through
December 31, 2004 as all income tax benefits were fully
offset by a valuation allowance against our net deferred income
tax assets.
55
The
Predecessor Period from January 1, 2004 through
November 11, 2004
Revenue.
Revenue was $1.6 million for the
period from January 1, 2004 through November 11, 2004.
Z-KATs revenue was primarily generated from the sale of
CAS products of $1.2 million, revenues for development
services of $300,000, and revenues for license fees of $69,000.
Cost of Revenue.
Cost of revenue was
$1.1 million for the period from January 1, 2004
through November 11, 2004. Z-KATs cost of revenue was
primarily generated from direct costs related to the sale of CAS
products of $924,000 expenses for development services of
$131,000, and expenses for license fees of $30,000.
Selling, General and Administrative.
Selling,
general and administrative expense was $2.6 million for the
period from January 1, 2004 through November 11, 2004.
Selling, general and administrative expense included
compensation expense of $1.1 million, expenses for
professional fees of $690,000, and expenses for general overhead
costs of $847,000.
Research and Development.
Research and
development expense was $1.5 million for the period from
January 1, 2004 through November 11, 2004. Research
and development expense primarily related to costs associated
with the research and development of CAS products.
Depreciation and Amortization.
Depreciation
and amortization expense was $430,000 for the period from
January 1, 2004 through November 11, 2004.
Depreciation and amortization expense primarily related to
amortization of intangible assets of $296,000 related to CAS
patents and licenses and, to a lesser extent, depreciation of
fixed assets of $134,000.
Interest and Other Expense.
Interest and other
expense was $480,000 for the period from January 1, 2004
through November 11, 2004. Interest and other expense
primarily related to $332,000 of interest on outstanding loans
payable and, to a lesser extent, $148,000 of other expenses,
including a fair value adjustment to market associated with
preferred stock warrant liability.
Income Taxes.
No income taxes were recognized
for the period from January 1, 2004 through
November 11, 2004 due to net operating losses incurred in
such period. In addition, no current or deferred income taxes
were recorded for the period from January 1, 2004 through
November 11, 2004 as all income tax benefits were fully
offset by a valuation allowance against our net deferred income
tax assets.
Liquidity
and Capital Resources
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, 2007, we had an
accumulated deficit of $34.9 million. We have financed our
operations to date principally through the sale of
Series A, Series B and Series C redeemable
convertible preferred stock. Through September 30, 2007, we
received net proceeds of $52.2 million from the issuance of
Series A, Series B and Series C redeemable
convertible preferred stock. Each share of preferred stock will
automatically convert into shares of common stock immediately
upon the closing of this public offering. Upon the close of this
offering, the cumulative dividends on the redeemable convertible
preferred stock accrued to date will be eliminated. See detailed
discussion of redeemable convertible preferred stock in
Note 7 to Financial Statements.
As of September 30, 2007, we had $20.1 million in
cash, cash equivalents and short-term investments. Our cash and
investment balances are held in a variety of interest bearing
instruments, including corporate bonds, auction rate securities
and certificates of deposit. In order to continue operations and
achieve our business objectives, we must achieve profitability
or obtain additional debt or equity financing. We cannot assure
you that we will be able to obtain additional debt or equity
financing on terms acceptable to us, or at all. If we are unable
to obtain sufficient funds on acceptable terms when needed, it
could have a material adverse effect on our business, results of
operations and financial condition.
As noted in the Revenue Recognition section above,
sales arrangements for our TGS contain several elements,
including elements requiring us to provide upgrades and
enhancements to the TGS unit, including hardware and related
software on a when and if available basis. As of
September 30, 2007, three TGS
56
customers are entitled to receive an upgrade to version 2.0 of
the TGS at no additional charge, and one customer has the right
to receive it at a discounted price. All of these customer
upgrade rights to receive the upgrades through version 2.0 of
the TGS are on a when and if available basis. We are not
obligated to provide upgrades for the two TGS units under
consignment programs for clinical and technical feedback. For
sales of TGS units to date, the costs to provide upgrades up to
and including the delivery of version 2.0 of the TGS are
estimated to not exceed $250,000 in total per customer TGS unit.
Payments received upon customer acceptance of TGS units are
recognized as deferred revenue until all related revenue
recognition criteria is satisfied. We anticipate ultimately
recognizing a positive margin on the sales of TGS units to date
including the satisfaction of the remaining upgrades through the
final deliverable of version 2.0 of the TGS, which is
anticipated to be in the first half of 2009, subject to
regulatory clearances or approvals. To date, deferred revenue
and deferred cost of revenue does not include any amounts
related to providing upgrades and enhancements to the TGS units.
If we are not able to deliver version 2.0 of the TGS, customers
would retain the original TGS unit sold and we would not be
obligated to refund the purchase price of the TGS unit.
We are in the process of developing version 2.0 of our TGS. If
completion of version 2.0 of our TGS unit is unsuccessful or
delayed, or regulatory clearances or approvals are denied or
delayed, it could have a material adverse impact on our results
of operations and financial position and we may be unable to
recognize any revenue associated with sales of our TGS. No right
of return exists on sales of TGS if we are unable to complete
and deliver version 2.0 of our TGS.
We have various license and royalty agreements which are more
fully discussed in Note 6 to the Financial
Statements section of this prospectus. Royalty payments
related to each of these existing agreements are anticipated to
range between 1% and 7% of future sales of our TGS units and/or
products and are recognized as cost of revenue as incurred.
These royalty payments are subject to certain minimum annual
royalty payments as shown in the Contractual
Obligations section below. These license and royalty
agreements are not expected to impact our future product
development efforts.
Net
Cash Used in Operating Activities
Net cash used in operating activities was $3.0 million for
the Predecessor period from January 1, 2004 through
November 11, 2004. Net cash used in operating activities
primarily reflects the net loss for the period, which was
reduced in part by depreciation and amortization, stock-based
compensation, accrued interest, and changes in operating assets
and liabilities.
Net cash used in operating activities was $279,000,
$5.0 million and $9.4 million for the period from
November 12, 2004 through December 31, 2004, and the
years ended December 31, 2005 and 2006, respectively. Net
cash used in operating activities was $6.3 million and
$9.7 million for the nine months ended September 30,
2006 and 2007, respectively. Net cash used in operating
activities primarily reflects the net loss for those periods,
which was reduced in part by depreciation and amortization,
stock-based compensation, accrued interest, and changes in
operating assets and liabilities. Included in the changes in
operating assets for the year ended December 31, 2006 and
the nine months ended September 30, 2007, are $700,000 and
$1.3 million, respectively, of increases to the deferred
revenue balance partially offset by increases in the deferred
cost of revenue balance. The increases to the deferred revenue
balance are primarily related to unit sales of our TGS. Deferred
revenue related to unit sales of our TGS will be recognized in
the statement of operations upon satisfaction of all related
revenue recognition criteria.
Net
Cash Provided by or Used in Investing Activities
Net cash provided by investing activities was $273,000 for the
Predecessor period from January 1, 2004 through
November 11, 2004. Net cash provided by investing
activities primarily relates to the sale of assets during the
period.
Net cash provided by (used in) investing activities was
$(61,000), $(10.8 million), $5.4 million,
$5.0 million, and $(6.3 million) for the period from
November 12, 2004 through December 31, 2004, the years
ended December 31, 2005 and 2006, and the nine months ended
September 30, 2006 and 2007, respectively.
57
Net cash used in investing activities was primarily related to
purchase of short-term investments and, to a lesser extent, the
acquisition of intangible assets and property and equipment
partially offset by the proceeds from the sale of short-term
investments. Net cash provided by investing activities was
primarily related to the proceeds from the sale of short-term
investments partially offset by the license of intellectual
property rights from IBM and, to a lesser extent, the purchase
of investments and property and equipment.
Net
Cash Provided by or Used in Financing Activities
Net cash provided by financing activities was $3.2 million
for the Predecessor period from January 1, 2004 through
November 11, 2004. Net cash provided by financing
activities primarily relates to the issuance of short term loans
during the period.
Net cash provided by (used in) financing activities was
$2.3 million, $20.0 million, $(7,000), $1,000, and
$27.9 million for the period from November 12, 2004
through December 31, 2004, the years ended
December 31, 2005 and 2006, and the nine months ended
September 30, 2006 and 2007, respectively. Net cash
provided by our financing activities was primarily attributable
to the issuance of Series A redeemable convertible
preferred stock in the period from November 12, 2004
through December 31, 2004, the issuance of Series B
redeemable convertible preferred stock in the year ended
December 31, 2005, and the issuance of Series C
redeemable convertible preferred stock in the nine months ended
September 30, 2007. The net cash provided by financing
activities for the nine months ended September 30, 2007 was
partially offset by deferred initial public offering costs
incurred and capitalized during the period.
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 the next
several years as we develop version 2.0 of our TGS and a modular
implant system, expand our sales and marketing capabilities in
the orthopedics product market, and continue to develop the
corporate infrastructure required to sell and market our
products and operate as a publicly traded company. We also
expect to experience increased cash requirements for inventory
and property and equipment in conjunction with the expected
commercial launch of version 2.0 of our TGS and modular implant
system in the first half of 2009.
We believe the net proceeds from this offering, together with
our cash, cash equivalents and investment balances and interest
income we earn on these balances will be sufficient to meet our
anticipated cash requirements for approximately the next
16-18 months. If our available cash, cash equivalents and
investment balances and net proceeds from this offering are
insufficient to satisfy our liquidity requirements, we may seek
to sell additional equity or debt securities or enter into a
credit facility. The sale of additional equity and debt
securities may result in dilution to our stockholders. If we
raise additional funds through the issuance of debt securities,
these securities will have rights senior to those of our common
stock and could contain covenants that would restrict our
operations. We may require additional capital beyond our
currently forecasted amounts. Any such required additional
capital 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, such as version 2.0 of our
TGS and modular implant system, we are unable to estimate the
exact amounts of capital outlays and operating expenditures
necessary to complete the development of the products and
successfully deliver a commercial product to the market. Our
future capital requirements will depend on many factors,
including but not limited to the following:
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the success of our research and development efforts;
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the expenses we incur in selling and marketing our products;
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58
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the costs and timing of regulatory clearance;
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the revenue generated by sales of our future products;
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the rate of progress and cost of development activities;
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the emergence of competing or complementary technological
developments;
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the costs of filing, prosecuting, defending and enforcing any
patent or license claims and other intellectual product rights,
or participating in litigation-related activities; and
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the acquisition of businesses, products and technologies,
although we currently have no understanding, commitments or
agreements relating to any of these types of transactions.
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Contractual
Obligations
The following table summarizes our outstanding contractual
obligations as of December 31, 2006 and the effect those
obligations are expected to have on our liquidity and cash flows
in future periods:
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Payments Due by Period
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December 31,
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After
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Contractual Obligations
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Total
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2007
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2008-2009
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2010-2011
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2011
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Operating lease real estate
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$
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977,000
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$
|
202,000
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$
|
423,000
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|
$
|
352,000
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|
$
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Capital leases furniture
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78,000
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54,000
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|
24,000
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IBM deferred license fee(1)
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4,000,000
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4,000,000
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Minimum royalty payments licenses
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4,492,000
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584,000
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1,201,000
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|
1,260,000
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|
1,447,000
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Total
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$
|
9,547,000
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$
|
4,840,000
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$
|
1,648,000
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|
$
|
1,612,000
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|
|
$
|
1,447,000
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The table above reflects only payment obligations that are fixed
and determinable and does not give effect to contingent
obligations, such as dividend, redemption and liquidation rights
on our shares of redeemable convertible preferred stock
outstanding. Our commitments for operating leases relate to the
lease for our headquarters in Ft. Lauderdale, Florida. Our
commitments for minimum royalty payments relate to payments
under various licenses and sublicenses as discussed in the
Financial Statements section of this prospectus.
There has been no material change in these obligations other
than scheduled payments through September 30, 2007.
Additionally, MAKO does not have any significant purchase
commitments or obligations.
(1) In March 2006, we entered into a license agreement with
IBM in exchange for a payment of $2.0 million upon
execution of the agreement and pursuant to which we are required
to make a $4.0 million payment to IBM upon the initial
public offering of our common stock or other change in control
events (e.g., acquisition or change in voting ownership
greater than 50.01%). For purposes of disclosure in this table,
we have assumed that the $4.0 million payment to IBM will
occur upon the closing of our initial public offering in 2008.
Recent
Accounting Pronouncements
In July 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation
of FASB Statement No. 109
, or FIN 48. FIN 48
clarifies the accounting for uncertainty in income taxes by
prescribing the recognition threshold a tax position is required
to meet before being recognized in the financial statements. It
also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 is effective for fiscal
years beginning after December 15, 2006. We adopted the
provisions of FIN 48 effective January 1, 2007. No
cumulative adjustment to our accumulated deficit was required
upon adoption.
59
In September 2006, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 108,
Considering the
Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements
, or
SAB 108. SAB 108 provides guidance on the
consideration of the effects of prior year misstatements in
quantifying current year misstatements for the purpose of a
materiality assessment. SAB 108 establishes an approach
that requires quantification of financial statement errors based
on the effects on each of our balance sheets and statement of
operations and the related financial statement disclosures. We
adopted SAB 108 effective January 1, 2007. We have
determined that the adoption of SAB 108 had no material
effect on our results of operations and financial position.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157,
Fair Value
Measurements
, or SFAS 157. SFAS 157 provides
guidance for using fair value to measure assets and liabilities.
It also responds to investors requests for expanded
information about the extent to which companies measure assets
and liabilities at fair value, the information used to measure
fair value, and the effect of fair value measurements on
earnings. SFAS 157 applies whenever other standards require
(or permit) assets or liabilities to be measured at fair value,
and does not expand the use of fair value in any new
circumstances. SFAS 157 is effective for financial
statements issued for fiscal years beginning after
November 15, 2007 and is required to be adopted effective
January 1, 2008. We are currently evaluating the effect
that the adoption of SFAS 157 will have on our results of
operations and financial position.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159,
The Fair Value Option for
Financial Assets and Financial Liabilities Including
an amendment of FASB Statement No. 115
, or
SFAS 159. SFAS 159 provides companies with an option
to report selected financial assets and liabilities at fair
value. The objective of SFAS 159 is to reduce both
complexity in accounting for financial instruments and the
volatility in earnings caused by measuring related assets and
liabilities differently. Most of the provisions in Statement 159
are elective; however, the amendment to FASB Statement
No. 115,
Accounting for Certain Investments in Debt and
Equity Securities
, applies to all entities with
available-for-sale and trading securities. SFAS 159 is
effective as of the beginning of an entitys first fiscal
year beginning after November 15, 2007. We are currently
evaluating the effect that the adoption of SFAS 159 will
have on our results of operations and financial position.
Off-Balance
Sheet Arrangements
We do not have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures
or capital resources.
Quantitative
and Qualitative Disclosure of Market Risks
Our exposure to market risk is confined to our cash, cash
equivalents and short-term investments which have maturities or
interest reset dates of less than one year. The goals of our
investment policy are preservation of capital, fulfillment of
liquidity needs and fiduciary control of cash and investments.
We also seek to maximize income from our investments without
assuming significant risk. To achieve our goals, we maintain a
portfolio of cash equivalents and investments in a variety of
securities of high credit quality. The securities in our
investment portfolio are not leveraged, are classified as
available for sale and are, due to their very short-term nature,
subject to minimal interest rate risk. We currently do not hedge
interest rate exposure. Because of the short-term maturities of
our investments, we do not believe that an increase in market
rates would have any material negative impact on the value of
our investment portfolio.
60
BUSINESS
Overview
We are a medical device company that markets our advanced
robotic-arm solution and orthopedic implants for minimally
invasive orthopedic knee procedures. We offer MAKOplasty, an
innovative, restorative surgical solution that enables
orthopedic surgeons to consistently, reproducibly and precisely
treat patient-specific, early to mid-stage osteoarthritic knee
disease. MAKOplasty is performed using our proprietary,
U.S. Food and Drug Administration, or FDA, cleared Tactile
Guidance System, or TGS. Our TGS includes an interactive tactile
robotic-arm platform that utilizes tactile-guided robotic-arm
technology and patient-specific visualization to prepare the
knee joint for the insertion and alignment of our resurfacing
implants through a keyhole incision in a minimally invasive,
bone-preserving and tissue-sparing procedure. We believe
MAKOplasty will empower physicians to address the needs of the
large and growing, yet underserved population of patients with
early to mid-stage osteoarthritic knee disease who desire a
restoration of quality of life and reduction of pain, but for
whom current surgical treatments are not appropriate or
desirable due to the highly invasive nature of such procedures,
the slow recovery and the substantial costs of rehabilitation,
medication and hospitalization.
Unlike conventional knee replacement surgery, which requires
extraction and replacement of the entire joint, MAKOplasty
enables resurfacing of the specific diseased compartment of the
joint, preserving significantly more soft tissue and healthy
bone of the knee. We believe localized resurfacing can be
optimized using the robotic-arm technology of our TGS which
offers consistently reproducible precision to surgeons to
achieve optimal implant placement and alignment. We believe that
the tissue-sparing and bone-conserving techniques enabled with
MAKOplasty can offer substantial advantages to patients,
surgeons and healthcare providers. Because of the minimally
invasive nature of the procedure, smaller incisions are
required, which lead to less tissue loss and faster recoveries,
thereby reducing the overall costs of rehabilitation, medication
and hospitalization. In addition, because more of the
patients natural anatomy is preserved and less trauma is
inflicted on the knee, we believe that patients who undergo
MAKOplasty have the potential to experience better functionality
and more natural knee movements, thereby achieving an improved
post-operative quality of life. Finally, because our TGS is easy
to use, we believe that our MAKOplasty solution makes
resurfacing procedures accessible to orthopedic surgeons with a
broad range of training and skills and has the potential to lead
to greater adoption of knee resurfacing solutions for early to
mid-stage osteoarthritis of the knee.
In May 2005, we obtained 510(k) marketing clearance from the FDA
for a surgical visualization system with a robotic arm that was
an earlier version of our TGS. In November 2005, we obtained
510(k) marketing clearance from the FDA for version 1.0 of our
TGS. In January 2008, we received 510(k) marketing clearance
from the FDA for version 1.2 of our TGS, which incorporates
several upgrades developed and introduced since the commercial
introduction of version 1.0. We plan to commercially launch
version 1.2 in the first quarter of 2008 and version 2.0 of our
TGS in the first half of 2009, subject to regulatory clearances
or approvals, which we may not receive. As part of the sales
contract, existing TGS customers are entitled to receive a
replacement version 2.0 unit at no additional charge, with the
exception of one customer who has the right to receive it at a
discounted price. As of January 1, 2008, we have
commercially installed six TGS units and installed two
additional units for research and evaluation purposes. As of
January 1, 2008, 181 MAKOplasty procedures have been
performed since commercial introduction in June 2006. We are
currently conducting a post-market study of MAKOplasty, which is
aimed at demonstrating the accuracy of the placement and
alignment of our implants and the clinical efficacy of the
MAKOplasty procedure. We anticipate that preliminary results of
this study will be available in the first quarter of 2008. We
have an intellectual property portfolio of more than 200
licensed or owned patents and patent applications relating to
the areas of computer-assisted surgery, robotics, haptics and
implants.
To date, we have generated revenues primarily from the sale of
implants and disposable products, the majority of which is from
a single customer, Holy Cross Hospital, Inc. Although we have
generated some revenue from sales of our current version of the
TGS, we are unable to recognize such revenue until we have
fulfilled our contractual obligation to deliver version 2.0 of
our TGS to customers.
61
Industry
Background
The
Growing Osteoarthritis Problem
Osteoarthritis is a common medical condition that leads to the
degeneration of joints from aging and repetitive stresses,
resulting in a loss of the flexibility, elasticity and
shock-absorbing properties of the joints. As osteoarthritis
disease progresses, the cartilage and other soft tissues
protecting the surfaces of key joints in the body, including
knees, hips and shoulders, deteriorate, resulting in substantial
and chronic joint pain, numbness and loss of motor function.
This pain can be overwhelming for patients and can have
significant physical, psychological, quality of life and
financial implications. According to estimates by the National
Institutes of Health, or NIH, 21 million people in the
U.S., or 12.1% of the U.S. population age 25 and
older, suffer from osteoarthritis.
Compelling demographic trends, such as the growing, aging and
more active population and rising obesity rates are expected to
be key drivers in the continued growth of osteoarthritis. The
NIH projects that by 2030, 20% of Americans, or approximately
72 million people, will be 65 years or older and will
be at high risk of developing osteoarthritis. According to
Frost & Sullivan, it is estimated that in 2007 there
are 73.7 million obese people in the U.S. and by 2012,
as many as 88 million Americans will suffer from obesity.
According to the American Journal of Epidemiology, obese women
had nearly four times the risk of suffering from osteoarthritis
of the knee as non-obese women, and obese men had nearly five
times the risk of suffering from osteoarthritis of the knee as
non-obese men.
For the most severe cases of osteoarthritis, in which patients
suffer from extreme pain, reconstructive joint surgery may be
required. Reconstructive joint surgery involves the removal of
the bone area surrounding the affected joint and the insertion
of one or more manufactured implants as a replacement for the
affected bone. According to Knowledge Enterprises, Inc., the
joint replacement product market as a whole, including knees,
hips, elbows, wrists, digits and shoulders, is estimated to have
approached $9 billion worldwide in 2004. According to
Frost & Sullivan, the U.S. joint implant market was
nearly $6 billion in 2006, and is expected to grow to
nearly $10 billion by 2013, with knee and hip implant
systems representing the two largest sectors.
Market
for Osteoarthritis of the Knee
The knee joint consists of the medial, patellofemoral and
lateral compartments. As depicted below by the shaded diseased
areas of the knee joint, osteoarthritis of the knee usually
begins with the deterioration of the soft tissue and cartilage
in the medial compartment and progresses to either or both the
patellofemoral and lateral compartments. The progression of
osteoarthritis of the knee can take many years, and even in the
early-stages, it can result in substantial pain for the patient
and a reduction in the quality of life.
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Early-Stage
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Mid-Stage
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Late-Stage
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62
According to Datamonitor, in 2006 there were approximately
15 million people in the U.S. with osteoarthritis of
the knee. The growth of osteoarthritis of the knee among the
U.S. population is expected to accelerate as the
increasingly active population ages and obesity rates increase.
As a result of this substantial clinical need, the market for
orthopedic knee procedures in the U.S. has experienced
tremendous growth over the past decade. According to
Frost & Sullivan, the U.S. market for total knee
replacement and knee resurfacing procedures was greater than
$2.7 billion in 2006, and is expected to grow at
approximately 8% per year to more than $4.6 billion by
2013. In addition to the substantial costs of the procedure
itself, total knee replacement and resurfacing procedures
represent significant incremental costs to the healthcare
system. These include costs associated with rehabilitation,
medication, hospitalization and, over the long-term, costs
incurred as a result of replacements or revisions that may be
required due to wear and tear or improper placement.
Current
Orthopedic Knee Arthroplasty Approaches
To date, arthroplasty options for treating osteoarthritis of the
knee have been limited to either total knee replacement surgery
or knee resurfacing procedures.
Total Knee Replacement.
Currently, most people
who choose to surgically address osteoarthritis of the knee
elect to undergo total knee replacement surgery. Total knee
replacement is a highly invasive surgical procedure in which a
patients diseased knee joint is removed and replaced with
a manufactured replacement knee joint comprised of several
components that attempt to mimic the normal function of the knee
joint. The procedure requires a large incision ranging from 4 to
12 inches to accommodate the complex scaffold of cutting
blocks and jigs required to execute the blunt, planar cuts
involved in total knee replacement surgery and to prepare the
knee for insertion of the large implants. Both internal and
external soft-tissue damage is significant in this procedure as
the entire knee joint is fully exposed and much of the bone and
tissue surrounding it are removed. The bone cuts are also
extensive, presenting a large surface area for bone bleeding.
The implants are typically manufactured out of metal, ceramic or
polymers and have an approximate useful life of between 15 and
20 years before they usually are revised or replaced.
The figures below illustrate a conventional total knee
replacement surgery and implant:
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Total Knee Replacement Surgery
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Total Knee Implant
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Despite its long history as an established and effective
orthopedic procedure, total knee replacement surgery is not an
ideal option for many patients suffering from early to
mid-stage, unicompartmental or multicompartmental degeneration
of the knee. Some of the principal limitations of total knee
replacement surgeries include:
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highly invasive nature of the surgical procedure, which requires
a large incision ranging from 4 to 12 inches to prepare and
implant the large implants;
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63
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significant damage to the bone and tissue surrounding the joint;
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substantial bone bleeding;
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required removal of all three compartments of the knee,
regardless of which compartments are actually diseased;
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extended and often painful recovery time and rehabilitation;
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reduced mobility and range of motion; and
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likely implant replacement or revision in approximately 15 to
20 years when the implant reaches the end of its useful
life.
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For these and other reasons, many people who are eligible for
total knee replacement surgery elect not to undergo or postpone
the procedure, choosing instead to suffer significant pain and
limited mobility. According to a 2006 Duke University survey of
published literature, which was unable to independently confirm
the validity of the surveyed data, it is estimated that
approximately 92% of men and 87% of women who were candidates
for total knee replacement surgery declined to undergo the
procedure.
Unicompartmental Knee
Resurfacing.
Unicompartmental knee resurfacing is
a less invasive arthroplasty procedure in which only the
arthritic region of the knee is removed and a small implant is
inserted to resurface the diseased compartment of the knee.
Unicompartmental knee resurfacing procedures are ideal for
patients with early to mid-stage osteoarthritis and are aimed at
sparing the healthy bone, cartilage and other soft tissues
typically removed in a conventional total knee replacement
procedure. Today, other than those performed by surgeons using
MAKOplasty, these procedures are performed manually and require
a level of training, expertise and precision that significantly
exceeds what is required for the typical total knee replacement
surgery. Orthopedic Network News has estimated that more than
49,000 unicompartmental knee resurfacing procedures were
performed in 2006 in the U.S.
Unicompartmental knee resurfacing is a potentially more
desirable procedure than total knee replacement surgery for
patients suffering from early to mid-stage degeneration of the
knee because it preserves more of the patients natural
anatomy and results in less trauma to the patient. As a result,
patients experience less tissue loss and faster recoveries.
However, despite the potential clinical, quality of life and
cost benefits of the procedure, it has achieved only limited
adoption to date, in part, as a result of the following
limitations that make performing the procedure very difficult:
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the restricted room to maneuver and impeded line of sight due to
the smaller incision and minimally invasive nature of the
procedure which make it difficult to insert, place and align the
implant properly; and
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the complex process of removing portions of the bone and
resurfacing the knee joint in preparation for the implant.
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The difficulties in manually executing a unicompartmental knee
resurfacing procedures can result in inaccurate implant
alignment, which can lead to reduced range of motion and
premature implant failure. In light of the difficulties, many
physicians choose not to recommend the procedure and many
patients choose either to live with the osteoarthritic pain or
to undergo total knee replacement surgery. According to Medtech
Insight, LLC, some experts estimate that between 5% to 20% of
patients who underwent total knee replacement surgeries had
osteoarthritis in only one compartment of the knee, which we
believe may qualify them as appropriate candidates for a
unicompartmental implant.
Introduction
of Minimally Invasive Surgery
Over the past thirty years, one of the most significant medical
trends has been the development of minimally invasive methods of
performing surgical procedures. Compared to traditional, open
surgical techniques, minimally invasive techniques offer
potentially superior benefits for patients, surgeons and
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hospitals. For patients, these techniques result in reduced
procedure-related pain and less scarring at the incision site
leading to faster recovery times and shorter post-operative
hospital stays, as well as better aesthetic outcomes. For the
surgeon, these techniques reduce procedure-related complications
and have the potential to reduce risks associated with more
invasive procedures. For the hospital, these procedures can
result in reduced hospital stays for faster recovery times and
lower rates of complications.
Despite the many benefits of minimally invasive techniques,
however, they also present several notable limitations due to
the restricted surgical space, including:
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restricted vision at the anatomical site;
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cumbersome handling of surgical instruments;
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difficult hand-eye coordination; and
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limited tactile feedback.
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Minimally invasive approaches have seen substantial adoption in
various surgical fields where procedures can be performed within
existing anatomical cavities of the human body. However, because
of the limitations of minimally invasive techniques, they have
been less successful for complex surgical procedures requiring
cutting and replacement of large anatomical parts that
nevertheless require precision and control.
Introduction
of Robotics into Other Surgical Fields
We believe that the application of robotics technologies in
minimally invasive surgical procedures represents the next
generation in the evolution of the surgical technique. These
technologies are being developed to provide surgeons with a more
precise, repeatable and controlled ability to perform complex
procedures by offering increased visual acuity and greatly
improved tactile feedback. These characteristics empower
surgeons to better control their surgical technique and limit
the margin of error.
With the assistance of robotics technology, an increasing number
of surgeons have been able to perform procedures previously
limited to a small subset of highly-skilled surgeons. In
addition, robotics technology has allowed these procedures to be
performed in a more minimally invasive manner, requiring only
small incisions, which result in reduced procedure related
trauma, fewer infections and post-procedure complications, and
reduced recovery and hospitalization times.
To date, robotics technology has been successfully applied in a
variety of diverse fields including urology, gynecology,
cardiothoracic surgery and catheter-based interventional
cardiology and radiology. The success of robotics technologies
in these applications has led to the growing adoption and
commercialization of these technologies in the medical world.
The
Use of Robotics in Orthopedic Surgical Procedures
Despite the success of robotics technology in other medical
fields, only limited applications have been available in the
field of orthopedics to date. Some orthopedic companies have
introduced instruments that are smaller than their predecessors,
which are marketed as minimally invasive, but these
instruments still require large incisions to perform the
surgical procedure. Orthopedic companies have also introduced
surgical navigation systems that are designed for use in open
procedures. However, while these surgical navigation systems do
provide a minimally invasive means of viewing the anatomical
site, their benefits are marginal because they do not improve a
surgeons ability to make consistently reproducible and
precise surgical movements through a small keyhole incision.
We believe that the limitations of currently available surgical
options for knee disease have created a sizeable market for
treatment of a large, growing, and underserved population of
patients with early to mid-stage osteoarthritis of the knee. We
believe that robotics technology is the key to enabling surgeons
to perform
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the kind of minimally invasive knee surgery that results in
restoration of function and improved post-operative outcomes for
such patients.
The MAKO
Solution
We have designed our MAKOplasty solution to provide the
consistently reproducible precision, accuracy and dexterity
necessary for a surgeon to successfully perform minimally
invasive orthopedic arthroplasty procedures on the knee despite
a limited field of vision in a confined anatomical space. Our
MAKOplasty solution is composed of two critical components: the
TGS, which consists of the proprietary tactile robotic-arm and
our patient-specific visualization system that provides both
pre-operative and intra-operative guidance to the surgeon, and
the MAKO implant portfolio which is designed for minimally
invasive restoration of the diseased compartment of the joint.
By integrating robotic-arm and patient-specific visualization
technology with the touch and feel of the surgeons skilled
hand, MAKOplasty is designed to enable a level of surgical
precision and accuracy that is beyond the scope of the typical
surgeons freehand capabilities, which we believe will
result in broad adoption of our technologies by orthopedic knee
surgeons and better outcomes for patients. We believe MAKOplasty
offers the following key benefits to patients, surgeons and
hospitals:
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Minimally Invasive Targeted Knee
Arthroplasty.
MAKOplasty enables surgeons to
isolate and resurface just the diseased compartment of the knee
joint through a minimally invasive keyhole incision, rather than
replacing the entire joint. The precision of our robotic-arm
technology makes such minimally invasive targeted treatment
possible by eliminating the complex scaffold of cutting blocks
and jigs that would otherwise be required to execute the blunt,
planar bone cuts and insert the large implants involved in
conventional total knee replacement surgery or a manually
executed resurfacing procedure. We believe that our solution
will make minimally invasive orthopedic procedures, like
unicompartmental resurfacing, a viable option for a greatly
expanded pool of patients and physicians.
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Consistently Reproducible Precision.
We
believe that MAKOplasty will reduce the variability of procedure
outcomes and increase efficacy through the consistently
reproducible precision provided by our computer-assisted and
tactile robotic-arm technology. We believe that the precision of
our cutting process and placement and alignment of implants
leads to significantly improved and reliable results, compared
to conventional, manually executed unicompartmental resurfacing
procedures. The surgeon retains control of the actual movements
of the robotic arm within a pre-established volume of space, the
tactile safety zone, which is tracked and bounded by
our TGS. We believe that the tactile safety zone lowers the risk
of surgical error, while the
3-D
visualization enables improved placement and alignment of the
implant. We believe that this consistently reproducible
precision will enable physicians to be trained in the use of
MAKOplasty in a relatively short period of time and also
increase the number of physicians who are willing and able to
perform unicompartmental resurfacing procedures.
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Ease of Use.
We believe that our TGS leverages
and complements the surgical skills and techniques already
familiar to the surgeon, while providing substantial incremental
control and precision that has not previously been possible. The
customized, patient-specific visualization system guides the
surgeon through each step of the surgical procedure, while the
tactile safety zone ensures that the surgeon does
not apply the bone cutting instrument beyond the intended area
of the knee joint.
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Improved Restorative Post-Operative
Outcomes.
Due to the minimally invasive nature of
the procedure, we believe that patients who undergo MAKOplasty
are likely to experience less tissue loss, less visible scarring
and a faster recovery, thereby reducing the cost of
rehabilitation, physical therapy, medication and
hospitalization. In addition, because more of the patients
natural anatomy is preserved and less trauma is inflicted on the
knee, patients who undergo MAKOplasty have the potential to
experience better mobility, comfort, range of motion and more
natural knee movements to achieve an improved post-operative
quality of life.
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Reduced Costs for Patients and Hospitals.
The
minimally invasive nature of the MAKOplasty solution aids
hospitals and patients in reducing costs by shortening hospital
stays and recovery periods and reducing the amount of
rehabilitation and medication.
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The comprehensive nature of the MAKOplasty solution also
provides hospitals with all the implants and disposable products
necessary to perform the procedures. We believe that our
complete knee arthroplasty solution represents a substantial
improvement over currently available approaches which we hope
will lead to rapid adoption in the marketplace.
The figure below illustrates a MAKOplasty unicompartmental
resurfacing procedure.
Our
Strategy
Our goal is to drive sales of our TGS and generate recurring
revenues through sales of implants, disposable products and
service contracts by establishing MAKOplasty as the preferred
surgical procedure for patients with early to mid-stage,
unicompartmental and multicompartmental degeneration of the
knee. We believe that we can achieve this objective by working
with hospitals to demonstrate key benefits of MAKOplasty, such
as consistently reproducible surgical precision, improved
post-operative outcomes and reduced healthcare costs. Our
strategy includes the following key elements:
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Focus on key physicians and thought leaders to encourage
early adoption of our MAKOplasty solution.
We plan to
initially focus our marketing efforts on key orthopedic surgeons
who currently perform the majority of unicompartmental knee
procedures or who are actively involved in the development of
minimally invasive orthopedic approaches. We also plan to focus
our marketing efforts on the hospitals with which these key
surgeons are affiliated and engage them to promote the benefits
of MAKOplasty. Our strategy is to convince hospitals that
through early adoption of MAKOplasty and purchase of our TGS,
they can reinforce their reputations as leading institutions for
the treatment of early to mid-stage osteoarthritis of the knee.
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Expand the market for unicompartmental knee
resurfacing.
We plan to expand the market for
unicompartmental knee resurfacing procedures by encouraging use
of the procedure for patients who, given only conventional
surgical alternatives, would have opted for total knee
replacement surgery or no surgery at all. Our current
application of MAKOplasty is for unicompartmental knee
resurfacing procedures using an inlay knee implant system. We
also plan to commercially introduce version 1.2 of our TGS for
use with not only inlay knee implants but also onlay knee
implants in the first quarter of 2008. The addition of onlay
knee implants to our offerings helps accommodate additional
patient profiles and surgeon preferences. We believe that the
potential benefits of our MAKOplasty solution and the
combination of these product offerings will facilitate our
efforts to expand and capture the market for unicompartmental
knee resurfacing.
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Drive volume sales of implants and disposable products for
installed TGS units
. Following the initial installation
of our TGS at a given hospital, we intend to expand the number
of orthopedic surgeons
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who use our TGS and work with the hospitals and their surgeons
to promote patient education about the benefits of MAKOplasty.
Our goal is to increase usage per system to drive higher volume
sales of our implants and disposable products.
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Expand our product offerings to multicompartmental
implants.
We believe that a key to growing our business
is expanding the application of MAKOplasty to resurfacing
procedures that address mid-stage multicompartmental
degeneration of the knee. This modular application of MAKOplasty
to multicompartmental resurfacing procedures will allow
orthopedic surgeons to treat degenerative osteoarthritis of the
knee from early-stage, unicompartmental degeneration through
mid-stage, multicompartmental degeneration with a single knee
implant system. To achieve this goal, we are developing the next
version of our TGS, which will include improved surgical
planning and execution software and customized bone cutting
instruments. We are also developing new modular implants, as
well as strengthening our intellectual property rights as
necessary to support these new offerings. We believe that this
expanded product offering should position us as a leading
company in the field of orthopedic knee procedures, offering a
complete range of minimally invasive solutions for the treatment
of osteoarthritis of the knee.
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Demonstrate the clinical and financial value proposition of
MAKOplasty.
We intend to collaborate with leading
surgeons and early-adopting hospitals through such programs as
the MAKOplasty Knee Center of Excellence to build clinical and
financial data which support the benefits of MAKOplasty. The
MAKOplasty Knee Center of Excellence is a program developed in
conjunction with participating hospitals to educate surgeons and
patients regarding the benefits of MAKOplasty. As part of the
collaborative program, participating hospitals maintain and
provide us with certain clinical and financial data that we use
to support the business case for the MAKOplasty solution. Our
goal is to establish clinical data supporting the safety and
efficacy of MAKOplasty unicompartmental resurfacing procedures,
as well as the accuracy and longevity of such implant
placements, while demonstrating to hospitals the top and bottom
line financial benefits of our MAKOplasty solution.
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Our
Products
Our proprietary technology consists of two components: our TGS
and our knee implants for use in the resurfacing procedures.
Tactile
Guidance System
The centerpiece of MAKOplasty is the TGS, a proprietary tactile
robotic-arm and patient-specific visualization system that
provides both pre-operative and intra-operative guidance to the
surgeon, enabling minimally invasive, tissue-sparing bone
removal and implant insertion. Our TGS consists of two elements:
a tactile robotic arm utilizing an integrated bone-cutting
instrument and a patient-specific visualization component.
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The figures below identify the key components of the tactile
robotic arm and stereo tracking system and instruments:
Tactile Robotic-Arm System.
The tactile robotic-arm
system consists of the key components identified in the figures
above and incorporates the following specifications, features
and benefits:
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Tactile Robotic Arm
The tactile robotic arm
is designed to respond fluidly to movements initiated by the
surgeon operating the bone cutting instrument. We have designed
the robotic arm with five degrees of freedom which enables the
robotic arm to achieve substantial dexterity and range of
movement. The robotic arm helps enforce a tactile safety zone
that is established by the patient-specific visualization system
by providing tactile resistance when the boundaries of the
tactile safety zone are reached. This tactile resistance helps
ensure that the surgeon does not apply the bone cutting
instrument beyond the intended area of the knee joint.
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Controller
The controller is the electronic
hardware and firmware component of our computing system which
interfaces with our proprietary surgical planning and execution
software to allow the surgeon to safely guide the tactile
robotic arm. The controller governs the basic, low-level
functions of the tactile robotic arm, such as the tactile
constraints and the safety circuit.
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Stereo Tracking System Camera and Instruments
During a MAKOplasty procedure, the boundaries of the tactile
safety zone are tracked continuously through a series of images
transmitted to the computer system by an infrared stereo
tracking system, which consists of a special camera that is
directed toward a series of spheres and arrays placed in the
patients joint by bone pins. The tracking system assists
the TGS in locating and physically tracking the patients
anatomy and coordinating its real-time position with the cutting
instrument of the robotic arm. It has a refresh rate of
approximately 30 60 hz (cycles/second), providing
the TGS with a sufficient flow of information regarding
movements by both the patient and the robotic arm to ensure
optimal cutting and placement. Our TGS is able to adjust for any
body movements and to communicate such adjustments to the
robotic arm, which responds to such feedback at rates up to
2,000 hz (cycles/second). As a result, the surgeon can freely
move the robotic arm within the defined space, but encounters
tactile resistance as the boundaries of such space are reached.
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End Effector
The end effector is the
mechanical component by which the bone cutting instrument is
attached to the tactile robotic arm. It is designed to ensure
the secure placement of the bone cutting instrument, while
providing the flexibility necessary for the surgeon to
manipulate the instrument.
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Bone Cutting Instrument with Disposable Cutting
Tip
The bone cutting instrument is integrated
into the tactile robotic arm at the end effector. This
instrument is composed of a high-speed motor and a component
that houses a variety of single-use bone cutting tips. The
design of the bone cutting instrument allows the surgeon to grip
it in a manner similar to holding a pen-like cutting tool,
making it easy to manipulate the instrument in the
patients anatomy. The cutting tip is the disposable end
tip of the bone cutting instrument that makes contact with the
knee joint and actually removes the bone for placement of the
implant in accordance with the pre-operative plan. In
combination with our tactile robotic arm, the bone cutting
instrument enables the smooth precision and accuracy necessary
for resurfacing procedures.
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Portable Base Console
The base component of
our tactile robotic arm is a mobile unit that enables the
portability of the tactile robotic arm from one operating room
to another. The base controller houses the controller and
various electrical and mechanical components that help power the
tactile robotic arm. Its design enables the console to be
situated next to the patient during surgery and the tactile
robotic arm to be conveniently positioned over the
patients anatomy.
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The figure below identifies the key components of the
patient-specific visualization system:
Patient-Specific Visualization System.
Our
patient-specific visualization system is a vital part of our
ability to deliver minimally invasive surgical procedures for
the knee. The surgical team uses our system pre-operatively to
plan and intra-operatively to guide the surgical procedure. It
consists of the key components identified in the figure above
and incorporates the following specifications, features and
benefits:
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Surgical Planning and Execution Software
Our
surgical planning and execution software, which is integrated
into our patient-specific visualization system, is used during
the pre-operative surgical planning process to visualize and map
the exact portion of bone to be removed and resurfaced, define
the anatomical boundaries of the tactile safety zone and plan
the optimal placement and alignment of our implants. During the
procedure, the visualization system guides the surgeon through
each specific, well-defined surgical technique and displays in
real time each current and planned surgical activity.
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Tactile Safety Zone
While the robotic arm
enforces a tactile safety zone by providing tactile resistance
when the boundaries of the tactile safety zone are reached, our
patient-specific visualization system provides a visual
representation of the tactile safety zone and provides
additional visual and auditory cues when the boundaries of such
tactile safety zone are reached. The combination of this tactile
resistance and patient-specific visualization helps ensure that
the surgeon does not apply the bone cutting instrument beyond
the intended area of the knee joint.
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Instrument Locator
The instrument locator
provides visual guidance on the position of the bone cutting
instrument and other surgical instruments in relation to the
patients anatomy.
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Monitors
Prior to surgery, patients undergo a
conventional CT-scan that captures an image of the diseased knee
joint. This CT-image is uploaded to the patient-specific
visualization system, which then processes the image and
displays a
3-D
volume
in space corresponding to the implant shape and placement
overlaid onto the CT-image of the patients knee joint.
This patient-specific visualization of our implant overlaid onto
an image of the patients actual knee joint helps the
surgeon to pre-operatively plan the procedure, by providing
information which enables the surgeon to determine the optimal
placement and alignment of the implant and establishing the
boundaries of the tactile safety
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zone. During surgery, each monitor projects an active
3-D
representation of the patients actual knee joint, showing
the areas of the bone that are actually removed as the procedure
progresses. Various fields of view and angles are made available.
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Mobile Base
The base component of our
visualization system is a mobile unit that enables the
portability of the patient-specific visualization system from
one operating room to another. It houses our computer hardware
and our surgical planning and execution software and various
electrical and mechanical components that help power the
visualization system.
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Version
1.0 of the Tactile Guidance System
In November 2005, we obtained 510(k) marketing clearance from
the FDA for version 1.0 of our TGS for use with an inlay knee
implant system, as described below. We have subsequently
developed and introduced several upgrades to our TGS, including
improvements to our surgical planning software as well as
changes to certain instrumentation to make the device easier to
use. We determined that these modifications did not require the
submission of a new 510(k) application.
Version
1.2 of the Tactile Guidance System
In January 2008, we obtained 510(k) marketing clearance from the
FDA for version 1.2 of our TGS. We currently anticipate that
Version 1.2, which features new surgical planning software
applications and instrumentation necessary to support
unicompartmental resurfacing procedures using a tibial onlay
knee implant system, will be commercially available in the first
quarter of 2008. Version 1.2 also reflects further
refinement of the basic instrumentation set and features a
customized bone cutting instrument.
Future
Versions of the Tactile Guidance System
We are also developing version 2.0 of our TGS. We expect that
version 2.0 will represent an important expansion from the first
generation of our TGS, enabling application of MAKOplasty to
multicompartmental resurfacing procedures, allowing orthopedic
surgeons to treat degenerative osteoarthritis from early-stage,
unicompartmental degeneration through mid-stage,
multicompartmental degeneration with a modular knee implant
system. In addition, we currently plan to incorporate in
version 2.0 the following improvements, which we believe will
allow us to offer the benefits of MAKOplasty to more patients:
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improved dexterity and range of motion in the robotic arm to
allow additional degrees of freedom in the movement of the
robotic arm;
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physical integration of the patient-specific visualization
system, robotic arm, bone cutting instrument, and electronic
components;
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improvement of the tracking system for monitoring movements by
the patient and the robotic arm;
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intelligent implant planning features that will aid the surgeon
in achieving optimal patient-specific alignments;
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redesign of certain components to make them more accessible for
service repairs and easier to replace; and
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sophisticated industrial design and state-of-the art user
interface.
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We plan to commercially release version 2.0 of our TGS in the
first half of 2009, subject to regulatory clearances or
approvals, which we may not receive. In addition, we intend to
apply for a European Union CE marking.
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Knee
Implants
Inlay
Implant for Use in Unicompartmental Procedures
The second component of MAKOplasty is our implant portfolio that
is designed for insertion in a minimally invasive manner. We
currently offer an inlay knee implant system for
unicompartmental resurfacing procedures. The inlay knee implant
system is composed of a rounded, anatomically-shaped femoral
component that attaches to the sculpted surface of the femur and
a flat polymer component that fits into a pocket
that has been sculpted in the tibial bone by the TGS. Both the
femoral and tibial components are offered in multiple sizes to
best accommodate the size and shape of the patients knee.
Patients with relatively good tibial bone quality, including a
sufficiently thick and appropriately located bed of hardened
tibial bone, are generally candidates for our inlay implants.
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Inlay Implant
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Onlay Implant
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Post-operative
Inlay Implant
Placement
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Post-operative
Onlay Implant
Placement
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Onlay
Implant for Use in Unicompartmental Procedures
We received 510(k) marketing clearance for version 1.2 of our
TGS from the FDA in January 2008 Version 1.2 of our TGS can be
used with either our inlay or onlay knee implant systems. The
addition of onlay knee implants to our offerings helps
accommodate different patient profiles and surgeon preferences.
The MAKO onlay knee implant system consists of a femoral
component and a flat polymer component that is backed by a metal
support. The metal support is placed horizontally on a planar
surface prepared on the tibia by the TGS, rather than fitted
into a pocket of the tibia. The onlay knee implant system is
designed to
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accommodate patients whose tibial bone is unable to support a
pocket insertion due to the lack of a sufficiently thick and
appropriately located bed of hardened tibial bone. We plan to
offer both the femoral and tibial components in multiple sizes
to best accommodate the size and shape of the patients
knee.
Because of our TGSs technical design and programming, only
our knee implant systems may be used effectively with our TGS.
In addition, purchasers of our TGS are contractually required to
purchase all implants and disposable products used in MAKOplasty
procedures from us.
Modular
Implants for Use in Multicompartmental Procedures
We are currently in the process of developing a proprietary
modular knee implant system for use with version 2.0 of our TGS
which we expect to offer on a commercial basis in the first half
of 2009, subject to the receipt of regulatory clearance or
approval. This line of implants would allow an orthopedic
surgeon to treat degenerative osteoarthritis of the knee from
early-stage, unicompartmental degeneration through mid-stage,
multicompartmental degeneration with a modular implant system.
We believe that modular components are key to the successful
execution of minimally invasive knee surgeries because they can
be more easily inserted into the knee joint through smaller
incisions than a single, complete device. They can also be
positioned independently to better accommodate the specific
contours of the patients anatomy. We are planning
development of the modular knee implant system for targeted
release in the first half of 2009, subject to regulatory
clearance or approval. We expect to seek 510(k) marketing
clearance from the FDA, but it is possible that pre-market
approval, or PMA, may be required if the new implant is not
eligible for 510(k) marketing clearance, in which case our
commercial release would likely be delayed. See
Regulatory Requirements of the U.S. Food and
Drug Administration.
Disposable
Products
Our TGS utilizes disposable products such as the arrays, bone
pins and spheres used in our tracking system, irrigation clips
and tubes that cool the cutting instruments, a boot used to
position the patients leg, drapes to cover the robotic arm
and other items that require disposal after each use.
Disposables are not only a source of recurring revenue, but also
an opportunity to differentiate our product platform from those
of less comprehensive solutions offered by competitors.
Future
Potential Applications
We believe that with further research and development, our
robotic-arm technology has the potential to serve as a platform
technology with applications in other areas of the body, such as
the hip, shoulder and spine. However, we are not currently
pursuing applications of MAKOplasty outside of the knee, and to
date, we have not conducted any research or development for
these other potential applications. Moreover, our products do
not have marketing clearance from the FDA or any other
regulatory approvals for applications outside of the knee.
Sales and
Marketing
We are currently building a sales and marketing organization
comprised of a direct sales force and a network of independent
orthopedic product agents and distributors, who primarily
generate leads for us, to commercialize and market MAKOplasty in
the U.S. As of January 1, 2008, our sales and
marketing group had a total of 26 employees, including six
direct sales representatives, who are responsible for sales and
marketing activity throughout the U.S. We expect to
increase the number of sales and marketing personnel as we
continue to expand our business.
Our sales and marketing goals are to drive capital equipment
sales of our TGS and generate recurring revenues through sales
of implants, disposable products and service contracts. To
achieve these goals, we must
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promote early adoption of MAKOplasty by leading surgeons and
hospitals and build demand for the procedure among patients
through the following sales and marketing strategy:
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Target High Volume Orthopedic Facilities.
Our
sales representatives actively target hospitals with strong
orthopedic reputations and significant knee replacement and
resurfacing practices. We believe that early adoption by such
leading hospitals will help us to seed the market for MAKOplasty
and provides the validation and visibility necessary for more
widespread adoption.
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Establish and Promote MAKOplasty Knee Centers of
Excellence.
The MAKOplasty Knee Center of
Excellence is a joint marketing program that we promote in
collaboration with participating hospitals to educate surgeons
and patients regarding the benefits of MAKOplasty and to
coordinate our public relations strategy. As part of the
program, hospitals agree to maintain and provide us with certain
clinical and financial data that we use in support of our
business case for the MAKOplasty solution. As of January 1,
2008, we have entered into four co-marketing agreements with
hospitals to establish MAKOplasty Knee Centers of Excellence.
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Drive Patient Demand for MAKOplasty.
We plan
to expand our marketing efforts to include direct-to-patient
marketing. We believe that patients are becoming increasingly
more involved in the healthcare decision-making process and have
the potential to influence the adoption of new procedures such
as MAKOplasty. Currently, our representatives work with
hospitals participating in the MAKOplasty Knee Center of
Excellence program to publicize the benefits of MAKOplasty and
educate patients.
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The generation of recurring revenues through sales of our
implants, disposable products and service contracts is an
important part of the MAKOplasty business model. We anticipate
that recurring revenues will constitute an increasing percentage
of our total revenues as we leverage each new installation of
our TGS to generate recurring sales of implants and disposable
products. To enhance our generation of recurring revenues,
purchasers of our TGS are contractually required to purchase all
implants and disposable products used in MAKOplasty procedures
from us. In addition, because of our TGSs technical design
and programming, only our knee implant systems may be used
effectively with our TGS. We also offer a four-year supplemental
service contract that provides enhanced levels of maintenance
and support services related to our TGS beyond the basic
warranty period. We also offer protection against technological
obsolescence, which requires us to upgrade the installed version
of our TGS to version 2.0 and provide all interim software and
hardware version enhancements.
We provide training to surgeons and hospital staff on the use of
the TGS. Our customers also receive pre-operative and
intra-operative support from our
on-site
clinical and technical representatives who provide clinical and
technical support in connection with each MAKOplasty procedure.
These representatives help set up the equipment, participate in
the pre-operative planning process and are present in the
operating room with the surgeon, facilitating the surgeons
use of the TGS. By increasing familiarity with the system and
helping ensure safe and proper usage of our equipment and
products by surgeons and hospitals, we hope to promote seamless
adoption of MAKOplasty. The presence of our representatives in
the surgical theater also provides us with immediate feedback
and understanding of our customers preferences and
requirements in clinical conditions.
Research
and Development
Continued innovation through research and development is
critical to our future success. Substantially all of our
research and development activity is performed internally. As of
January 1, 2008, our research and development team, which
is based at our headquarters in Ft. Lauderdale, Florida,
consisted of 52 employees. We have assembled an experienced
team with recognized expertise in advanced robotics, software,
instrumentation and orthopedic knee implants. Although we do not
currently have plans to significantly increase the size of our
research and development team, we may do so in the future,
depending on the progress of our ongoing research and
development efforts.
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Our principal research and development goal is to enable use of
MAKOplasty for both unicompartmental and multicompartmental knee
resurfacing procedures. To that end, we are working to improve
the dexterity and range of motion in the robotic arm of our TGS
and developing upgraded surgical planning software to facilitate
multicompartmental resurfacing procedures. We expect to
incorporate these improvements in version 2.0 of the TGS. We are
also researching alternative tracking systems that may permit
greater freedom of intra-operative movement by the surgeon and
patient and customized bone cutting instruments. Similarly, we
are researching and developing a modular knee implant system
that would allow a single knee implant system to treat multiple
stages of osteoarthritis of the knee from early-stage
unicompartmental degeneration through mid-stage,
multicompartmental degeneration.
We are also researching the possibility of integrating
components of both our inlay and onlay knee systems to create a
single MAKO-branded unicompartmental implant system for use with
our TGS.
We have historically spent a significant portion of our capital
resources on research and development. Our research and
development expenses were $403,000 in the period from
November 12, 2004 to December 31, 2004,
$2.6 million in fiscal year 2005, $5.2 million in
fiscal year 2006 and $5.3 million in the nine months ended
September 30, 2007.
Manufacturing
and Assembly
The MAKOplasty solution includes both off-the-shelf and
custom-made components produced to our specifications by various
third parties. We purchase major components of our TGS,
including the computer hardware, camera used in connection with
our tracking system, the robotic controller, the high-speed
cutting instrumentation, the molded plastic and machined metal
parts, and the various electro-mechanical components that
support the robotic-arm system from a number of third-party
suppliers. We internally develop the software components of our
TGS. We then assemble and integrate these various hardware
components with our proprietary software to complete each TGS.
By assembling the final product at our facilities, we are able
to perform stringent quality assurance inspection and testing on
each TGS to best control the quality of the final product prior
to shipment. We also purchase fully manufactured and
pre-packaged implants from third-party suppliers. A portion of
our Ft. Lauderdale facilities are presently dedicated to
these warehousing, assembly, testing and inspection activities.
Other than our proprietary software, single source suppliers
currently provide us with all major components of the TGS,
including the bone cutting instrument, and our current offering
of implants.
We generally purchase our components through purchase orders and
do not have long-term contracts with most of our suppliers. We
have, however, entered into a long-term contractual arrangement,
including both supply and license agreements, with Encore
Medical, L.P. the supplier of our onlay knee implant system.
Under the supply agreement, Encore will provide us with the
desired quantity of implants in accordance with a fixed pricing
schedule. Our supply contract with Stelkast (a business division
of Trigon Incorporated), the supplier of our inlay knee
implants, expired in September 2007, and we currently purchase
our inlay knee implants from Stelkast pursuant to purchase
orders. We do, however, have a long-term license agreement with
Stelkast. Under the license agreements, Stelkast granted us a
non-exclusive license and Encore granted us an exclusive license
to the design of the respective implants and the right to
sublicense for the manufacture of components. We have also
entered into a long-term agreement with Symmetry Medical, Inc.
to manufacture, label and package knee implant systems, pursuant
to which we plan to have Symmetry supply us with both inlay and
onlay knee implants subject to final agreement on pricing. Our
agreement with Symmetry also contemplates the development and
manufacture of new implant designs in the future.
Our supply agreement with Encore expires on the date we are able
and ready to make and sell onlay implants independently, under
our own label and own 510(k) clearance, but no later than
February 28, 2010, which we may extend by one year periods.
The supply agreement with Encore terminates automatically upon
the termination of the corresponding license agreement that we
have entered into with Encore. In addition, Encore may terminate
its supply agreement at any time Encore ceases to manufacture
the onlay implants based on a bona fide product safety, efficacy
or regulatory concern or upon Encores six months written
notice
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to us that Encore elects to cease manufacturing onlay implants
for any other reason. Our agreement with Symmetry continues
until terminated. We may terminate the agreement with Symmetry
for any reason upon 180 days notice, and Symmetry may
terminate the agreement for any reason upon one years
notice.
We intend to achieve improvements in our manufacturing
operations and in our cost of sales by improving our procurement
and third-party manufacturing processes. We also intend to
upgrade our management information systems and implement new
quality assurance, inventory and cost controls to improve the
efficiency of our manufacturing operations, maintain product
quality, reduce our cost of sales and increase our profitability.
Our operations and those of the third-party suppliers and
manufacturers we use are subject to extensive regulation by the
FDA under its QSRs as well as numerous postmarket requirements.
Our operations and those of third-party suppliers and
manufacturers may also be subject to international regulatory
requirements in the event we expand our operations or business
overseas. Our facility is FDA registered and we believe is
compliant with FDAs QSR. We have instituted a quality
management system to evaluate and monitor compliance internally
and by our third-party suppliers and manufacturers. Our facility
and the facilities of the third-party suppliers and
manufacturers we use are subject to periodic, announced and
unannounced inspections by regulatory authorities, including the
FDA and other governmental agencies. To date, our facilities
have not been inspected by any regulatory authorities.
Intellectual
Property
We must develop, maintain and protect the proprietary aspects of
our products and technologies to remain competitive in the
marketplace. Our intellectual property portfolio includes rights
to patents, patent applications and other intellectual property
that we wholly-own or license from others. We seek patent and
other intellectual property protection in the U.S. and
internationally for our products and technologies where
available and when appropriate.
We also rely on other forms of intellectual property rights,
including copyright, trademark, trade secrets and know-how, to
develop, maintain and protect the proprietary aspects of our
products and technologies. We require our employees and
consultants to execute confidentiality agreements in connection
with their employment or consulting relationships with us. We
also require our employees and consultants to disclose and
assign to us all inventions conceived during the term of their
employment or engagement while using our property or which
relate to our business.
Despite measures taken to protect our intellectual property,
unauthorized parties may attempt to copy aspects of our products
or to obtain and use information that we regard as proprietary.
In addition, our competitors may independently develop similar
technologies. Although patents may provide some degree of
protection for our intellectual property, patent protection
involves complex legal and factual determinations and is
therefore uncertain.
Wholly-Owned
Patents
As of January 1, 2008, we held 19 wholly-owned pending
U.S. patent applications. All of these patent applications
are either used in our current products or relate to core
technologies used in our products, such as computer-assisted
surgery, robotics, haptics and implants. The first of our
currently pending patent applications was filed in October 2003
and should expire in October 2023, exclusive of any statutory
extensions or reductions. None of our patent applications have
yet issued. As of January 1, 2008, we also held 21 foreign
patent applications. We are also pursuing additional
U.S. and foreign patent applications on key inventions to
enhance our intellectual property portfolio.
Patents
and Patent Applications Licensed from Third
Parties
As of January 1, 2008, we had licensed rights to 118
U.S. and 47 foreign third-party granted patents, and we had
licensed rights to 22 U.S. and 40 foreign third-party
pending patent applications. The majority of these patents and
applications are either used in our current products or relate
to core technologies used in our
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products, such as computer-assisted surgery, robotics, haptics
and implants. We also have rights to additional third-party
patents and intellectual property that relate to our core
technologies, but are not currently used in our products. Nine
of the licensed U.S. patents and three related foreign patents
will expire by the end of 2009. Of these, four licensed
U.S. patents and three related foreign patents will expire
during 2008 and five licensed U.S. patents will expire by
the end of 2009. Two of these U.S. patents and all three
related foreign patents are surgical navigation method patents,
and three of these U.S. patents relate to robotic
technology. These five U.S. patents and the related foreign
patents are considered material to our intellectual property
portfolio because they potentially enable us to exclude others
from practicing the claimed technology. The last licensed patent
will expire in 2024.
License
Arrangements with Z-KAT
Our principal licensing arrangement is with Z-KAT, from whom we
license or sublicense core technologies in navigation, haptics
and robotics. In connection with our formation in November 2004,
we were granted an exclusive, irrevocable, non-terminable
license or sublicense to all intellectual property owned or
licensed by Z-KAT in the field of medical orthopedic surgery to
the extent Z-KATs licenses from third parties were
exclusive. Our license from Z-KAT includes a limited license to
Z-KATs CAS and haptic robotic intellectual property
portfolio for exclusive use in the field of orthopedics, subject
to a prior license to Biomet Manufacturing Corp. to use
Z-KATs CAS intellectual property, but not its haptic
robotic intellectual property, in the field of orthopedics.
Because of the prior license to Biomet and pursuant to our
license with Z-KAT, we cannot use the CAS intellectual property
on a stand-alone basis; we can only use the CAS intellectual
property in combination with robotics technology. Z-KATs
license also granted to us the sole right to prosecute and
maintain all Z-KAT patents and patent applications that are
licensed to us. In 2006, we obtained the right to take
enforcement action against all third parties with respect to any
intellectual property rights held by Z-KAT in the field of
orthopedics. We have granted back to Z-KAT a fully paid,
royalty-free, nonexclusive sublicense to our intellectual
property portfolio in all fields other than orthopedic surgery.
Through these and other arrangements, we have rights to
Z-KATs wholly-owned and third-party licensed intellectual
property portfolio, which includes a wide suite of intellectual
property in the areas of haptic robotics and surgical
visualization.
License
Arrangements with Other Third Parties
In September 2005, we entered into a license agreement with
Integrated Surgical Systems, Inc. pursuant to which we obtained
an exclusive, worldwide license to patented technology relating
to bone registration and tracking for use in the field of human
interactive robotics in orthopedics and a nonexclusive license
in the field of orthopedics generally. We paid a one-time
licensing fee that provides a fully paid, worldwide license for
the life of the licensed patents.
In March 2006, we entered into a license agreement with IBM that
covers a number of technologies related to the application of
computers and robotics to surgery. Under the terms of this
agreement, we have a nonexclusive, worldwide license to any IBM
patents and patent applications with effective filing dates
prior to March 31, 2011 in the field of robotic devices
primarily designed for surgery in the medical field of
orthopedics
and/or
primarily designed for spinal surgery in the medical field of
neurology. We are obligated to make royalty payments based on
the sale of each robotic product covered by the IBM patents. The
IBM license agreement will terminate upon the expiration of the
last licensed patent.
In May 2006, we entered into a sublicense agreement with
SensAble Technologies, Inc. The sublicense grants nonexclusive
rights in the field of computer-assisted surgery to a patent
directed to core haptic technology that SensAble licensed from
MIT. The sublicense also included an option to license or
sublicense five additional patents, which we exercised in May
2007. We paid a one-time sublicensing fee (and a one-time option
fee) that provides a fully paid, worldwide license for the life
of the licensed patents.
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Competition
Our success depends on convincing hospitals, surgeons and
patients to utilize the robotic-arm technology embodied in both
our current version of the TGS to perform unicompartmental
resurfacing and our planned version 2.0 of the TGS to perform
multicompartmental resurfacing of the knee. We face competition
from large, well-known companies, principally Zimmer Holdings,
Inc., DePuy Orthopedics, Inc., a Johnson & Johnson
company, Stryker Corporation, and Biomet, Inc., that dominate
the market for orthopedic products. Each of these companies, as
well as other companies like Smith & Nephew, Inc.,
which introduced the Journey Deuce Bi-Compartmental Knee System
in July 2007, offers conventional instruments and implants for
use in conventional total and partial knee replacement surgeries
as well as unicompartmental resurfacings procedures, which may
compete with our MAKOplasty solution and negatively impact sales
of our TGS. A number of these and other companies also offer
surgical navigation systems for use in arthroplasty procedures
that provide a minimally invasive means of viewing the
anatomical site.
Currently, we are not aware of any well-known orthopedic
companies that broadly offers robotics technology in combination
with surgical navigation. All of these companies, however, have
the ability to acquire and develop robotics technology that may
compete with our TGS. In addition, Biomet has a license from
Z-KAT to intellectual property rights in computer-assisted
surgical navigation, or CAS intellectual property, for use in
the field of orthopedics. The license is non-exclusive with
respect to use of CAS intellectual property in combination with
robotics technology and exclusive with respect to all other uses
within the field of orthopedics, which could enable them to
compete with us.
We also face competition from other medical device companies
that may seek to extend robotics technology and minimally
invasive approaches and products that they have developed for
use in other parts of the human anatomy to minimally invasive
arthroplasty of the knee. Even if these companies currently do
not have an established presence in the field of minimally
invasive surgery for the knee, they may attempt to apply their
robotics technology to the field of knee replacement and
resurfacing procedures to compete directly with us.
Even if our TGS becomes commercially successful, our implant
products may face substantial competition from implants offered
by the well-known companies currently in the market for
orthopedic products. We have designed our products so that our
TGS only works effectively with our implant products. We also
contractually require purchasers of our TGS to use only our
implants in connection with the TGS. We cannot guarantee,
however, that these measures will be effective or that our
customers will agree to such contracts in the future.
Accordingly, if use of our TGS becomes more prevalent,
competitors may attempt to market their implant products for use
with the TGS and compete directly with our implant products.
We believe that the principal competitive factors in our market
include:
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the safety and efficacy of the procedure and product offerings,
as documented through published studies and other clinical
reports;
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product benefits, including the ability to offer orthopedic
surgeons a complete solution for minimally invasive orthopedic
knee procedures;
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the strength of acceptance and adoption by orthopedic surgeons
and hospitals;
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the ability to deliver new product offerings and enhanced
technology to expand or improve upon existing applications
through continued research and development;
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the quality of training, services and clinical support provided
to surgeons and hospitals;
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the cost of product offerings and the availability of product
coverage and reimbursement from third-party payors, insurance
companies and others parties;
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the ability to provide proprietary products protected by strong
intellectual property rights; and
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the ability to offer products that are intuitive and easy to
learn and use.
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Many of our competitors have significantly greater financial,
human and other resources than we do, and have established
relationships with healthcare professionals, customers and
third-party payors. In addition, many of our competitors have
established sales networks, greater resources for product
development, additional lines of products and the ability to
offer financial incentives such as rebates, bundled products or
discounts on other product lines that we cannot provide. Our
products could also be rendered obsolete or uneconomical by
technological advances developed by one or more of our
competitors. These competitive factors may negatively affect our
ability to convince individuals to utilize our TGS and implant
products and result in our inability to acquire technology,
products and businesses from third parties to develop our
current and planned versions of the TGS and related products.
Regulatory
Requirements of the U.S. Food and Drug Administration
Our research, development and clinical programs, as well as our
manufacturing and marketing operations, are subject to extensive
regulation in the U.S. and other countries. Most notably,
all of our products sold in the U.S. are subject to
regulation as medical devices under the Federal Food, Drug, and
Cosmetic Act, or the FDCA, as implemented and enforced by the
FDA. The FDA governs the following activities that we perform or
that are performed on our behalf, to ensure that medical
products we manufacture, promote and distribute domestically or
exported internationally are safe and effective for their
intended uses:
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product design, preclinical and clinical development and
manufacture;
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product premarket clearance and approval;
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product safety, testing, labeling and storage;
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record keeping procedures;
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product marketing, sales and distribution; and
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post-marketing surveillance, complaint handling, medical device
reporting, reporting of deaths, serious injuries or device
malfunctions and repair or recall of products.
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FDA
Premarket Clearance and Approval Requirements
Unless an exemption applies, each medical device we wish to
commercially distribute in the U.S. will require either
premarket notification, or 510(k), clearance or approval of a
premarket approval application, or PMA, from the FDA. The FDA
classifies medical devices into one of three classes.
Class I devices, considered to have the lowest risk, are
those for which safety and effectiveness can be assured by
adherence to the FDAs general regulatory controls for
medical devices, which include compliance with the applicable
portions of the FDAs QSR, facility registration and
product listing, reporting of adverse medical events, and
appropriate, truthful and non-misleading labeling, advertising,
and promotional materials (General Controls). Class II
devices are subject to the FDAs General Controls, and any
other special controls as deemed necessary by the FDA to ensure
the safety and effectiveness of the device (Special Controls).
Manufacturers of most class II and some class I
devices are required to submit to the FDA a premarket
notification under Section 510(k) of the FDCA requesting
permission to commercially distribute the device. This process
is generally known as 510(k) clearance. Devices deemed by the
FDA to pose the greatest risks, such as life-sustaining,
life-supporting or implantable devices, or devices that have a
new intended use, or use advanced technology that is not
substantially equivalent to that of a legally marketed device,
are placed in class III, requiring approval of a PMA.
All of our currently marketed products, such as our TGS, are
class II devices marketed pursuant to 510(k) clearances. In
January 2008, we obtained 510(k) marketing clearance from the
FDA for version 1.2 of our TGS. We originally submitted a
Special 510(k) application in September 2007, which the FDA
subsequently indicated was converted to a Traditional 510(k)
application. On November 1, 2007, the FDA provided us with
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a letter requesting additional information in which the FDA,
among other things, asked us to justify our proposed use of the
terms haptic and robot in the labeling
of version 1.2 of our TGS. Through subsequent correspondence and
communications, the FDA indicated that we needed to use the term
tactile in lieu of haptic and the term
robotic-arm in lieu of robotic, as
appropriate, when these terms are used to market our products
and in order to obtain timely clearance of our 510(k)
submission. The FDA granted 510(k) clearance for version 1.2 of
our TGS with those terms. See Risks Related to Our
Business We are currently required by the FDA to
refrain from using certain terms to label and market our
products, which could harm our ability to market and
commercialize our current and future products.
Our current regulatory strategy for version 2.0 of our TGS is to
submit a 510(k) application to obtain FDA clearance once
development is substantially complete. We hope to substantially
complete development of version 2.0 sometime in late 2008 or
early 2009 and to submit a 510(k) application soon thereafter.
However, the FDA may require us to submit extensive additional
data to support clearance for use in multi-compartmental knee
resurfacing procedures. Due to this indication, FDA also may
require us to submit a PMA for version 2.0 of the TGS.
510(k)
Clearance Pathway
To obtain 510(k) clearance, we must submit a premarket
notification demonstrating that the proposed device is
substantially equivalent to a legally marketed
predicate device that is either in class I or
class II, or to a class III device that was in
commercial distribution before May 28, 1976 for which the
FDA has not yet called for the submission of a PMA. A Special
510(k) is an abbreviated 510(k) application which can be used to
obtain clearance for certain types of device modification such
as modifications that do not affect the intended use of the
device or alter the devices fundamental scientific
technology. A Special 510(k) generally requires less information
and data than a complete, or Traditional 510(k). In
addition, a Special 510(k) application often takes a shorter
period of time, which could be as short as 30 days, than a
Traditional 510(k) clearance application, which can be used for
any type of 510(k) device. FDAs 510(k) clearance pathway
usually takes from three to twelve months, but may take
significantly longer. The FDA may require additional
information, including clinical data, to make a determination
regarding substantial equivalence. There is no guarantee that
the FDA will grant 510(k) clearance for our future products and
failure to obtain necessary clearances for our future products
would adversely affect our ability to grow our business.
Medical devices can be marketed only for the indications for
which they are cleared or approved. After a device receives
510(k) clearance, any modification that could significantly
affect its safety or effectiveness, or that would constitute a
new or major change in its intended use, will require a new
510(k) clearance or, depending on the modification, PMA
approval. The FDA requires each manufacturer to determine
whether the proposed change requires submission of a 510(k) or a
PMA, but the FDA can review any such decision and can disagree
with a manufacturers determination. If the FDA disagrees
with a manufacturers determination, the FDA can require
the manufacturer to cease marketing
and/or
recall the modified device until 510(k) clearance or PMA
approval is obtained. Also, in these circumstances, we may be
subject to significant regulatory fines or penalties. We have
made and plan to continue to make additional product
enhancements to our TGS and other products that we believe do
not require new 510(k) clearances. We cannot assure you that the
FDA would agree with any of our decisions not to seek 510(k)
clearance or PMA approval.
PMA
Approval Pathway
A PMA must be submitted to the FDA if the device cannot be
cleared through the 510(k) process, or is not otherwise exempt
from the FDAs premarket clearance and approval
requirements. A PMA must generally be supported by extensive
data, including, but not limited to, technical, preclinical,
clinical trials, manufacturing and labeling, to demonstrate to
the FDAs satisfaction the safety and effectiveness of the
device for its intended use. No device that we are marketing to
date has required premarket approval. During the review period,
the FDA will typically request additional information or
clarification of the information already provided. Also, an
advisory panel of experts from outside the FDA may be convened
to review and evaluate the application and provide
recommendations to the FDA as to the approvability of the
device. The FDA may
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or may not accept the panels recommendation. In addition,
the FDA will generally conduct a pre-approval inspection of our
or our
third-party
manufacturers or suppliers manufacturing facility or
facilities to ensure compliance with the QSR.
New PMAs or PMA supplements are required for modifications that
affect the safety or effectiveness of the device, including, for
example, certain types of modifications to the devices
indication for use, manufacturing process, labeling and design.
PMA supplements often require submission of the same type of
information as a PMA, except that the supplement is limited to
information needed to support any changes from the device
covered by the original PMA and may not require as extensive
clinical data or the convening of an advisory panel. None of our
products are currently approved under a PMA approval. However,
we may in the future develop devices which will require the
approval of a PMA. There is no guarantee that the FDA will grant
PMA approval of our future products and failure to obtain
necessary approvals for our future products would adversely
affect our ability to grow our business.
Clinical
Trials
Clinical trials are generally required to support a PMA
application and are sometimes required for 510(k) clearance.
Such trials generally require an investigational device
exemption application, or IDE, approved in advance by the FDA
for a specified number of patients and study sites, unless the
product is deemed a non-significant risk device eligible for
more abbreviated IDE requirements. A significant risk device is
one that presents a potential for serious risk to the health,
safety, or welfare of a patient and either is implanted, used in
supporting or sustaining human life, substantially important in
diagnosing, curing, mitigating, or treating disease or otherwise
preventing impairment of human health, or otherwise presents a
potential for serious risk to a subject. Clinical trials are
subject to extensive monitoring, recordkeeping and reporting
requirements. Clinical trials must be conducted under the
oversight of an institutional review board, or IRB, for the
relevant clinical trial sites and must comply with FDA
regulations, including but not limited to those relating to good
clinical practices. To conduct a clinical trial, we also are
required to obtain the patients informed consent in form and
substance that complies with both FDA requirements and state and
federal privacy and human subject protection regulations. We,
the FDA or the IRB could suspend a clinical trial at any time
for various reasons, including a belief that the risks to study
subjects outweigh the anticipated benefits. Even if a trial is
completed, the results of clinical testing may not adequately
demonstrate the safety and efficacy of the device or may
otherwise not be sufficient to obtain FDA clearance or approval
to market the product in the U.S. Similarly, in Europe the
clinical study must be approved by a local ethics committee and
in some cases, including studies with high-risk devices, by the
ministry of health in the applicable country.
Post-Market
Study
To date, none of our submissions to the FDA have required the
submission of clinical data. However, we are conducting a
post-market study of MAKOplasty aimed at demonstrating the
accuracy of the placement and alignment of our implants and the
clinical efficacy of the MAKOplasty procedure. We anticipate
that preliminary results of this study will be available in the
first quarter of 2008. Currently, we are conducting this study,
known as a post-market study, at only one site, Holy Cross
Hospital, but we may expand this to additional sites in the
future. We are conducting this study as a non-significant
risk study. As a result, we do not believe that we are
required to obtain FDA approval of an IDE. However, we did
receive the approval of the Holy Cross Hospital IRB and obtained
informed consents from all study subjects. Holy Cross Hospital
IRB policy required us to obtain IRB approval and informed
consent for patient data confidentiality reasons only. If the
FDA disagrees with our determination that the study is a
non-significant risk study, the FDA could require us
to stop the study and could take enforcement action against us.
Pervasive
and Continuing Regulation
After a device is placed on the market, numerous regulatory
requirements continue to apply. In addition to the requirements
below, the Medical Device Reporting, or MDR, regulations require
that we report to the
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FDA any incident in which our products may have caused or
contributed to a death or serious injury or in which our product
malfunctioned and, if the malfunction were to recur, would
likely cause or contribute to death or serious injury. MAKO has
submitted two MDRs to the FDA to date. See Risk Related to
Regulatory Compliance for further information regarding
our reporting obligations under MDR regulations. Additional
regulatory requirements include:
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product listing and establishment registration, which helps
facilitate FDA inspections and other regulatory action;
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QSR, which requires manufacturers, including third-party
manufacturers, to follow stringent design, testing, control,
documentation and other quality assurance procedures during all
aspects of the design and manufacturing process;
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labeling regulations and FDA prohibitions against the promotion
of products for uncleared, unapproved or off-label use or
indication;
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clearance of product modifications that could significantly
affect safety or efficacy or that would constitute a major
change in intended use of one of our cleared devices;
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approval of product modifications that affect the safety or
effectiveness of one of our approved devices;
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post-approval restrictions or conditions, including
post-approval study commitments;
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post-market surveillance regulations, which apply, when
necessary, to protect the public health or to provide additional
safety and effectiveness data for the device;
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the FDAs recall authority, whereby it can ask, or under
certain conditions order, device manufacturers to recall from
the market a product that is in violation of governing laws and
regulations;
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regulations pertaining to voluntary recalls; and
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notices of corrections or removals.
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We must also register with the FDA as a medical device
manufacturer and must obtain all necessary state permits or
licenses to operate our business. As a manufacturer, we are
subject to announced and unannounced inspections by the FDA to
determine our compliance with FDAs QSR and other
regulations. We have not yet been inspected by the FDA. We
believe that we are in substantial compliance with QSR and other
regulations. Failure to comply with applicable regulatory
requirements can result in enforcement action by the FDA, which
may include any of the following sanctions:
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untitled letters, warning letters, fines, injunctions, consent
decrees and civil penalties;
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customer notifications or repair, replacement, refunds, recall,
detention or seizure of our products;
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operating restrictions or partial suspension or total shutdown
of production;
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refusing or delaying requests for 510(k) clearance or PMA
approvals of new products or modified products;
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withdrawing 510(k) clearances or PMA approvals that have already
been granted;
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refusal to grant export approval for our products; or
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criminal prosecution.
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83
International
Marketing Approvals
International sales of medical devices are subject to foreign
government regulations, which vary substantially from country to
country. The time required to obtain approval by a foreign
country may be longer or shorter than that required for FDA
clearance or approval, and the requirements may differ.
The European Union has adopted numerous directives and standards
regulating the design, manufacture, clinical trials, labeling,
and adverse event reporting for medical devices. Each European
Union member state has implemented legislation applying these
directives and standards at the national level. Other countries,
such as Switzerland, have voluntarily adopted laws and
regulations that mirror those of the European Union with respect
to medical devices. Devices that comply with the requirements of
the laws of the relevant member state applying the applicable
European Union directive are entitled to bear CE conformity
marking and, accordingly, can be commercially distributed
throughout the member states of the European Union and other
countries that comply with or mirror these directives. The
method of assessing conformity varies depending on the type and
class of the product, but normally involves a combination of
self-assessment by the manufacturer and a third-party assessment
by a Notified Body, an independent and neutral
institution appointed to conduct conformity assessment. This
third-party assessment consists of an audit of the
manufacturers quality system and clinical information, as
well as technical review of the manufacturers product. An
assessment by a Notified Body in one country within the European
Union is required in order for a manufacturer to commercially
distribute the product throughout the European Union. In
addition, compliance with ISO 13845 on quality systems issued by
the International Organization for Standards, among other
standards, establishes the presumption of conformity with the
essential requirements for a CE marking. In addition, many
countries apply requirements in their reimbursement, pricing or
health care systems that affect companies ability to
market products.
Health
Care Laws and Regulations
Third-Party
Reimbursement
In the U.S. and elsewhere, health care providers that
perform surgical procedures using medical devices such as ours
generally rely on third-party payors, including governmental
payors such as Medicare and Medicaid and private payors, to
cover and reimburse all or part of the cost of the products.
Consequently, sales of medical devices are dependent in part on
the availability of reimbursement to the customer from
third-party payors. The manner in which reimbursement is sought
and obtained varies based upon the type of payor involved and
the setting in which the product is furnished and utilized. In
general, third-party payors will provide coverage and
reimbursement for medically reasonable and necessary procedures
and tests that utilize medical devices and may provide separate
payments for the implanted or disposable devices themselves.
Most payors, however, will not pay separately for capital
equipment, such as our TGS. Instead, payment for the cost of
using the capital equipment is considered to be covered as part
of payments received for performing the procedure. In
determining payment rates, third-party payors are increasingly
scrutinizing the prices charged for medical products and
services in comparison to other therapies. Our products, and the
procedures in which our products are used, may not be reimbursed
by these third-party payors at rates sufficient to allow us to
sell our products on a competitive and profitable basis.
In addition, in many foreign markets, including the countries in
the European Union, pricing of medical devices is subject to
governmental control. In the U.S., there have been, and we
expect that there will continue to be, a number of federal and
state proposals to limit payments by governmental payors for
medical devices, and the procedures in which medical devices are
used. While we cannot predict whether such legislative or
regulatory proposals will be adopted, the adoption of such
proposals could have a material adverse effect on our business,
financial condition and profitability.
84
Medicare
and Medicaid
The Medicare program is a federal health benefit program
administered by the Centers for Medicare and Medicaid Services,
or CMS, that covers and pays for certain medical care items and
services for eligible elderly, blind, and disabled individuals,
and individuals with end stage renal disease. The Medicaid
program is a federal-state partnership under which states
receive matching federal payments to fund healthcare services
for the poor. Because we expect that a significant percentage of
MAKOplasty patients will be Medicare beneficiaries, and because
some private commercial health insurers and some state Medicaid
programs may follow the coverage and payment policies for
Medicare, Medicares coverage and payment policies are
significant to our business.
Medicare coverage for procedures using our technology currently
exists in the hospital inpatient setting, which falls under
Part A of the Medicare program. Under Medicare Part A,
Medicare reimburses acute care hospitals a flat prospectively
determined payment amount for beneficiaries receiving covered
inpatient services in an acute care hospital. This method of
payment is known as the prospective payment system, or PPS.
Under PPS, the prospective payment for a patients stay in
an acute care hospital is determined by the patients
condition and other patient data and procedures performed during
the inpatient stay using a classification system known as
diagnosis-related groups, or DRGs. As of October 1, 2007,
the Centers for Medicare and Medicaid Services, or CMS,
implemented a revised version of the DRG system that uses 745
Medicare Severity DRGs, or MS-DRGs, instead of the approximately
540 DRGs Medicare previously used. The MS-DRGs are intended to
account more accurately for the patients severity of
illness when assigning each patients stay to a payment
classification. Medicare pays a fixed amount to the hospital
based on the MS-DRG into which the patients stay is
classified, regardless of the actual cost to the hospital of
furnishing the procedures, items and services that the
patients condition requires. Accordingly, acute care
hospitals generally do not receive direct Medicare reimbursement
under PPS for the specific costs incurred in purchasing medical
devices. Rather, reimbursement for these costs is deemed to be
included within the MS-DRG-based payments made to hospitals for
the services furnished to Medicare-eligible inpatients in which
the devices are utilized. For cases involving unusually high
costs, a hospital may receive additional outlier
payments above the pre-determined amount. In addition, there is
a mechanism by which new technology services can apply to
Medicare for additional payments above the pre-determined
amount, although such requests have not been granted frequently.
Because PPS payments are based on predetermined rates and may be
less than a hospitals actual costs in furnishing care,
acute care hospitals have incentives to lower their inpatient
operating costs by utilizing products, devices and supplies that
will reduce the length of inpatient stays, decrease labor or
otherwise lower their costs. For each MS-DRG, a relative weight
is calculated representing the average resources required to
care for cases grouped in that particular MS-DRG relative to the
average resources used to treat cases in all MS-DRGs. MS-DRG
relative weights are recalculated every year to reflect changes
in technology and medical practice in a budget neutral manner.
MS-DRG payment system, there can be significant delays in
obtaining adequate reimbursement amounts for hospitals for new
technologies such that reimbursement may be insufficient to
permit broad acceptance by hospitals.
We believe that there are existing reimbursement codes that can
be used for MAKOplasty procedures performed in the hospital
inpatient setting. Procedures for hospital inpatient billing are
referenced by international classifications of diseases,
clinical modification, or ICD-9-CM, volume 3 procedure codes.
Knee arthroplasty is billed under ICD-9-CM code 81.54
(Total Knee Replacement), which is assigned to
MS-DRG 469 (Major Joint Replacement or Reattachment of
Lower Extremity with Complication or Comorbidity) and
MS-DRG 470 (Major Joint Replacement or Reattachment of
Lower Extremity without Major Complication or
Comorbidity). We anticipate that Medicare will continue to
reimburse hospitals under MS-DRGs 469 and 470 for MAKOplasty
procedures, but CMS can revise MS-DRG assignments from year to
year.
In addition to payments to hospitals for procedures using our
technology, Medicare makes separate payments to physicians for
their professional services. The American Medical Association,
or AMA, has developed a coding system known as the Current
Procedural Terminology, or CPT, codes, which have been adopted
by the Medicare program to describe and develop payment amounts
for certain physician services.
85
The Medicare physician fee schedule uses CPT codes (and other
codes) as part of the determination of allowable payment amounts
to physicians. In determining appropriate payment amounts for
surgeons, CMS receives guidance from the AMA regarding the
relative technical skill level, level of resources used, and
complexity of a new surgical procedure. Generally, the
designation of a new procedure code for a new procedure using a
new product does not occur until after FDA approval of the
product used in the surgery. Codes are assigned by either the
AMA (for CPT codes) or CMS (for Medicare-specific codes) and new
codes usually become effective on January 1st of each
year. Physicians performing procedures using our technology
submit bills under CPT code 27446 (Arthroplasty, knee,
condyle and plateau; medial OR lateral compartment). We
anticipate that third-party payors will continue to reimburse
physicians under this code for services performed in connection
with MAKOplasty procedures.
Commercial
Insurers
In addition to the Medicare program, many private payors look to
CMS policies as a guideline in setting their coverage policies
and payment amounts. The current coverage policies of these
private payors may differ from the Medicare program, and the
payment rates they make may be higher, lower, or the same as the
Medicare program. If CMS or other agencies decrease or limit
reimbursement payments for doctors and hospitals, this may
affect coverage and reimbursement determinations by many private
payors. Additionally, some private payors do not follow the
Medicare guidelines, and those payors may reimburse only a
portion of the costs associated with the use of our products, or
not at all.
Fraud
and Abuse Laws
Because of the significant federal funding involved in Medicare
and Medicaid, Congress and the states have enacted, and actively
enforce, a number of laws whose purpose is to eliminate fraud
and abuse in federal health care programs. Our business is
subject to compliance with these laws.
Anti-Kickback
Statutes and Federal False Claims Act
The federal healthcare programs Anti-Kickback Statute
prohibits persons from knowingly and willfully soliciting,
offering, receiving or providing remuneration, directly or
indirectly, in exchange for or to induce either the referral of
an individual, or the furnishing or arranging for a good or
service, for which payment may be made under a federal
healthcare program such as Medicare or Medicaid. The definition
of remuneration has been broadly interpreted to
include anything of value, including for example gifts, certain
discounts, the furnishing of free supplies, equipment or
services, credit arrangements, payments of cash and waivers of
payments. Several courts have interpreted the statutes
intent requirement to mean that if any one purpose of an
arrangement involving remuneration is to induce referrals of
federal healthcare covered business, the statute has been
violated. Penalties for violations include criminal penalties
and civil sanctions such as fines, imprisonment and possible
exclusion from Medicare, Medicaid and other federal healthcare
programs. In addition, some kickback allegations have been
claimed to violate the Federal False Claims Act, discussed in
more detail below.
The Anti-Kickback Statute is broad and prohibits many
arrangements and practices that are lawful in businesses outside
of the healthcare industry. Recognizing that the Anti-Kickback
Statute is broad and may technically prohibit many innocuous or
beneficial arrangements, Congress authorized the Office of
Inspector General of the U.S. Department of Health and
Human Services, or OIG, to issue a series of regulations, known
as safe harbors. These safe harbors, issued by the
OIG beginning in July 1991, set forth provisions that, if all
their applicable requirements are met, will assure healthcare
providers and other parties that they will not be prosecuted
under the Anti-Kickback Statute. The failure of a transaction or
arrangement to fit precisely within one or more safe harbors
does not necessarily mean that it is illegal or that prosecution
will be pursued. However, conduct and business arrangements that
do not fully satisfy each applicable safe harbor may result in
increased scrutiny by government enforcement authorities such as
the OIG.
86
Many states have adopted laws similar to the Anti-Kickback
Statute. Some of these state prohibitions apply to referral of
patients for healthcare items or services reimbursed by any
source, not only the Medicare and Medicaid programs.
Government officials have focused their enforcement efforts on
marketing of healthcare services and products, among other
activities, and recently have brought cases against companies,
and certain sales, marketing and executive personnel, for
allegedly offering unlawful inducements to potential or existing
customers in an attempt to procure their business.
Another development affecting the healthcare industry is the
increased use of the federal Civil False Claims Act and, in
particular, actions brought pursuant to the False Claims
Acts whistleblower or qui tam
provisions. The False Claims Act imposes liability on any person
or entity who, among other things, knowingly presents, or causes
to be presented, a false or fraudulent claim for payment by a
federal healthcare program. The qui tam provisions of the False
Claims Act allow a private individual to bring actions on behalf
of the federal government alleging that the defendant has
submitted a false claim to the federal government, and to share
in any monetary recovery. In recent years, the number of suits
brought against healthcare providers by private individuals has
increased dramatically. In addition, various states have enacted
false claim laws analogous to the Civil False Claims Act,
although many of these state laws apply where a claim is
submitted to any third-party payor and not merely a federal
healthcare program.
When an entity is determined to have violated the False Claims
Act, it may be required to pay up to three times the actual
damages sustained by the government, plus civil penalties of
between $5,500 to $11,000 for each separate false claim. There
are many potential bases for liability under the False Claims
Act. Liability arises, primarily, when an entity knowingly
submits, or causes another to submit, a false claim for
reimbursement to the federal government. The False Claims Act
has been used to assert liability on the basis of inadequate
care, kickbacks and other improper referrals, and improper use
of Medicare numbers when detailing the provider of services, in
addition to the more predictable allegations as to
misrepresentations with respect to the services rendered. In
addition, companies have been prosecuted under the False Claims
Act in connection with alleged off-label promotion of products.
Our future activities relating to the reporting of wholesale or
estimated retail prices for our products, the reporting of
discount and rebate information and other information affecting
federal, state and third-party reimbursement of our products,
and the sale and marketing of our products, may be subject to
scrutiny under these laws. We believe our current consulting
agreements with physicians represent legitimate compensation for
needed documented services actually furnished to us. However,
engagement of physician consultants by orthopedic medical device
manufacturers has recently been subject to heightened scrutiny,
and has resulted in four of the major orthopedic medical device
implant manufacturers entering deferred prosecution agreements
with the federal government and agreeing to pay substantial
amounts to the federal government in settlement of Anti-Kickback
law allegations, and all such companies submitting to
supervision by a court-appointed monitor throughout the term of
the 18-month agreements. In this environment, our engagement of
physician consultants in product development and product
training and education could subject us to similar scrutiny. We
are unable to predict whether we would be subject to actions
under the False Claims Act or a similar state law, or the impact
of such actions. However, the costs of defending such claims, as
well as any sanctions imposed, could significantly affect our
financial performance.
As part of our internal compliance program, we review our sales
and marketing materials, contracts and programs with counsel,
and require employees and marketing representatives to
participate in regular training. We also have adopted and train
our personnel on the code of conduct for Interactions with
Health Care Professionals promulgated by the Advanced Medical
Technology Association, or AdvaMed, a leading trade association
representing medical device manufacturers. However, we cannot
rule out the possibility that the government or other third
parties could interpret these laws differently and challenge one
or more of our activities under these laws.
HIPAA and
Other Fraud and Privacy Regulations
Among other things, the Health Insurance Portability and
Accountability Act of 1996, or HIPAA, created two new federal
crimes: healthcare fraud and false statements relating to
healthcare matters. The HIPAA health care fraud statute
prohibits, among other things, knowingly and willfully
executing, or attempting to
87
execute, a scheme to defraud any healthcare benefit program,
including private payors. A violation of this statute is a
felony and may result in fines, imprisonment
and/or
exclusion from government-sponsored programs. The HIPAA false
statements statute prohibits, among other things, knowingly and
willfully falsifying, concealing or covering up a material fact
or making any materially false, fictitious or fraudulent
statement or representation in connection with the delivery of
or payment for healthcare benefits, items or services. A
violation of this statute is a felony and may result in fines
and/or
imprisonment.
In addition to creating the two new federal healthcare crimes,
regulations implementing HIPAA also establish uniform standards
governing the conduct of certain electronic healthcare
transactions and protecting the security and privacy of
individually identifiable health information maintained or
transmitted by healthcare providers, health plans and healthcare
clearinghouses, which are referred to as covered
entities. Three standards have been promulgated under
HIPAAs regulations: the Standards for Privacy of
Individually Identifiable Health Information, which restrict the
use and disclosure of certain individually identifiable health
information, the Standards for Electronic Transactions, which
establish standards for common healthcare transactions, such as
claims information, plan eligibility, payment information and
the use of electronic signatures, and the Security Standards,
which require covered entities to implement and maintain certain
security measures to safeguard certain electronic health
information. Although we are not a covered entity and therefore
not directly subject to these standards, we expect that our
customers generally will be covered entities and may ask us to
contractually comply with certain aspects of these standards.
While the government intended this legislation to reduce
administrative expenses and burdens for the healthcare industry,
our compliance with certain provisions of these standards
entails significant costs for us.
In addition to federal regulations issued under HIPAA, some
states have enacted privacy and security statutes or regulations
that, in some cases, are more stringent than those issued under
HIPAA. In those cases, it may be necessary to modify our planned
operations and procedures to comply with the more stringent
state laws. If we fail to comply with applicable state laws and
regulations, we could be subject to additional sanctions.
Employees
As of January 1, 2008, we had 120 employees, 52 of
whom were engaged directly in research and development, 16 in
assembly, manufacturing and service, 16 in general
administrative and accounting activities, 10 in regulatory,
clinical affairs and quality activities and 26 in sales and
marketing activities. None of our employees is covered by a
collective bargaining agreement, and we consider our
relationship with our employees to be good.
Facilities
We lease approximately 20,000 square feet of office space
in Ft. Lauderdale, Florida, which is used as our
headquarters and for the assembly of our products. Our lease
expires on July 31, 2011. Thereafter, we have the right to
renew our lease for two three-year terms upon prior written
notice and the fulfillment of certain conditions. We believe
that this facility will be adequate to meet our needs through
July 2008, but additional space will be required in the future
to accommodate our anticipated growth. We are exploring the
possibility of securing additional office space in our current
or surrounding office buildings.
Litigation
On November 26, 2007, we received a letter from counsel to
SensAble Technologies, Inc. alleging that we infringed certain
of its patents and breached a confidentiality provision in the
Sublicense Agreement, dated May 24, 2006, pursuant to which
we license certain patents from SensAble. In the letter,
SensAble alleges, among other things, that we exceeded the scope
of our licensed field of computer-assisted surgery by using the
technology for, among other things, pre-operative planning and
post-operative
follow-up.
SensAble also alleges that we infringed one or more claims in
five U.S. patents that are not among the patents licensed
to us pursuant to the Sublicense Agreement.
88
We have investigated SensAbles allegations, and we believe
that if SensAble initiates a lawsuit against us, a court should
find that our TGS does not infringe any of the SensAble patents
identified in the November 26, 2007 letter. We have
communicated our belief to SensAble. SensAble has not commenced
any legal action against us, but may do so in the future. The
letter from counsel to SensAble stated that unless we, among
other things, cease and desist from alleged infringement of its
patents or pay additional licensing fees, including a proposed
licensing fee of $30 million for additional patents not
included in the Sublicense Agreement, SensAble intends to bring
a lawsuit against us. We intend to vigorously defend ourselves
against these allegations in the event of a lawsuit. We cannot
predict the outcome of this matter at this time.
89
MANAGEMENT
Directors,
Executive Officers and Key Employees
Our directors, executive officers and key employees and their
respective ages and positions as of January 1, 2008 are as
follows:
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Name
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Age
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Position
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Maurice R. Ferré, M.D.
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48
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President, Chief Executive Officer and Chairman of the Board
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Fritz L. LaPorte
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37
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Senior Vice President of Finance and Administration, Chief
Financial Officer and Treasurer
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Rony A. Abovitz
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37
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Senior Vice President and Chief Technology Officer
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Menashe R. Frank
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41
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Senior Vice President, General Counsel and Secretary
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Steven J. Nunes
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49
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Senior Vice President of Sales and Marketing
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S. Morry Blumenfeld, Ph.D
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70
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Director
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Gerald A. Brunk
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39
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|
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Director
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Marcelo G. Chao
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41
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Director
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Christopher C. Dewey
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63
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Director
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Charles W. Federico
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59
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Director
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Frederic H. Moll, M.D.
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56
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Director
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Michael P. Stansky
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49
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Director
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Benny Hagag
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39
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Vice President of Business Development
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William F. Tapia
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38
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Vice President of Regulatory, Quality and Clinical Affairs
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Directors
and Executive Officers
Maurice R. Ferré, M.D.
, our founding President,
Chief Executive Officer and current Chairman of the board of
directors, has been with us since our inception in November
2004. In May 2004, Dr. Ferré became Chief Executive
Officer of
Z-KAT,
Inc.,
a surgical navigation medical device company that incorporated
MAKO Surgical Corp. In 1993, Dr. Ferré founded
Visualization Technology, Inc., a medical device company for
image-guided surgery, and served as its Chief Executive Officer
until the company was acquired by GE Healthcare in April 2002.
Dr. Ferré served as Vice President of Strategic
Development at GE Navigation, a division of GE Healthcare, from
April 2002 until April 2004. Dr. Ferré holds a B.A. in
biology from Bennington College and an M.P.H. and an M.D. from
Boston University.
Fritz L. LaPorte
, our Senior Vice President of Finance
and Administration, Chief Financial Officer and Treasurer, has
been with us since our inception in November 2004. From 2001 to
November 2004, Mr. LaPorte served as Chief Financial
Officer of Z-KAT, Inc. From 1997 to 2000, Mr. LaPorte
served as the Director of Finance for Holy Cross Hospital, Inc.,
a 580-bed acute care facility in Ft. Lauderdale, Florida.
From 1993 to 1997, Mr. LaPorte served as a Senior Auditor
in the Assurance Healthcare Group of Ernst and Young LLP.
Mr. LaPorte holds a B.B.A. in accounting from Florida
Atlantic University and is a Certified Public Accountant.
Rony A. Abovitz
, our Senior Vice President and Chief
Technology Officer, has been with us since our inception in
November 2004. Mr. Abovitz was a co-founder of Z-KAT, Inc.,
and from 1997 to November 2004, he held various executive
positions, including Chief Executive Officer and Chief
Technology Officer. From 1994 to 1996, Mr. Abovitz worked
as a research and development engineer for Lima Orthopedics,
Inc. developing orthopedic implants. Mr. Abovitz holds a
B.S. in mechanical engineering and an M.S. in biomedical
engineering from the University of Miami.
90
Menashe R. Frank,
our Senior Vice President, General
Counsel and Secretary, has been with us since our inception in
November 2004. From July 2004 to November 2004, Mr. Frank
was a legal consultant to
Z-KAT,
Inc.
Mr. Frank was a corporate associate at the law firm of
Hogan & Hartson LLP from 2001 to June 2004, and the
law firm of Baker & McKenzie from 2000 to 2001. From
1998 to 2000, Mr. Frank served as Chief Legal Officer
for Enticent.com, Inc., a marketing technology enterprise. He
was also an associate in the business finance and restructuring
department of the law firm of Weil, Gotshal & Manges
LLP from 1996 to 1998. Mr. Frank holds a B.A. in political
science from American University and a J.D. from the University
of Miami School of Law.
Steven J. Nunes,
our Senior Vice President of Sales and
Marketing, has been with us since May 2006. From September 2002
to May 2006, Mr. Nunes served as Director of
Commercialization for GE Healthcare. From 1996 to April
2002, Mr. Nunes held various positions, including Vice
President of Sales and Marketing, at Visualization Technology,
Inc., a medical device company for image-guided surgery, which
was later acquired by GE Healthcare. In 1990, Mr. Nunes
established SJN Medical Inc., an independent distributor of
surgical endoscopy products, and served as its President until
the company was acquired in 1996. Mr. Nunes holds a B.A. in
broadcast journalism from the University of
Massachusetts-Amherst.
S. Morry Blumenfeld, Ph.D.
has served as one of our
directors since July 2005. In 2003, Mr. Blumenfeld founded
Meditech Advisors LLC and Meditech Advisors Management LLC, a
member of Ziegler MediTech Partners, LLC, the sole general
partner of Ziegler Meditech Equity Partners, LP, a private
equity fund specializing in investments in healthcare and
medical device companies. In April 2004, Mr. Blumenfeld
retired as Managing Director of GE Medical Systems in Israel
after 31 years with the company, where he initiated both
GEs CT and MR business lines. Currently, he serves on the
board of directors of a number of medical device and technology
companies, including Oridion Systems Ltd. and several private
companies. Mr. Blumenfeld holds a B.A.Sc in engineering
physics and a Ph.D. in molecular physics from the University of
Toronto.
Gerald A. Brunk
has served as one of our directors since
October 2006. Mr. Brunk is a Managing Director at Lumira
Capital Corp., a venture capital firm, which he joined in July
2002. From 2000 to 2002, Mr. Brunk was the Chief Operating
Officer of ActiveCyte, Inc., a bioinformatics software company.
During his career, Mr. Brunk has also served as a Manager
in the healthcare practice of The Boston Consulting Group and as
a member of the investment banking group at Credit Suisse First
Boston. Currently, Mr. Brunk serves on the board of
directors of ActivBiotics, Inc. and Cardiac Dimensions, Inc.
Mr. Brunk holds a B.A. from the University of Virginia and
an M.B.A. from Stanford University Graduate School of Business.
Marcelo G. Chao
has served as one of our directors since
January 2007. He is a Managing Director at The Exxel Group, an
affiliate of MK Investment Company, which he joined in March
2000. From 1995 to 2000, Mr. Chao was a Partner at Hermes
Management Consulting. From 1992 to 1995, Mr. Chao was Vice
President of Citibank in Buenos Aires, Argentina, and from 1991
to 1992 he worked for McKinsey & Company. Currently,
Mr. Chao serves on the board of directors of several Exxel
Group portfolio companies. Between November 2002 and December
2006, Mr. Chao also served on the Latin American and
Caribbean board of MasterCard International. Mr. Chao holds
a B.S. in business administration from Universidad Católica
Argentina and is a Certified Public Accountant.
Christopher C. Dewey
has served as one of our directors
since our inception in November 2004. Since January 2007,
Mr. Dewey has served as Vice Chairman of the board of
directors of National Holdings Corporation, a financial services
organization operating through its subsidiary, National
Securities. Mr. Dewey also serves as acting Chief Executive
Officer and director of Z-KAT, Inc. Mr. Dewey has over
25 years of experience in finance, most recently as
Executive Vice President of Jefferies & Company, Inc.
from 1994 to December 2006. Mr. Dewey co-founded several
companies, including Robotic Ventures LLC, Bonds Direct
Securities LLC and Cannon Group Inc., a motion picture company
that went public in 1972. Mr. Dewey holds an M.B.A. from
The Wharton School of the University of Pennsylvania.
Charles W. Federico
has served as one of our directors
since June 2007. From 2001 to April 2006, Mr. Federico
served as President and Chief Executive Officer of Orthofix
International N.V. and, from 1996 to
91
2001, President of Orthofix Inc. From 1985 to 1996,
Mr. Federico was President of Smith & Nephew
Endoscopy (formerly Dyonics, Inc.). From 1981 to 1985,
Mr. Federico served as Vice President of Dyonics.
Previously he held management and marketing positions with
General Foods Corporation, Puritan Bennett Corporation and LSE
Corporation. Mr. Federico is a Trustee of the Orthopaedic
Research and Education Foundation and a director of Orthofix
International N.V., SRI/Surgical Express, Inc., BioMimetic
Therapeutics, Inc. and Alveolus, Inc. Mr. Federico holds a
B.S. in marketing from Fordham University.
Frederic H. Moll, M.D.
has served as one of our
directors since August 2007. In September 2002, Mr. Moll
co-founded Hansen Medical, Inc. and serves as its Chief
Executive Officer and is a member of its board of directors. In
November 1995, Dr. Moll co-founded Intuitive Surgical,
Inc., a medical device company, and served as its first Chief
Executive Officer and later, its Vice President and Medical
Director until September 2003. In 1989, Dr. Moll co-founded
Origin Medsystems, Inc., a medical device company, which later
became an operating company within Guidant Corporation, a
medical device company, following its acquisition by Eli Lilly
in 1992. Dr. Moll served as Medical Director of
Guidants surgical device division until November 1995.
Dr. Moll holds a B.A. from the University of California,
Berkeley, an M.S. from Stanford University and an M.D. from the
University of Washington School of Medicine.
Michael P. Stansky
has served as one of our directors
since February 2007. Mr. Stansky is a Managing Director of
Tudor Investment Corporation, which he joined in February 1994.
From 1985 to 1994, Mr. Stansky was a portfolio manager at
Wellington Management. Mr. Stansky holds a B.A. in
accounting from the University of Massachusetts and an M.B.A.
from Harvard Business School. Mr. Stansky is a Certified
Public Accountant and a Chartered Financial Analyst.
Other Key
Employees
Benny Hagag
, our Vice President of Business Development,
has been with us since our inception in November 2004. From
December 2002 to November 2004, Mr. Hagag was an
engineering manager at
Z-KAT,
Inc.
In addition to holding engineering team leader positions at
several companies early in his career, from 2000 to November
2002, Mr. Hagag was a mechanical systems manager for
GE Medical Systems. Mr. Hagag holds a B.Sc. in
aerospace engineering and an M.B.A. from the Technion University
in Israel.
William F. Tapia
, our Vice President of Regulatory,
Quality and Clinical Affairs, has been with us since our
inception in November 2004. In 1997, Mr. Tapia co-founded
Z-KAT, Inc. and served as a key executive leading the regulatory
affairs and quality assurance departments until November 2004.
He holds a B.S. in mathematics from Jacksonville University and
an M.S. in biomedical engineering from the University of Miami.
Board
Composition
Our board of directors currently consists of eight members. In
accordance with our third amended and restated certificate of
incorporation to be effective upon the completion of this
offering, we will divide our board of directors into three
classes, as follows:
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Class I, which will consist of Messrs. Stansky and
Blumenfeld, whose terms will expire at our annual meeting of
stockholders to be held in 2008;
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Class II, which will consist of Messrs. Brunk,
Federico and Moll, whose terms will expire at our annual meeting
of stockholders to be held in 2009; and
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Class III, which will consist of Messrs. Chao, Dewey
and Ferré, whose terms will expire at our annual meeting of
stockholders to be held in 2010.
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At each annual meeting of stockholders to be held after the
initial classification, the successors to directors whose terms
then expire will serve until the third annual meeting following
their election and until their successors are duly elected and
qualified. Our third amended and restated certificate of
incorporation will
92
provide that the authorized number of directors may be changed
only by resolution of the board of directors. Any additional
directorships resulting from an increase in the number of
directors will be distributed among the three classes so that,
as nearly as possible, each class will consist of one-third of
the directors. This classification of the board of directors may
have the effect of delaying or preventing changes in our control
or management. Under Delaware law, our directors may be removed
for cause by the affirmative vote of the holders of a majority
of our voting stock.
Our board has determined that a majority of our board of
directors are independent directors as defined under
the rules of the Nasdaq Stock Market, Inc. As of the date of
this prospectus, Messrs. Blumenfeld, Brunk, Chao, Federico,
Moll and Stansky are our independent directors.
Board
Committees
Our board of directors has an audit committee, a compensation
committee and a corporate governance and nominating committee.
Audit
Committee
Our audit committee consists of Messrs. Brunk, Chao and
Federico, each of whom our board has determined to be an
independent director. Mr. Brunk serves as the chair of the
audit committee. The functions of this committee include, among
other things:
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overseeing the audit and other services of our independent
registered public accounting firm and being directly responsible
for the appointment, compensation, retention and oversight of
the independent registered public accounting firm, who will
report directly to the audit committee;
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reviewing and pre-approving the engagement of our independent
registered public accounting firm to perform audit services and
any permissible non-audit services;
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overseeing compliance with the requirements of Section 404
of the Sarbanes-Oxley Act of 2002, as required;
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reviewing our annual and quarterly financial statements and
reports and discussing the financial statements and reports with
our independent registered public accounting firm and management;
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reviewing and approving all related person transactions;
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reviewing with our independent registered public accounting firm
and management significant issues that may arise regarding
accounting principles and financial statement presentation, as
well as matters concerning the scope, adequacy and effectiveness
of our internal controls over financial reporting;
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establishing procedures for the receipt, retention and treatment
of complaints received by us regarding internal controls over
financial reporting, accounting or auditing matters; and
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preparing the audit committee report for inclusion in our proxy
statement for our annual meeting.
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Our board of directors has determined that Mr. Brunk
qualifies as an audit committee financial expert within the
meaning of SEC regulations and the Nasdaq listing standards. In
making this determination, our board considered the nature and
scope of experience that Mr. Brunk has previously had with
reporting companies. Both our independent registered public
accounting firm and management periodically meet privately with
our audit committee.
Compensation
Committee
Our compensation committee consists of Messrs. Blumenfeld,
Brunk and Chao, each of whom our board has determined to be an
independent director. See Compensation Discussion and
Analysis Role of
93
Directors, Executive Officers and Compensation
Consultants. Mr. Blumenfeld serves as the chair of
the compensation committee. The functions of this committee
include, among other things:
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determining the compensation and other terms of employment of
our CEO and other executive officers and reviewing and approving
corporate performance goals and objectives relevant to such
compensation;
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administering and implementing our incentive compensation plans
and equity-based plans, including approving option grants,
restricted units and other awards;
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evaluating and recommending to our board of directors the equity
incentive-compensation plans, equity-based plans and similar
programs advisable for us, as well as modifications or
terminations of existing plans and programs;
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reviewing and approving the terms of any employment-related
agreements, severance arrangements,
change-in-control
and similar agreements/provision and any amendments, supplements
or waivers to the foregoing agreements with our CEO and other
executive officers;
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reviewing and discussing the Compensation Discussion &
Analysis required in our annual report and proxy statement with
management and determining whether to recommend to the board the
inclusion of the Compensation Discussion & Analysis in
the annual report or proxy; and
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preparing a report on executive compensation for inclusion in
our proxy statement for our annual meeting.
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Each member of our compensation committee is a non-employee
director, as defined in
Rule 16b-3
promulgated under the Securities Exchange Act of 1934, as
amended, and an outside director, as defined pursuant to
Section 162(m) of the Internal Revenue Code of 1986.
Corporate
Governance and Nominating Committee
Our corporate governance and nominating committee consists of
Messrs. Brunk, Moll and Stansky, each of whom our board has
determined to be an independent director. Mr. Brunk serves
as the chair of the corporate governance and nominating
committee. The functions of this committee include, among other
things:
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evaluating director performance on the board and applicable
committees of the board;
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interviewing, evaluating, nominating and recommending
individuals for membership on our board of directors;
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evaluating nominations by stockholders of candidates for
election to our board;
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reviewing and recommending to our board of directors any
amendments to our corporate governance documents; and
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making recommendations to the board regarding management
succession planning.
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Compensation
Committee Interlocks and Insider Participation
No member of our compensation committee has ever been an
executive officer or employee of ours. None of our executive
officers currently serves, or has served during the last
completed fiscal year, on the compensation committee or board of
directors of any other entity that has one or more executive
officers serving as a member of our board of directors or
compensation committee.
94
2007 Director
Compensation
Mr. Federico, who joined the board in June 2007, and
Dr. Moll, who joined the board in August 2007, each
received an annual retainer of $20,000, a fee of $1,000 for each
board meeting or committee meeting attended in person during
2007 and $500 for each telephonic or video board or committee
meeting attended during 2007. None of our other non-employee
directors, Messrs. Blumenfeld, Brunk, Chao, Dewey or
Stansky, received any compensation for their services on the
board of directors during 2007. Similarly, Dr. Ferré,
our only employee director, does not receive any compensation
for his services as a director. All directors are entitled to
reimbursement for their reasonable out-of-pocket travel expenses
associated with board or committee meetings attended in person.
On June 5, 2007, the compensation committee generally
looked to the experience Mr. Federico brought to the board
and, based on negotiations with Mr. Federico, approved an
option award of 9,900 shares of our common stock at a fair
market value of $9.67. Similarly, on August 24, 2007, the
compensation committee looked to the experience Dr. Moll
brought to the board and, based on negotiations with
Dr. Moll, approved an option award of 9,900 shares of
our common stock at a fair market value of $11.12. Mr. Federico
was granted an additional option for 3,300 shares of common
stock at a fair market value of $11.12. In addition, each of
Mr. Federico and Dr. Moll is entitled to an annual
grant of options to purchase 3,300 shares of the
Companys common stock at fair market value. In each case,
one-third of the option grant vests on the first anniversary of
Mr. Federico or Dr. Molls election to the board.
The remaining two-thirds of the option grant vests ratably over
the ensuing 24 months of the directors tenure on the
board of directors, subject to their continued service. On a
case-by-case
basis, non-employee directors may be entitled to receive
options, in an amount determined by the compensation committee
in its discretion, to purchase shares of common stock upon
initial election or appointment to the board of directors. In
determining the number of options granted to a director upon
initial election or appointment, the compensation committee uses
its judgment and, consistent with our compensation objectives,
maintains the flexibility necessary to recruit qualified and
experienced directors. To date, all outstanding options granted
to our non-employee directors have been issued under our 2004
Stock Incentive Plan. All future options granted to our
non-employee directors will be issued under our 2008 Omnibus
Incentive Plan.
The following table sets forth information with respect to the
compensation of all non-employee directors of the Company in
2007.
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Fees Earned or Paid
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in Cash
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Option Awards
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Total
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Name
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($)(1)
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($)(2)
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($)
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S. Morry Blumenfeld, Ph.D.
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Gerald A. Brunk
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Marcelo G. Chao
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Christopher C. Dewey
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Charles W. Federico
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$
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20,500
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$
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13,516
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(3)
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$
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34,016
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Frederic H. Moll, M.D.
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$
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8,167
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$
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7,574
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(4)
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$
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15,741
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Michael P. Stansky
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(1)
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Represents fees earned or paid in cash in 2007, including an
annual retainer of $20,000 prorated for the length of service
during 2007, $1,000 for each board or committee meeting attended
in 2007 and $500 for each telephonic or video board or committee
meeting attended in 2007.
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(2)
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Amounts represent the compensation expense recognized by the
Company during 2007 as computed in accordance with
FAS 123(R), disregarding any estimated forfeitures relating
to service-based vesting conditions. For a discussion of the
assumptions made in the valuation of these awards, see
Note 8 to Financial Statements.
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(3)
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With respect to Mr. Federicos option award granted
June 5, 2007, the grant date fair value of the award,
computed in accordance with FAS 123(R), was $58,816. With
respect to the option award to Mr. Federico
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on August 24, 2007, the grant date fair value of the award,
computed in accordance with FAS 123(R), was $21,430. As of
December 31, 2007, Mr. Federico holds options
exercisable for 13,200 shares, all of which were
unexercisable.
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(4)
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With respect to the option award to Mr. Moll on
August 24, 2007, the grant date fair value of the award,
computed in accordance with FAS 123(R), was $64,289. As of
December 31, 2007, Mr. Moll holds options exercisable
for 9,900 shares, all of which were unexercisable.
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Compensation
Discussion and Analysis
The following discussion and analysis of compensation
arrangements of our named executive officers for 2007 should be
read together with the compensation tables and related
disclosures set forth below. This discussion contains forward
looking statements that are based on our current plans,
considerations, expectations and determinations regarding future
compensation programs. Actual compensation programs that we
adopt may differ materially from currently planned programs as
summarized in this discussion.
Compensation
Philosophy and Objectives
Our compensation philosophy is to offer our executive officers,
including the named executive officers, compensation and
benefits that are competitive and that meet our goals of
attracting, retaining and motivating highly skilled management
so that we can achieve our financial and strategic objectives to
create long-term value for our stockholders. Compensation should
be determined within a framework that is intended to reward
individual contribution and strong financial performance by our
company. Within this overall philosophy, our objectives are to:
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offer a total compensation program that takes into consideration
competitive market requirements and strategic business needs;
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determine total compensation based on our companys overall
financial performance as well as individual
contributions; and
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align the financial interests of our executive officers with
those of our shareholders.
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Role
of Directors, Executive Officers and Compensation
Consultants
All final decisions regarding the compensation of our named
executive officers have been made by the board of directors
typically based on the recommendations of the compensation
committee. Although the compensation committee has the power and
authority to make final compensation decisions, the board of
directors approved all of the compensation committees
recommendations with respect to the named executive
officers 2007 compensation set forth in the tables below.
In formulating its recommendations, the compensation committee
considers the various factors described below in this
Compensation Discussion and Analysis with respect to
particular compensation elements. In addition, the compensation
committee typically considers, but is not required to accept,
the recommendations of Dr. Ferré regarding the
performance and proposed base salary, bonus target and equity
awards for the other named executive officers, as well as
himself. The compensation committee may also request the
assistance of Mr. LaPorte, our Chief Financial Officer, and
our human resources department in evaluating the financial,
accounting and tax implications of various compensation awards
paid to the named executive officers. Neither Mr. LaPorte
nor our human resources employees, however, recommend or
determine the amounts or types of compensation paid to the named
executive officers. Dr. Ferré, our President and Chief
Executive Officer, and certain of our other executive officers
may attend compensation committee meetings, as requested by the
chairman of the compensation committee and dependent upon the
issues to be discussed by the compensation committee, but none
of these executive officers, including Dr. Ferré,
attend any portion of the compensation committee meetings during
which his or her compensation is discussed and approved.
96
The compensation committee historically has not performed
competitive reviews of our compensation programs with those of
similarly-situated companies, nor have we engaged in
benchmarking of compensation paid to our named
executive officers. In the third quarter of 2007, however, the
compensation committee retained Radford Surveys and Consulting
to conduct a review of the pre-IPO equity ownership levels for
senior management at other pre-IPO medical device and
biotechnology companies in later stages of financing, and
provide an analysis of how our senior managements,
including each of the named executive officers, current
equity holding compared to the median of the surveyed companies.
As discussed below under Elements of our Executive
Compensation Program Long-Term Equity
Compensation, the survey showed that the equity holdings
of our senior management was below the median and, as a result,
the compensation committee recommended, and the board of
directors approved, additional equity grants, primarily in an
effort to retain these executives once we are public, consistent
with our objectives.
Radford Surveys and Consulting used the following survey sources
to conduct their analysis: (i) the 2006 Radford
Biotechnology Pre-IPO Executive Report, which includes 30
pre-IPO biotechnology and pharmaceutical companies with outside
investment levels between $40 and $80 million;
(ii) the Dow Jones Venture Capital Compensation
Pro Database, which includes pre-IPO companies that have
classified themselves as a medical device company and is in the
later stage rounds of financings (generally, any
round after the second round of financing); and (iii) the
Top 5 Pre-IPO Life Sciences Industry (Medical Device)
Survey, which includes 10 pre-IPO medical device companies that
have completed series C round of financing. We do not know
the component companies that were surveyed by Radford Surveys
and Consulting as the companys names were not included in
the report provided to the compensation committee by Radford. In
analyzing pre-IPO ownership levels, the Company was compared to
the
50
th
percentile. While we compared our senior management to the
median of the survey results for equity holding purposes, we do
not believe it is appropriate to emphasize this target as it was
used for the limited purpose of equity holdings as a pre-IPO
company and it is not an indication that we intend to
benchmark the equity holdings of our senior
management at the median of a peer group of
companies. Any such determinations as to whether or not we will
benchmark in the future will be made by the
compensation committee after the completion of this offering.
Elements
of Our Executive Compensation Program
The principal elements of our executive compensation program
have been base salary, a discretionary cash bonus and long-term
equity compensation in the form of stock options or shares of
restricted stock. We also have provided some named executive
officers with limited perquisites and other benefits that the
compensation committee believes are reasonable and consistent
with the objectives of our executive compensation programs, as
discussed below. In August 2007, we adopted a performance-based
cash bonus plan applicable to all employees in management
positions, including the named executive officers, and made
grants of performanced-based and other equity compensation to
our employees, including the named executive officers. We
discuss these more fully below.
Each of these compensation elements satisfies one or more of our
retention, performance and alignment objectives, as described
more fully below. We combine the compensation elements for each
executive officer in a manner that the compensation committee
believes, in its discretion and judgment, is consistent with the
executives contributions to our company and our overall
goals with respect to executive compensation. We have not
adopted any policies with respect to long-term versus
currently-paid compensation, but feel that both elements are
necessary for achieving our compensation objectives.
Currently-paid compensation provides financial stability for
each of our named executive officers and immediate reward for
superior company and individual performance, while long-term
compensation rewards achievement of strategic long-term
objectives and contributes toward overall shareholder value.
Similarly, while we have not adopted any policies with respect
to cash versus equity compensation, we feel that it is important
to encourage or provide for a meaningful amount of equity
ownership by our named executive officers as to help align their
interests with those of shareholders, one of our compensation
objectives.
97
Base
Salary
We believe that a competitive base salary is an important
component of compensation as it provides a degree of financial
stability for our executive officers and is critical to
recruiting and retaining our executives. Base salary is also
designed to recognize the scope of responsibilities placed on
each executive officer and reward each executive for his unique
leadership skills, management experience and contributions. We
make a subjective determination of base salary after considering
such factors collectively. Our compensation committee has
historically reviewed the base salaries of our named executive
officers on a periodic basis, as the facts and circumstances may
warrant.
As discussed below under Employment Agreements,
each of our named executive officers entered into an employment
agreement with us which established an initial base salary for
each officer. In February 2007, we increased the base salaries
of each of Messrs. Abovitz, Frank, LaPorte and Nunes from
$160,500, $160,500, $160,500 and $160,000, respectively, to
$173,340, $176,550, $176,550 and $167,840, respectively, to
reflect the compensation committees subjective review of
their overall individual 2006 performances. Similarly, in
February 2007, Dr. Ferrés base salary was
increased from $278,200 to $300,000 to reflect the compensation
committees subjective review of his overall individual
2006 performance. We believe this increase to
Dr. Ferrés base salary is reasonable given our
performance during his tenure.
Cash
Bonuses
Our cash bonus compensation is designed to reward achievement of
strategic and financial goals that support our objective of
enhancing stockholder value and to motivate executives to
achieve superior performance in their areas of responsibility.
Historically, each of our named executive officers was
compensated under a discretionary cash bonus arrangement based
on a subjective evaluation by the compensation committee of the
individuals overall performance.
In August 2007, however, we adopted the 2007 2008
Metric Scorecard Cash Bonus Plan, pursuant to which our
management level employees, including our named executive
officers, may be compensated in the form of a cash bonus with
respect to performance in 2007 and 2008. The 2007
2008 Metric Scorecard Cash Bonus Plan measures company-wide
performance and is designed to encourage teamwork and
collaboration among our employees and to reward them for
achieving financial and operating goals that are key to the
success of our business. Moreover, the board believed that a
cash bonus plan that primarily measures achievement of
Company-wide performance targets is the appropriate mechanism
for rewarding and motivating management, including the named
executive officers, because each of these executives is
responsible for, among other things, strategic, operational and
financial objectives that cannot always be measured on an
individual basis.
The 2007 2008 Metric Scorecard Cash Bonus Plan
provides that upon achievement of specified measurable
performance goals by the Company, each management level
employee, including our named executive officers, will be paid a
cash performance bonus amount. The amount of this bonus will be
based on a percentage of the Metric Scorecard Percentage
achieved by the Company. In connection with this determination,
there is a minimum and maximum Metric Scorecard Percentage that
govern any potential award.
The Metric Scorecard Percentage represents the percentage of
pre-defined goals achieved by the Company at the end of 2007, as
determined by the compensation committee in its discretion. For
2007, these goals include the following:
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launch and support of U.S. clinical sites, including
installations of TGS units, purchase orders for TGS units,
achievement of revenues (including deferred revenues) for TGS
units upon customer acceptance, and number of TGS procedures
performed;
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development and validation of MAKOplasty business case model and
clinical efficacy, including release of clinical whitepaper;
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continuation of TGS and implant development, including release
of version 1.2 of TGS and onlay knee implant system, FDA
clearance for version 1.2 of TGS, development of version 2.0 of
TGS and modular implants, and securing relationships for cutting
technology;
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establishment and maintenance of operational infrastructure for
TGS system manufacturing and service;
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achievement of 2007 budget;
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definition and execution of strategy for financing;
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continuation of intellectual property development to expand
value; and
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continuation of Company values and vision.
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We establish a baseline target and stretch levels for
achievement of each of these goals. The determination of whether
and to what extent these metrics have been achieved will be made
by the compensation committee in its discretion, and has not yet
been determined.
The compensation committee in its discretion will determine the
performance goals and criteria to govern potential awards to be
issued in 2008 under the cash bonus plan. These goals have not
yet been determined.
Long-Term
Equity Compensation
We grant stock options and restricted stock to our named
executive officers, as we believe that such grants further our
compensation objectives of aligning the interests of our named
executive officers with those of our stockholders, encouraging
long-term performance, and providing a simple and
easy-to-understand form of equity compensation that promotes
executive retention. We view such grants both as incentives for
future performance and as compensation for past accomplishments.
We historically have made grants of equity to named executive
officers in connection with their initial hire. The number of
stock options or restricted stock granted to each named
executive officer in connection with his initial hire was
determined based upon negotiations with each executive,
represented the number necessary to recruit each executive from
their then-existing positions and reflected the compensation
committees subjective evaluation of the executives
experience and potential for future performance. In addition, we
have made additional discretionary grants, from time to time, as
recommended by the compensation committee and determined by the
board of directors, taking into consideration such factors as
individual performance and competitive market conditions. The
timing of any such equity grants was determined by the
compensation committees determination of achievement by
the named executive officer, and not any effort to time the
grants in coordination with changes in our stock price.
We have used stock options and restricted stock, rather than
other forms of long-term incentives, because they create value
for the executive only if stockholder value is increased through
an increased share price. Prior to this offering, all stock
option and restricted stock grants were made pursuant to the
2004 Stock Incentive Plan and our board of directors determined
the exercise price based on internal or third-party valuation
reports. Following this offering, all option grants will be made
pursuant to our 2008 Omnibus Incentive Plan, and the exercise
price of stock options will be based on the fair market value of
our common stock on the grant date, which will be equal to the
closing price of our common stock on that date.
Messrs. Abovitz, Frank and LaPorte received options for
82,508, 66,006 and 66,006 shares, respectively, in respect
of the compensation committees subjective review of their
overall individual performances in 2006. In each case, half of
the stock options was granted in May 2006, and the remaining
half was granted in March 2007. All of these stock option awards
are time based, with the first 25% of the option
grant vesting upon the one year anniversary of the grant and the
remaining 75% vesting ratably on a monthly basis over the
remaining three-year period beginning on the first anniversary
of the date of grant. They generally expire ten years from the
date of the grant. We believe that this provides a reasonable
time frame to align the executive
99
officer compensation with the interests of shareholders. See the
Grants of Plan-Based Awards table included elsewhere
in this prospectus for the option awards in 2007.
In March 2007, we issued 82,508 shares of restricted common
stock to Dr. Ferré at a purchase price of
$2.48 per share in exchange for a promissory note from
Dr. Ferré in the principal amount of $205,000. The
March 2007 issuance to Dr. Ferré was made based on the
compensation committees subjective review of his overall
individual performance in 2006. See the Grants of
Plan-Based Awards table included elsewhere in this
prospectus for additional information regarding the award of
restricted stock in 2007.
As referenced under Role of Directors, Executive Officers
and Compensation Consultants above, in the third quarter
of 2007, the compensation committee retained Radford Surveys and
Consulting to conduct a review of pre-IPO equity ownership
levels for our senior management, as compared to other pre-IPO
medical device and biotechnology companies in later stages of
financing. Based on Radfords analysis of our equity
ownership levels for senior management, including the named
executive officers, the compensation committee recommended, and
the board of directors approved in August 2007, the grant of
247,524 shares of restricted stock to Dr. Ferré,
which shares vest ratably on a quarterly basis over a four-year
period, based on his continued service. The compensation
committee also recommended, and the board of directors approved
the grant of stock options to purchase 198,019 shares of
our common stock to Dr. Ferré, to be made upon closing
of this initial public offering. The options would vest ratably
on a quarterly basis over a four year period starting at grant
on the completion of this initial public offering. The
compensation committee recommended, and the board of directors
approved in August 2007, the grant of stock options to each of
Messrs. Abovitz, Frank, LaPorte and Nunes, to purchase
95,148, 66,006, 66,006, and 33,003 shares, respectively, of
our common stock. Each grant of stock options to
Messrs. Abovitz, Frank, LaPorte and Nunes vests ratably on
a quarterly basis over a four-year period in accordance with the
following schedule:
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50% begins vesting immediately;
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25% begins vesting upon an evaluation of the individual
performance with respect to 2007, which determination is to be
made in the sole discretion of the Chief Executive Officer
(which has not yet occurred); and
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25% begins vesting upon a determination of a passing score on
the Companys 2007 Metric Scorecard.
|
The board of directors issued these awards to bring the equity
holdings of management to the median of the surveyed companies
for retention purposes.
Employee
Stock Purchase Plan
We have not adopted any formal employee equity ownership
requirements or guidelines. However, we intend to adopt a
Employee Stock Purchase Plan to encourage equity ownership by
all of our employees. See 2008 Employee Stock Purchase
Plan below for a description of the 2008 Employee Stock
Purchase Plan to be adopted and made effective immediately upon
completion of this offering.
Perquisites
and Other Benefits
As a general matter, we do not intend to offer perquisites or
other benefits to any executive officer, including the named
executive officers, with an aggregate value in excess of
$10,000, because we believe we can provide better incentives for
desired performance with compensation in the forms described
above. We recognize that, from time to time, it may be
appropriate to provide some perquisites or other benefits in
order to attract, motivate and retain our executives, with any
such decision to be reviewed and approved by the compensation
committee as needed.
On September 5, 2007, the board of directors recognized
Dr. Ferrés performance in leading the
establishment of our initial Knee Centers of Excellence and
facilitating the performance of MAKOplasty procedures at those
sites through the forgiveness of approximately $1.1 million
of outstanding loans, including
100
accrued interest of $113,000, made by the Company to
Dr. Ferré. The board of directors also recognized Mr.
Abovitzs research and development leadership with respect
to versions 1.2 and 2.0 of our TGS through the forgiveness of
approximately $25,000 of an outstanding loan made by us to Mr.
Abovitz. The board of directors determined that the forgiveness
of such loan made by the Company to Dr. Ferré and
Mr. Abovitz were adequate compensation for extraordinary
performance and in the best interests of the Company. See
Note 4 to Financial Statements for additional information
regarding these loans. In connection with the forgiveness of the
loans, 35,244 shares of common stock were surrendered by
Dr. Ferré to us to pay for the payroll taxes associated
with the taxable income from the forgiveness of the loans. Also
on September 5, 2007, to partially compensate
Dr. Ferré for these surrendered shares, the board of
directors granted options to Dr. Ferré to purchase
35,244 shares of common stock at an exercise price of
$11.12.
Change
in Control Arrangements
Each of our named executive officers has an employment agreement
which provides for severance payment arrangements following
specified termination events. Other than Dr. Ferré,
none of the named executive officers would automatically be
entitled to payments under their employment agreements upon a
change in control, unless specific additional events occur, such
as a material adverse change in responsibilities. Each of the
named executive officers severance packages was negotiated
by us with the executive and was based on what the compensation
committee believed, in its experience, to be a reasonable, but
not overly generous, severance package to each executive, and
necessary to retain the executive.
The compensation committee does not take into account severance
packages in determining the amounts of other elements of
compensation, such as base salary, cash bonus, stock option
grants and restricted stock grants. See
Termination and Change of Control
Payments below for a description of the severance and
change in control arrangements for our named executive officers.
Effect
of Accounting and Tax Treatment on Compensation
Decisions
In the review and establishment of our compensation programs, we
consider the anticipated accounting and tax implications to us
and our executives. While we consider the applicable accounting
and tax treatment, these factors alone are not dispositive, and
we also consider the cash and non-cash impact of the programs
and whether a program is consistent with our overall
compensation philosophy and objectives.
Section 162(m) of the Internal Revenue Code imposes a limit
on the amount of compensation that we may deduct in any one year
with respect to covered employees, unless specific and detailed
criteria are satisfied. Performance-based compensation, as
defined in the Internal Revenue Code, is fully deductible if the
programs are approved by stockholders and meet other
requirements. In general, we have determined that we will not
seek to limit executive compensation so that all of such
compensation is deductible under Section 162(m). However,
from time to time, we monitor whether it might be in our
interests to structure our compensation programs to satisfy the
requirements of Section 162(m). We seek to maintain
flexibility in compensating our executives in a manner designed
to promote our corporate goals and, as a result, our
compensation committee has not adopted a policy requiring all
compensation to be deductible. Our compensation committee will
continue to assess the impact of Section 162(m) on our
compensation practices and determine what further action, if
any, is appropriate.
101
Executive
Compensation
The following table sets forth the compensation paid in 2007 and
2006 to our Chief Executive Officer, our Chief Financial Officer
and each of the three other most highly compensated executive
officers who were serving as executive officers on
December 31, 2007. These five individuals are sometimes
referred to collectively as the named executive
officers.
2007 and
2006 Summary Compensation Table
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Non-Equity
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Incentive Plan
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Name and
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Stock
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Option
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Compensation
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All Other
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Principal Position
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Year
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Salary ($)
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Bonus ($)(1)
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Awards ($)(2)
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Awards ($)(2)
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($)
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Compensation ($)
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Total ($)
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Maurice R. Ferré, M.D.
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2007
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$
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299,058
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$
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379,589
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$
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18,339
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(3
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)
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$
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1,149,320
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(4)
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$
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1,846,306
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Chief Executive
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2006
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$
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274,000
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$
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200,000
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$
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73,112
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$
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547,112
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Officer and President
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Fritz L. LaPorte
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2007
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$
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175,686
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$
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48,394
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(3
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$
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224,080
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Senior Vice President of
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2006
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$
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159,692
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$
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48,150
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$
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9,118
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$
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216,960
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Finance and Administration, Chief Financial Officer and
Treasurer
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Rony A. Abovitz
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2007
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$
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172,772
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$
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76,263
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(3
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$
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26,815
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(5)
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$
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275,850
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Senior Vice President and
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2006
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$
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159,692
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$
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48,150
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$
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21,930
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$
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229,772
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Chief Technology Officer
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Menashe R. Frank
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2007
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$
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175,686
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$
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46,035
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(3
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$
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$
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221,721
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Senior Vice President,
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2006
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$
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159,692
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$
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48,150
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$
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6,759
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$
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214,601
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General Counsel and Secretary
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Steven J. Nunes
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2007
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$
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167,731
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$
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24,994
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(3
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$
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192,725
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Senior Vice President of
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2006
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$
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101,539
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(6)
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$
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15,123(6
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$
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4,190
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$
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26,319
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(7)
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$
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147,171
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Sales and Marketing
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(1)
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Amounts represent discretionary cash bonus payments made to each
named executive officer in respect of his performance in 2006,
as determined by the compensation committee. All payments were
made in the first quarter of 2007.
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(2)
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Amounts represent the compensation expense recognized by the
Company during 2006 and 2007, respectively, as computed in
accordance with FAS 123(R), disregarding any estimated
forfeitures relating to service-based vesting conditions. For a
discussion of the assumptions made in the valuation of these
awards, see Note 8 to Financial Statements.
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(3)
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Cash bonus payments, to be made pursuant to the 2007-2008 Metric
Scorecard Cash Bonus Plan, have not yet been determined by the
compensation committee for each named executive officer in
respect of his performance in 2007 and is not determinable at
this time. The compensation committee expects to determine the
bonuses for these named executive officers in February or March
of 2008.
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(4)
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On September 5, 2007, the Board of Directors forgave
approximately $1,149,320 of outstanding loans, including accrued
interest, that the Company made to Dr. Ferré.
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(5)
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On September 5, 2007, the Board of Directors forgave
approximately $25,000 of outstanding loans, made by the Company
to Mr. Abovitz.
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(6)
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Mr. Nunes joined the Company in May 2006.
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(7)
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As part of our employment agreement with Mr. Nunes, and to
encourage Mr. Nunes to relocate to Ft. Lauderdale,
Florida in May 2006, we agreed to provide Mr. Nunes with a
relocation bonus of $15,000 to cover the costs of temporary
housing and travel expenses during the initial six month
relocation period. In addition, we reimbursed Mr. Nunes for his
relocation expenses of $11,319.
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102
2007
Grants of Plan-Based Awards
The following table sets forth information with respect to
grants of plan-based awards during 2007 to the named executive
officers:
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All Other
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All Other
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Stock
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Option
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Grant
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Awards:
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Awards:
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Exercise
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Date Fair
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Estimated Future Payouts
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Number of
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Number of
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or Base
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Value of
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Under Non-Equity Incentive
|
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Shares of
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Securities
|
|
|
Price of
|
|
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Stock
|
|
|
|
|
|
Plan Awards(1)
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Stock or
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Underlying
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|
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Option
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and
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Threshold
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Target
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Maximum
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Units
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Options
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Awards
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Option
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Name
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Grant Date
|
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($)
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($)
|
|
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($)
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(#)
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(#)
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($/Sh)(2)
|
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Awards(3)
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Maurice R. Ferré, M.D.
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|
March 26, 2007
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$
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60,000
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$
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75,000
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$
|
180,000
|
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82,508
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(4)
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|
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$
|
2.48
|
|
|
$
|
107,547
|
|
|
|
August 24, 2007
|
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|
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247,524
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(5)
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$
|
11.12
|
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$
|
2,752,467
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|
|
|
September 5, 2007
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|
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|
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35,244
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(6)
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$
|
11.12
|
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$
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228,851
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Fritz L. LaPorte
|
|
March 26, 2007
|
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35,310
|
|
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|
44,138
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|
|
|
105,930
|
|
|
|
|
|
|
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33,003
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(7)
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$
|
2.48
|
|
|
$
|
48,700
|
|
|
|
August 24, 2007
|
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|
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66,006
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(8)
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$
|
11.12
|
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$
|
321,444
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Rony A. Abovitz
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March 26, 2007
|
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34,668
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43,335
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|
|
104,004
|
|
|
|
|
|
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41,254
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(7)
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$
|
2.48
|
|
|
$
|
60,875
|
|
|
|
August 24, 2007
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|
|
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95,148
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(8)
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$
|
11.12
|
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$
|
463,361
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Menashe R. Frank
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March 26, 2007
|
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35,310
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|
|
|
44,138
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|
|
|
105,930
|
|
|
|
|
|
|
|
33,003
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(7)
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$
|
2.48
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|
$
|
48,700
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|
|
|
August 24, 2007
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,006
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(8)
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$
|
11.12
|
|
|
$
|
321,444
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|
Steven J. Nunes
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|
March 26, 2007
|
|
|
33,568
|
|
|
|
41,960
|
|
|
|
100,704
|
|
|
|
|
|
|
|
16,501
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(7)
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$
|
2.48
|
|
|
$
|
24,350
|
|
|
|
August 24, 2007
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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33,003
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(8)
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|
$
|
11.12
|
|
|
$
|
160,722
|
|
|
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|
(1)
|
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Represents the threshold, target and maximum amounts that could
be earned by each named executive officer pursuant to our
2007-2008 Metric Scorecard Cash Bonus Plan.
|
|
(2)
|
|
Equals the estimated fair value of the common stock on the date
of grant.
|
|
(3)
|
|
Represents the grant date fair value of the awards calculated in
accordance with SFAS No. 123(R).
|
|
(4)
|
|
Restricted common stock, with 25% vested on the date of grant
and the remaining 75% vesting ratably on a monthly basis over a
four year period.
|
|
(5)
|
|
Restricted common stock, vesting ratably on a quarterly basis
over a four year period.
|
|
(6)
|
|
Vesting ratably on a quarterly basis over a four year period.
|
|
(7)
|
|
The first 25% of this option vests upon the one year anniversary
of the grant date and the remaining 75% vests ratably on a
monthly basis over the remaining three years.
|
|
(8)
|
|
The first 50% of this option vests ratably on a quarterly basis
over a four year period upon grant and the remaining 50% vests
ratably on a quarterly basis over a four year period upon and
subject to 2007 performance evaluations.
|
Employment
Agreements
On September 19, 2007, we entered into a new employment
agreement with Dr. Ferré, which was subsequently
amended and restated on November 12, 2007 to permit
Dr. Ferré to serve on the board of directors of Z-KAT
if approved by a majority of our disinterested directors. The
employment agreement expires on December 31, 2010, subject
to automatic renewal for successive one-year terms unless either
party gives 120 days notice of its intention not to renew
the agreement. Under the employment agreement,
Dr. Ferré is entitled to an initial base salary of
$300,000 and an opportunity to earn a performance bonus with a
target of 50% of his base salary which performance bonus may be
higher or lower based on the attainment of performance criteria
established by the company. For a description of severance
arrangements, see Termination and Change of
Control Payments below.
We entered into employment agreements, effective January 2005,
with each of Messrs. Abovitz, Frank and LaPorte. Each of
these agreements was amended and restated on February 5,
2007 to provide for a term of three years from the effective
date of the original agreement. In May 2006, we entered into an
employment agreement with Mr. Nunes for a term of two
years. Each of these agreements provides for automatic renewal
for successive one-year terms. These employment agreements
provided for an initial negotiated base salary of $150,000 for
each of Messrs. Abovitz, Frank and LaPorte, and $160,000 for Mr.
Nunes. See Base Salary
103
above for current base salaries. Pursuant to these employment
agreements, each of Messrs. Abovitz, Frank and LaPorte
received options for 82,508, 13,201 and 24,752 shares,
respectively, of our common stock upon closing of the
Series B redeemable convertible preferred stock financing
in July 2005. Mr. Nunes received options for
49,504 shares pursuant to this employment agreement, 16,501
of which was granted in 2007. As part of our package to recruit
Mr. Nunes to relocate to Ft. Lauderdale, Florida in
May 2006, we agreed to provide Mr. Nunes with a relocation
bonus of $15,000 to cover the costs of temporary housing,
together with travel expenses during the initial six month
relocation period, and reimbursement for moving expenses. In the
event that Mr. Nunes employment is terminated for any
reason during the first 24 months following his employment,
other than by us for cause or by Mr. Nunes for other than
good reason, Mr. Nunes is required to repay a prorated
share of the relocation bonus. Each executive also is eligible
to participate in various benefits programs that are available
to our employees generally. In addition, each of the employment
agreements provides for certain payments to be made to
Messrs. Abovitz, Frank, LaPorte and Nunes upon termination
of employment. For a description of these terms, including an
estimation of the payments to be made, see
Termination and Change of Control
Payments below.
2007
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth information with respect to
outstanding equity awards of the named executive officers as of
December 31, 2007:
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Market Value of
|
|
|
|
Number of Securities
|
|
|
Option
|
|
|
|
|
|
Shares or
|
|
|
Shares or Units of
|
|
|
|
Underlying Unexercised
|
|
|
Exercise
|
|
|
Option
|
|
|
Units of Stock
|
|
|
Stock That Have
|
|
|
|
Options (#)
|
|
|
Price
|
|
|
Expiration
|
|
|
That Have Not Vested
|
|
|
Not Vested
|
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
($)
|
|
|
Date
|
|
|
(#)
|
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|
($)
|
|
|
Maurice R. Ferré
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107,997
|
(1)
|
|
$
|
1,619,950
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,386
|
(2)
|
|
$
|
560,790
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,278
|
(3)
|
|
$
|
754,170
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
232,054
|
(4)
|
|
$
|
3,480,810
|
(4)
|
|
|
|
2,202
|
(5)
|
|
|
33,042
|
(5)
|
|
$
|
11.12
|
|
|
|
9/04/2017
|
|
|
|
|
|
|
|
|
|
Fritz L. LaPorte
|
|
|
69,867
|
(6)
|
|
|
0
|
(6)
|
|
$
|
0.67
|
|
|
|
12/15/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
14,954
|
(7)
|
|
|
9,798
|
(7)
|
|
$
|
1.27
|
|
|
|
7/17/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
13,063
|
(8)
|
|
|
19,940
|
(8)
|
|
$
|
1.27
|
|
|
|
5/21/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
(9)
|
|
|
33,003
|
(9)
|
|
$
|
2.48
|
|
|
|
3/25/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
2,062
|
(10)
|
|
|
63,944
|
(10)
|
|
$
|
11.12
|
|
|
|
8/23/2017
|
|
|
|
|
|
|
|
|
|
Rony A. Abovitz
|
|
|
69,867
|
(11)
|
|
|
0
|
(11)
|
|
$
|
0.67
|
|
|
|
12/15/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
49,848
|
(12)
|
|
|
32,660
|
(12)
|
|
$
|
1.27
|
|
|
|
7/17/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
16,329
|
(13)
|
|
|
24,925
|
(13)
|
|
$
|
1.27
|
|
|
|
5/21/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
(14)
|
|
|
41,254
|
(14)
|
|
$
|
2.48
|
|
|
|
3/25/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
2,973
|
(15)
|
|
|
92,175
|
(15)
|
|
$
|
11.12
|
|
|
|
8/23/2017
|
|
|
|
|
|
|
|
|
|
Menashe R. Frank
|
|
|
34,933
|
(16)
|
|
|
0
|
(16)
|
|
$
|
0.67
|
|
|
|
12/15/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
7,975
|
(17)
|
|
|
5,226
|
(17)
|
|
$
|
1.27
|
|
|
|
7/17/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
13,063
|
(18)
|
|
|
19,940
|
(18)
|
|
$
|
1.27
|
|
|
|
5/21/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
(19)
|
|
|
33,003
|
(19)
|
|
$
|
2.48
|
|
|
|
3/25/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
2,062
|
(20)
|
|
|
63,944
|
(20)
|
|
$
|
11.12
|
|
|
|
8/23/2017
|
|
|
|
|
|
|
|
|
|
Steven J. Nunes
|
|
|
13,063
|
(21)
|
|
|
19,940
|
(21)
|
|
$
|
1.27
|
|
|
|
5/14/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
(22)
|
|
|
16,501
|
(22)
|
|
$
|
2.48
|
|
|
|
3/25/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
1,031
|
(23)
|
|
|
31,972
|
(23)
|
|
$
|
11.12
|
|
|
|
8/23/2017
|
|
|
|
|
|
|
|
|
|
104
|
|
|
(1)
|
|
The vesting of the shares subject to this restricted stock is as
follows: (i) 90,944 shares vested on
7/14/2005;
and (ii) 272,834 shares vest ratably over a
48 month period beginning 7/13/06 through
6/13/09.
|
|
(2)
|
|
The vesting of the shares subject to this restricted stock is as
follows: (i) 20,627 shares vested on
5/22/06;
and
(ii) 61,881 shares vest ratably over a 48 month
period beginning
5/21/07
through
4/21/10.
|
|
(3)
|
|
The vesting of the shares subject to this restricted stock is as
follows: (i) 20,627 shares vested on
3/26/07;
and
(ii) 61,881 shares vest ratably over a 48 month
period beginning
3/25/08
through
2/24/11.
|
|
(4)
|
|
The vesting of the shares subject to this restricted stock is as
follows: ratably on a quarterly basis over 4 years beginning
8/24/07 through 7/22/11.
|
|
(5)
|
|
The vesting of the shares subject to this stock option is as
follows: (i) 2,202 shares vested on
12/4/07;
and
(ii) 33,042 shares vest ratably quarterly over the
remaining period beginning
12/5/07
through
9/04/11.
|
|
(6)
|
|
The vesting of the shares subject to this stock option is as
follows: (i) 69,867 shares vested on
12/16/2004.
|
|
(7)
|
|
The vesting of the shares subject to this stock option is as
follows: (i) 6,188 shares vested on
7/15/06;
and
(ii) 18,564 shares vest ratably monthly over a
36 month period beginning
8/15/06
through
7/15/09.
|
|
(8)
|
|
The vesting of the shares subject to this stock option is as
follows: (i) 8,251 shares vest on
5/21/2007;
and (ii) 24,752 shares vest ratably monthly over a
36 month period beginning
6/21/07
through
5/21/10.
|
|
(9)
|
|
The vesting of the shares subject to this stock option is as
follows: (i) 8,251 shares vest on
3/25/2008;
and (ii) 24,752 shares vest ratably monthly over a
36 month period beginning
3/26/08
through
2/25/11.
|
|
(10)
|
|
The vesting of the shares subject to this stock option is as
follows: (i) 33,003 shares vest ratably quarterly over
four years beginning on
8/24/07;
and
(ii) 33,003 shares vest ratably quarterly over four
years upon and subject to 2007 performance evaluations.
|
|
(11)
|
|
All 69,867 shares vested on
12/16/2004.
|
|
(12)
|
|
The vesting of the shares subject to this stock option is as
follows: (i) 20,627 shares vested on
7/15/06;
and
(ii) 61,881 shares vest ratably monthly over a
36 month period beginning
8/15/06
through
7/15/09.
|
|
(13)
|
|
The vesting of the shares subject to this stock option is as
follows: (i) 10,313 shares vest on
5/21/2007;
and (ii) 30,941 shares vest ratably monthly over a
36 month period beginning
6/21/07
through
5/21/10.
|
|
(14)
|
|
The vesting of the shares subject to this stock option is as
follows: (i) 10,313 shares vest on
3/25/2008;
and (ii) 30,941 shares vest ratably monthly over a
36 month period beginning
3/26/08
through
2/25/11.
|
|
(15)
|
|
The vesting of the shares subject to this stock option is as
follows: (i) 47,574 shares vest ratably quarterly over
four years beginning on
8/24/07;
and
(ii) 47,574 shares vest ratably quarterly over four
years upon and subject to 2007 performance evaluations.
|
|
(16)
|
|
The vesting of the shares subject to this stock option is as
follows: (i) 34,933 shares vested on
12/16/2004.
|
|
(17)
|
|
The vesting of the shares subject to this stock option is as
follows: (i) 3,300 shares vested on
7/15/06;
and
(ii) 9,901 shares vest ratably monthly over a
36 month period beginning
8/15/06
through
7/15/09.
|
|
(18)
|
|
The vesting of the shares subject to this stock option is as
follows: (i) 8,251 shares vest on
5/21/2007;
and (ii) 24,752 shares vest ratably monthly over a
36 month period beginning
6/21/07
through
5/21/10.
|
|
(19)
|
|
The vesting of the shares subject to this stock option is as
follows: (i) 8,251 shares vest on
3/25/2008;
and (ii) 24,752 shares vest ratably monthly over a
36 month period beginning
3/26/08
through
2/25/11.
|
|
(20)
|
|
The vesting of the shares subject to this stock option is as
follows: (i) 33,003 shares vest ratably quarterly over
four years beginning on
8/24/07;
and
(ii) 33,003 shares vest ratably quarterly over four
years upon and subject to 2007 performance evaluations.
|
|
(21)
|
|
The vesting of the shares subject to this stock option is as
follows: (i) 8,251 shares vest on
5/14/2007;
and (ii) 24,752 shares vest ratably monthly over a
36 month period beginning
6/14/07
through
5/14/10.
|
|
(22)
|
|
The vesting of the shares subject to this stock option is as
follows: (i) 4,125 shares vest on
3/25/2008;
and (ii) 12,376 shares vest ratably monthly over a
36 month period beginning
3/26/08
through
2/25/11.
|
105
|
|
|
(23)
|
|
The vesting of the shares subject to this stock option is as
follows: (i) 16,501 shares vest ratably quarterly over
four years beginning on
8/24/07;
and
(ii) 16,502 shares vest ratably quarterly over four
years upon and subject to 2007 performance evaluations.
|
2007
Option Exercises and Stock Vested
No options were exercised by any of the named executive officers
during the year ended December 31, 2007. The following
table sets forth information with respect to stock vested during
2007:
|
|
|
|
|
|
|
|
|
|
|
Stock Awards
|
|
|
|
Number of
|
|
|
|
|
|
|
Shares
|
|
|
Value
|
|
|
|
Acquired on
|
|
|
Realized on
|
|
Name
|
|
Vesting (#)
|
|
|
Vesting ($)(1)
|
|
|
Maurice R. Ferré, M.D.
|
|
|
131,379
|
|
|
$
|
1,055,982
|
|
Fritz L. LaPorte
|
|
|
|
|
|
|
|
|
Rony A. Abovitz
|
|
|
|
|
|
|
|
|
Menashe R. Frank
|
|
|
|
|
|
|
|
|
Steven J. Nunes
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Value realized on vesting is determined by multiplying the
number of vested shares by the price of our common stock on the
vesting date. This amount is not intended to represent the
value, if any, that is actually realized by the individual.
|
2004
Stock Incentive Plan
We adopted the MAKO Surgical Corp. 2004 Stock Incentive Plan on
December 16, 2004 to enable us to attract, retain and
motivate employees. Under this plan, we granted to our employees
options intended to qualify as incentive stock
options under Section 422 of the Internal Revenue
Code and non-qualified stock options to purchase shares of our
common stock. Of the 2,830,033 shares of common stock that
were eligible for issuance pursuant to awards made under this
plan, 1,921,139 shares of common stock were subject to
options outstanding as of January 1, 2008. As of such date,
the outstanding options had a weighted average exercise price of
$4.81 per share and had expiration dates ranging from
December 15, 2014 to September 5, 2017. Although this
plan remains in effect and options under the plan remain
outstanding, we will cease making awards under the plan as of
the adoption and effectiveness of our 2008 Omnibus Incentive
Plan.
2008
Omnibus Incentive Plan
Our board of directors approved the MAKO Surgical Corp. 2008
Omnibus Incentive Plan on January 9, 2008 (referred to as
the new equity plan or the 2008 Omnibus
Incentive Plan). Our stockholders approved the plan on
January 10, 2008. The new equity plan is effective upon the
consummation of our initial public offering and will expire
January 9, 2018 unless earlier terminated by the board of
directors. We have not granted any awards under the new equity
plan as of the date of this prospectus.
The new equity plan permits the board of directors to delegate
such power and authority related to the administration and
implementation of the new equity plan. Accordingly, as further
described below, the granting of awards under the new equity
plan will generally be within the discretion of the compensation
committee of our board of directors.
Eligibility.
Awards may be granted under the
plan to officers, directors (including non-employee directors)
and other employees of our company or any of our subsidiaries or
other affiliates, to any individual who is an advisor,
consultant or other provider of services to our company or any
of our subsidiaries or other affiliates and to any other
individuals who are approved by our board of directors as
eligible to participate in
106
the plan. Only employees of our company or any of its
subsidiaries are eligible to receive incentive stock options.
Administration, Amendment and Termination.
Our
board of directors will have the power and authority to
administer the new equity plan. In accordance with the terms of
the plan, our board of directors may delegate this power and
authority to its compensation committee. The compensation
committee will have the authority to interpret the terms and
intent of the new equity plan, determine eligibility for and
terms of awards for participants and make all other
determinations necessary or advisable for the administration of
the new equity plan. To the extent permitted by law, our board
or compensation committee may delegate authority under the plan
to a member of our board of directors.
The compensation committee may amend, suspend or terminate the
new equity plan at any time with respect to any shares of common
stock as to which awards have not been made. No such action may
amend the new equity plan without the approval of stockholders
if the amendment is required to be submitted for stockholder
approval by applicable law, rule or regulation, including rules
of the Nasdaq Stock Market.
Awards.
Awards under the new equity plan may
be made in the form of: stock options, which may be either
incentive stock options or non-qualified stock options; stock
appreciation rights; restricted stock; restricted stock units;
dividend equivalent rights; performance shares; performance
units; cash-based awards; other stock-based awards, including
unrestricted shares; and any combination of the foregoing.
Any of the foregoing awards may be made subject to attainment of
performance goals over any applicable performance period.
Shares Subject to the Plan.
Following this
offering, the aggregate number of shares of our common stock
that may be issued initially pursuant to stock awards under the
new equity plan is 1,084,703 shares. The number of shares
of our common stock reserved for issuance will automatically
increase annually on January 1st, from January 1, 2009
through January 1, 2018, by 4% of the total number of
shares of our common stock outstanding on
December 31st of the preceding calendar year (rounded
down to the nearest whole share), unless the board determines an
increase, if any, for a lesser number of shares. In no event
will the annual increase, if any, be greater than
2.5 million shares. The maximum number of shares that may
be issued pursuant to the exercise of incentive stock options
under the new equity plan is equal to the total share reserve,
as increased from time to time pursuant to annual increases.
Shares issued under the new equity plan may be authorized but
unissued shares or treasury shares. Any shares covered by an
award, or portion of an award, granted under the new equity plan
that is forfeited or canceled, expires or is settled in cash
will be deemed not to have been issued for purposes of
determining the maximum number of shares available for issuance
under the new equity plan.
Adjustment of Shares Subject to New Equity
Plan.
In the event of certain changes in our
capitalization, the compensation committee will adjust, among
other award terms, the number and kind of shares or property
that may be delivered in connection with awards and the exercise
price, grant price or purchase price relating to any award in
such manner as the compensation committee determines to be
necessary to prevent dilution or enlargement of the rights of
participants.
Effect of Corporate Transactions.
Subject to
the exceptions described below, upon the occurrence of a
corporate transaction, as defined in the new equity
plan, all outstanding shares of restricted stock and all stock
units will become immediately vested, and the shares of stock
subject to outstanding stock units will be delivered immediately
before the occurrence of the corporate transaction. In addition,
either of the following two actions will be taken:
(i) fifteen days before the scheduled completion of the
corporate transaction, all options and stock appreciation rights
will become immediately exercisable and will remain exercisable
for a period of fifteen days; or (ii) instead of providing
for accelerated vesting in awards under the new equity plan in
connection with the corporate transaction, the compensation
committee may provide that awards, whether or not exercisable,
will be terminated and the holders of awards will receive a cash
payment, or the delivery of shares of stock, other securities or
a combination of cash, stock and securities equivalent to such
cash payment, equal to the value of the award.
107
These actions will not apply to any corporate transaction to the
extent that provision is made for the assumption or continuation
of the outstanding awards, or for the substitution for such
outstanding awards of similar awards relating to the stock of
the successor entity, or a parent or subsidiary of the successor
entity, with appropriate adjustments to the number of shares of
stock that would be delivered and the exercise price, grant
price or purchase price relating to any such award.
A corporate transaction means:
the
dissolution or liquidation of our company or a merger,
consolidation, or reorganization of our company with one or more
other entities in which we are not the surviving entity; a sale
of substantially all of our assets to another person or entity;
or any transaction which results in any person or entity, other
than persons who are our stockholders or affiliates immediately
prior to the transaction, owning 50% or more of the combined
voting power of all classes of our stock.
If we are the surviving entity in any reorganization, merger, or
consolidation of our company with one or more other entities
which does not constitute a corporate transaction, any option or
stock appreciation right outstanding under the new equity plan
will apply to the securities to which a holder of the number of
shares of our stock subject to the option or stock appreciation
right would have been entitled immediately following the
transaction, with a corresponding proportionate adjustment of
the exercise price. In such an event, stock units will be
adjusted so as to apply to the securities that a holder of the
number of shares of our stock subject to the stock units would
have been entitled to receive immediately following the
transaction.
The compensation committee may provide in any agreement under
the new equity plan for different provisions to apply to an
award other than those described above.
Corporate Performance
Objectives.
Section 162(m) of the Internal
Revenue Code limits public companies to an annual deduction for
federal income tax purposes of $1,000,000 for compensation paid
to their chief executive officer and, based on recent IRS
interpretation, the three most highly compensated executive
officers determined at the end of each year. Performance-based
compensation is excluded from this limitation. The new equity
plan is designed to permit the compensation committee to grant
awards that qualify as performance-based for purposes of
satisfying the conditions of Section 162(m) at such time as
the new equity plan becomes subject to Section 162(m).
2008
Employee Stock Purchase Plan
Our board of directors approved the MAKO Surgical Corp. 2008
Employee Stock Purchase Plan on January 9, 2008 (referred
to as the 2008 Employee Stock Purchase Plan). Our
stockholders approved the plan on January 10, 2008. The
2008 Employee Stock Purchase Plan will become effective upon
consummation of this initial public offering. We have not
granted any awards under the new equity plan as of the date of
this prospectus.
Share Reserve.
Following this offering, the
2008 Employee Stock Purchase Plan authorizes the issuance of
625,000 shares of common stock for purchase by eligible
employees of the Company or any of its participating affiliates.
The shares of common stock issuable under the 2008 Employee
Stock Purchase Plan may be authorized but unissued shares,
treasury shares, or shares purchased on the open market. The
2008 Employee Stock Purchase Plan is intended to qualify as an
employee stock purchase plan within the meaning of
Section 423 of the Internal Revenue Code.
Administration.
The 2008 Employee Stock
Purchase Plan will be administered by the compensation
committee. The compensation committee has the authority to
interpret the 2008 Employee Stock Purchase Plan, to prescribe,
amend and rescind rules relating to it, and to make all other
determinations necessary or advisable in administering the 2008
Employee Stock Purchase Plan.
Payroll Deductions.
The 2008 Employee Stock
Purchase Plan permits eligible employees to elect to have a
portion of their pay deducted by us to purchase shares of our
common stock. We will determine the length and duration of the
periods during which payroll deductions will be accumulated to
purchase shares of common stock. This period is known as the
offering period.
108
Purchase Price.
Rights to purchase shares of
our common stock will be deemed granted to participating
employees as of the first trading day of each offering period.
The purchase price for each share will be set by the
compensation committee. The purchase price for an offering
period may not be less than 85% of the fair market value of our
common stock on the first trading day of the offering period or
the day on which the shares are purchased, whichever is lower.
Eligibility.
Any employee of the Company or
our participating affiliates may participate in the 2008
Employee Stock Purchase Plan, except the following, who are
ineligible to participate: (i) an employee whose customary
employment is 20 hours or less per week; and (ii) an
employee who, after exercising his or her rights to purchase
stock under the 2008 Employee Stock Purchase Plan, would own
stock (including stock that may be acquired under any
outstanding options) representing 5% or more of the total
combined voting power of all classes of stock of the Company. An
employee must be employed on the last day of the offering period
in order to acquire stock under the 2008 Employee Stock Purchase
Plan unless the employee has retired, died or become disabled,
been laid off or is on an approved leave of absence.
Reorganizations.
Upon a reorganization in
which we are not the surviving corporation or a sale of assets
or stock, the 2008 Employee Stock Purchase Plan and all rights
outstanding shall terminate, except to the extent provision is
made in writing in connection with such transaction for the
continuation or assumption of the 2008 Employee Stock Purchase
Plan, or for the substitution of the rights under the 2008
Employee Stock Purchase Plan with rights covering the stock of
the successor corporation.
401(k)
Plan
We offer a 401(k) Plan pursuant to Section 401(k) of the
Internal Revenue Code. All full time U.S. employees are
eligible to participate in the plan. The plan permits pretax
contributions by participants not to exceed annual amounts
allowable under the Code. Participants are fully vested in their
contributions.
Termination
and Change of Control Payments
Dr. Ferré
The employment agreement for Dr. Ferré provides for
the payment of severance benefits if Dr. Ferré is
terminated without cause or if Dr. Ferré
resigns for good reason. Upon such a termination,
Dr. Ferré will be entitled to receive all accrued but
unpaid compensation, reimbursement of any outstanding reasonable
business expenses, one times the sum of
Dr. Ferrés annual salary and cash bonuses
received by him during the preceding completed fiscal years and
accelerated vesting of equity awards that vest based on the
passage of time; provided that if the termination occurs in
anticipation of a change of control of the company or within two
years thereafter, the applicable multiplier will be two instead
of one, payment of a pro rated bonus for the year of
termination, and assuming attainment of target performance
goals, accelerated vesting of all equity awards that vest based
on the attainment of performance goals at the greater of target
levels or actual performance at the date of termination.
Dr. Ferré is also entitled to a
gross-up
payment to the extent any payments payable to him in connection
with a change of control become subject to an excise tax
pursuant to sections 4999 and 280G of the Internal Revenue
Code. All equity that vest on the passage of time accelerate
vesting in the event of a change of control. In addition, all
equity awards that vest based on the passage of time vest in the
event of a termination of employment due to death or disability.
Under Dr. Ferrés employment agreement,
good reason includes any of the following, in each
case to the extent not corrected by us following 30 days
notice from Dr. Ferré:
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the assignment of duties materially inconsistent with
Dr. Ferrés position and status or a materially
adverse change in the nature of Dr. Ferrés
duties, responsibilities and authorities from those described in
his agreement;
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a material reduction in Dr. Ferrés annual salary
or the setting of his annual target incentive opportunity in
amounts materially less than those specified in his agreement;
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109
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relocation of Dr. Ferrés principal work location more
than 25 miles from current Company headquarters;
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failure to elect or reelect Dr. Ferré to the Companys
board of directors or his removal from the Board other than for
cause;
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our failure to obtain an agreement from any successor to us to
assume the agreement; or
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any other failure by us to perform any material obligation or
provision of the agreement.
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Under Dr. Ferrés employment agreement,
cause includes any of the following, provided that
the executive has been provided a copy of the resolution adopted
by at least three-quarters of the independent members of the
board at a meeting of the board (after reasonable notice to the
executive and an opportunity for the executive, together with
the executives counsel, to be heard before the board)
finding that the executive was guilty of the specified conduct:
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conviction for commission of a felony or a crime involving moral
turpitude;
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willful commission of any act of theft, fraud, embezzlement or
misappropriation against us; or
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willful and continued failure to perform duties, which failure
is not remedied within 30 days notice from us.
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Messrs. Abovitz,
Frank, LaPorte and Nunes
The employment agreements for Messrs. Abovitz, Frank,
LaPorte and Nunes provide for the payment of severance benefits
to the executive if we terminate the executives employment
without cause or if the executive resigns for
good reason. Upon such a termination, the executive
will be entitled to receive all accrued but unpaid compensation,
reimbursement of any outstanding reasonable business expenses,
an amount equal to six months, or nine months in the case of
Mr. Abovitz, of the executives annual base salary at
the rate then in effect, and the costs of continuation of health
benefits for six months, or nine months in the case of
Mr. Abovitz.
Under these employment agreements, good reason
includes:
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a material adverse change of the executives job
responsibilities;
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a breach by us with respect to our compensation obligations
under the employment agreement, which has not been cured after
30 days written notice by the executive, or our notice of
non-renewal;
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a decrease in executives base salary not equally applied
(on a percentage basis) to all employees subject to an
employment agreement with us; or
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relocation of our headquarters to a location more than
100 miles from the location at the time the employment
agreement was first executed.
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We have the right to terminate Messrs. Abovitz, Frank,
LaPorte and Nunes for cause if such termination is approved by
not less than two-thirds of the board provided the executive is
given at least five days advance notice of such meeting and is
given the opportunity to speak at such meeting. If any of these
executives employment is terminated by us for cause or by
the executive without good reason, the executive will be
entitled to receive only accrued but unpaid compensation and
reimbursement of any outstanding reasonable business expenses.
Termination for cause may include termination as a result of any
act or failure to act on the part of the executive which
constitutes:
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the willful, knowing or grossly negligent failure or refusal of
the executive to perform his duties under the employment
agreement or to follow the reasonable directions of the Chief
Executive Officer which has continued for 30 days following
written notice of such failure or refusal from the board;
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110
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a breach by the executive of any fiduciary duty to us or any of
our subsidiaries for which the executive is required to perform
services under the employment agreement;
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material and willful misfeasance or malfeasance by the executive
in connection with the performance of his duties under the
employment agreement;
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the executives commission of an act which is a fraud or
embezzlement;
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the conviction of the executive for, or a plea of guilty or nolo
contendere to a criminal act which is a felony;
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a material breach or default by the executive of any provision
of the employment agreement which has continued for 30 days
following notice of breach or default from the board;
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the executives willful and material breach or violation of
any law, rule or regulation (other than traffic violations or
similar offenses);
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abuse of drugs or alcohol to our detriment;
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not maintaining his primary residence in the South Florida
region; or
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willful breach of certain convenants and provisions with respect
to Z-KAT that has continued for 30 days following notice of
such breach or default from the board.
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Each employment agreement includes customary non-competition and
non-solicitation restrictions applicable to the executive for a
period of 12 months after the termination of the
executives employment, as well as customary
confidentiality provisions. In addition, each of these
employment agreements provides that all confidential information
that the executive has access to, uses or creates during his
employment and all intellectual property resulting from work
done by him on our behalf is our property. In the event the
employment agreement is not renewed at the end of its three year
term, we have the option of paying a severance payment equal to
six months, or nine months in the case of Mr. Abovitz, of
base salary payable in monthly installments, or waiving our
rights to enforce the non-competition covenants.
Acceleration
of Equity
Pursuant to the terms of restricted stock and option award
agreements we have entered into with our named executive
officers, no additional shares of common stock subject to any
outstanding restricted stock and option awards will vest after
termination of or by the executive for any reason. If the
executive is terminated for cause, the executive will forfeit
all rights to his options and the option will expire
immediately. For all other terminations, other than death or
disability, options expire on the ninetieth day after the
termination date. Upon death or disability, options expire
twelve months after the date of death or the date of
termination resulting from disability.
In the event of a change of control, if the successors entity
does not assume, continue or substitute for outstanding options
and restricted stock, all outstanding shares of our restricted
common stock will vest, and either (i) all options will become
immediately exercisable or (ii) the board will elect to cancel
any outstanding grants of options or restricted stock and pay an
amount in cash or securities. In addition, pursuant to the terms
of Dr. Ferrés employment agreement, in the event
of a change of control, any unvested equity awards that vest on
the passage of time would vest. As described above, unvested
equity awards that vest on the passage of time held by
Dr. Ferré vest upon his termination without cause, his
termination for good reason, his termination due to death and
his termination due to disability.
111
Assuming a December 31, 2007 termination event, the
aggregate severance and change of control payments to the named
executive officers are estimated to be as follows:
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Severance
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Change of
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Named Executive Officer
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Payment
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Control Payment
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Maurice R. Ferré, M.D.
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$
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450,000
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(1)
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$
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900,000
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(2)
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Rony A. Abovitz
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$
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130,005
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(3)
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Menashe R. Frank
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$
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88,275
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(4)
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Fritz L. LaPorte
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$
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88,275
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(4)
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Steven J. Nunes
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$
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83,920
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(4)
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(1)
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Represents base salary, as of December 31, 2007, and the
average amount of cash bonus received by Dr. Ferré in
2005 and 2006.
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(2)
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If Dr. Ferré is terminated as of December 31,
2007 in anticipation of a change of control of the Company or
within two years thereafter, Dr. Ferré would be
entitled to a payment of $900,000, which represents two times
the severance payment described in footnote (1) above. This
change of control payment would be made in lieu of a severance
payment. Dr. Ferré would also be entitled to a
gross-up
payment if any payments payable to him in connection with a
change of control were subject to an excise tax pursuant to
sections 4999 and 280G of the Internal Revenue Code.
Because the change of control payment of $900,000, assuming a
December 31, 2007 termination event, would not be subject
to an excise tax pursuant to sections 4999 and 280G of the
Internal Revenue Code, we would not be required to make any tax
gross-up payments pursuant to the terms of our employment
agreement with Dr. Ferré. Therefore, the table above
does not reflect any tax
gross-up
payments.
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(3)
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Represents the continuation of base salary, as of
December 31, 2007 for a period of nine months. No
additional severance payments would be payable upon or in
connection with a change in control.
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(4)
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Represents the continuation of base salary, as of
December 31, 2007 for a period of six months. No additional
severance payments would be payable upon or in connection with a
change in control.
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Assuming a December 31, 2007 change of control event, the
number and value of options and restricted stock that will have
vested would be as follows:
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Number of Shares of
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Number of
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Restricted
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Value of
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Named Executive Officer
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Options
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Stock
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Options or Restricted Stock(1)
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Maurice R. Ferré, M.D.
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35,244
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790,579
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$
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11,995,432
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Rony A. Abovitz
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330,031
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$
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3,586,121
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Menashe R. Frank
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180,146
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$
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1,804,272
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Fritz L. LaPorte
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226,631
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$
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2,463,471
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Steven J. Nunes
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82,507
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$
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787,775
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(1)
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The value of the options is calculated by subtracting the per
share exercise price of the option from the price of the
underlying shares as of December 31, 2007.
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Limitation
of Liability and Indemnification
Our second amended and restated certificate of incorporation
limits and our third amended and restated certificate of
incorporation, which will become effective upon completion of
this offering, will limit the personal liability of our board
members for breaches by them of their fiduciary duties to the
fullest extent permitted by Delaware General Corporation Law.
Delaware law allows companies to provide that directors will not
be personally liable for monetary damages for breach of their
fiduciary duties as directors, except liability for any of the
following acts:
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any breach of their duty of loyalty to us or our stockholders;
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112
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acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
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unlawful payments of dividends or unlawful stock repurchases,
redemptions or other distributions; and
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any transaction from which the director derived an improper
personal benefit.
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Such a limitation of liability may not apply to liabilities
arising under the federal securities laws and does not affect
the availability of equitable remedies such as injunctive relief
or rescission. Our second amended and restated certificate of
incorporation and second amended and restated bylaws require and
our third amended and restated certificate of incorporation and
third amended and restated bylaws, each of which will become
effective upon completion of this offering, will require us to
indemnify our directors and officers to the fullest extent
permitted by Delaware law.
In accordance with Delaware law, our second amended and restated
bylaws permit and our third amended and restated bylaws will
permit us to secure insurance on behalf of any officer,
director, employee or other agent for any liability arising out
of his or her actions in such capacity, regardless of whether
indemnification would be permitted under Delaware law. We
currently maintain liability insurance for our directors and
officers.
As permitted by the Delaware General Corporation Law, we intend
to enter into indemnity agreements with each of our directors
and executive officers, that require us to indemnify such
persons against any and all expenses (including attorneys
fees), witness fees, damages, judgments, fines, settlements and
other amounts incurred (including expenses of a derivative
action) in connection with any action, suit or proceeding,
whether actual or threatened, to which any such person may be
made a party by reason of the fact that such person is or was a
director, an officer or an employee of MAKO Surgical Corp. or
any of its affiliated enterprises, provided that such person
acted in good faith and in a manner such person reasonably
believed to be in or not opposed to our best interests and, with
respect to any criminal proceeding, had no reasonable cause to
believe his or her conduct was unlawful. The indemnification
agreements also set forth certain procedures that will apply in
the event of a claim for indemnification thereunder.
113
CERTAIN
RELATIONSHIPS AND RELATED PERSON TRANSACTIONS
Policies
and Procedures for Related Person Transactions
We have adopted a related person transactions policy to be
effective upon completion of this offering pursuant to which our
executive officers, directors and principal stockholders,
including their immediate family members, are not permitted to
enter into a related person transaction with us without the
consent of our audit committee, other independent committee of
our board of directors or the full board. Any request for us to
enter into a transaction with an executive officer, director,
principal stockholder or any of such persons immediate
family members, in which the amount involved exceeds $120,000
must be presented to our audit committee for review,
consideration and approval. All of our directors, executive
officers and employees are required to report to our audit
committee any such related person transaction. In approving or
rejecting the proposed agreement, our audit committee shall take
into account, among other factors it deems appropriate, whether
the proposed related person transaction is on terms no less
favorable than terms generally available to an unaffiliated
third party under the same or similar circumstances, the extent
of the persons interest in the transaction and, if
applicable, the impact on a directors independence. After
consideration of these and other factors, the audit committee
may approve or reject the transaction. Under the policy, if we
should discover related person transactions that have not been
approved, the audit committee will be notified and will
determine the appropriate action, including ratification,
rescission or amendment of the transaction.
Z-KAT
Transactions
Based on the number of shares of our common stock outstanding as
of January 1, 2008 and assuming the conversion of all
outstanding shares of our preferred stock as of January 1,
2008, Z-KAT, Inc. beneficially owns, on a fully diluted basis,
approximately 10.57% of our common stock. Mr. Dewey, a
member of our board of directors, serves as the acting Chief
Executive Officer and a director of Z-KAT. Messrs. Dewey,
Ferré and Abovitz own approximately 8.4%, 4.4% and 2.2%,
respectively, of the capital stock of Z-KAT.
Z-KAT was formed in 1997 to develop and commercialize
computer-assisted surgery, or CAS, applications. Z-KAT
purchased, developed and commercialized certain CAS intellectual
property and technology assets and also purchased and developed,
but did not commercialize, certain haptic robotic intellectual
property and technology assets. At the direction of its board of
directors and shareholders, Z-KAT formed MAKO in November 2004,
initially as a wholly owned subsidiary, to develop and
commercialize unique applications combining CAS with haptic
robotics in the medical field of orthopedics. MAKO issued 100
shares of our common stock to Z-KAT in connection with our
formation.
In December 2004, pursuant to a contribution agreement, we
acquired substantially all of Z-KATs tangible assets,
primarily furniture, office equipment and a majority of
Z-KATs CAS technology assets not required for Z-KATs
retained CAS business, and all of its haptic robotic research
and development technology assets. We were granted a limited
license to Z-KATs CAS and haptic robotic intellectual
property portfolio for exclusive use in the field of
orthopedics, subject to a prior license to Biomet Manufacturing
Corp. to use Z-KATs CAS intellectual property, but not its
haptic robotic intellectual property, in the field of
orthopedics. Because of the prior license to Biomet and pursuant
to our license with Z-KAT, we cannot use the CAS intellectual
property on a stand-alone basis; we can only use the CAS
intellectual property in combination with robotics technology.
The assets acquired by Z-KAT within two years prior to their
transfer to us had a carrying value of $392,000 and were
acquired by Z-KAT for a purchase price of $430,000, with the
difference representing depreciation. The contribution
agreement, including the Z-KAT license, was made in exchange for
approximately 1,410,000 shares of common stock,
1,999,000 shares of Series A redeemable convertible
preferred stock, warrants to purchase 190,000 shares of common
stock at an exercise price of $3.00 per share. All common share
and per share amounts have been retroactively adjusted to give
effect to a one-for-3.03 reverse stock split of our common stock
effected on February 8, 2008. These share amounts were
determined by Z-KATs board of directors. In making this
determination, the
Z-KAT
board
of directors determined the number of shares to be issued in
order to (1) obtain sufficient subsidiary stock for its
subsequent use in redeeming bridge note debt to its shareholders
and satisfying a substantial portion of its
114
accounts payable and (2) establish the capital structure of
its subsidiary to allow for the future sale of our Series A
redeemable convertible preferred stock. This acquisition was
accounted for based on the Z-KAT carrying value of the assets
acquired totaling approximately $652,000 as it was a transaction
between entities under common control. The common stock was
recorded at par and the remainder of the ascribed value was
allocated to the Series A redeemable convertible preferred
stock resulting in a discount to the potential redemption value
of approximately $1,346,000 which is being accreted over the
period from the date of issuance to the redemption date.
Pursuant to the December 2004 contribution of the Z-KAT
license, which was not assigned a value, we obtained the right
to manage and maintain the Z-KAT patent portfolio, and assumed
the obligation to pay a ratable portion (among all licensees) of
all maintenance fees, patent costs and applicable royalties to
Z-KATs licensors (except for an annual minimum royalty
payment to Z-KATs primary licensor in its retained CAS
business). Because there has only been one licensee of the Z-KAT
patent portfolio other than us, our ratable portion for the
intellectual property fees, costs and royalties has been 50%
since consummation of the Z-KAT license.
Z-KAT, through its retained business, continued the
commercialization of its CAS technology and retained its right
to use or license its CAS and haptic robotics intellectual
property portfolio outside of the field of orthopedics. In
connection with the contribution agreement, we reimbursed Z-KAT
for certain payroll and direct and indirect expenses incurred
from October 1, 2004 through November 11, 2004
relating to us prior to our legal formation on November 12,
2004. Such expenses totaled approximately $250,000 and have been
eliminated from Z-KATs results of operations for the
period from January 1, 2004 through November 11, 2004
and included in our results of operations for the period
November 12, 2004 through December 31, 2004. The
operating management team and all staff of Z-KAT transferred to
us in connection with its formation. For a period of time
subsequent to the contribution agreement, our employees provided
limited continuing commercial services to the retained business
of Z-KAT.
Because, pursuant to the contribution transaction, we acquired
substantially all of Z-KATs tangible assets and all of
Z-KATs employees, including management, and received all
necessary intellectual property rights, without all of which we
could not operate, Z-KAT is considered the predecessor company
of us. The Financial Statements section of this
prospectus for the period from January 1, 2004 through
November 11, 2004 was prepared to present the statements of
operations, redeemable convertible preferred stock and
stockholders deficit and cash flows of Z-KAT.
In March 2006, we entered into a three-party intellectual
property licensing transaction among MAKO, Z-KAT and IBM.
Pursuant to the transaction, we granted Z-KAT a perpetual,
paid-up
non-exclusive limited license to intellectual property licensed
by us from third parties, for use outside the field of
orthopedics, in exchange for Z-KATs grant to IBM of an
irrevocable,
paid-up
non-exclusive limited license to Z-KATs intellectual
property portfolio, for use in IBMs field of information
handling services. In consideration of its license from Z-KAT,
IBM granted to us a non-exclusive license to IBMs
intellectual property portfolio, for use by MAKO in the field of
orthopedic surgery in combination with a robotic device. See
also Business Intellectual
Property License Arrangements with Other Third
Parties and License and Royalty Agreements in
Note 6 to Financial Statements.
In August 2006, we created a special independent committee of
our board of directors, comprised of all directors that did not
hold an interest in Z-KAT, to act on our behalf on all matters
involving Z-KAT. In December 2006, we entered into an addendum
to the contribution agreement. Under the addendum, we loaned
Z-KAT approximately $125,000 to satisfy certain accounts
payable, assumed the obligation to pay the annual minimum
royalty payable to the sole excluded CAS licensor, and purchased
certain remaining Z-KAT CAS inventory at or below historical
costs, which is applicable to our field of orthopedics (which in
2004 Z-KAT had intended to utilize in its retained CAS business)
for $30,000. Z-KAT also assigned to us its right to receive
required royalty payments from two prior third-party CAS
intellectual property licensees. We secured the right and
assumed the obligation to pay the CAS minimum royalty due to the
importance of maintaining the licensed rights and Z-KATs
illiquid position in 2006. There was no change in licensed
intellectual property rights as a result of the addendum. The
liabilities assumed and the assets acquired were recorded at
115
Z-KATs carrying value and resulted in a net liability of
approximately $221,000. We recorded an offsetting charge to
reduce additional
paid-in-capital
to zero with the excess charged to accumulated deficit as Z-KAT
continued to be a significant shareholder of the Company. The
CAS minimum royalty was initially an obligation retained by
Z-KAT under the Z-KAT license as the intellectual property at
issue had greater applicability to Z-KATs retained CAS
business than our field of orthopedics. The Z-KAT note accrues
interest at a rate of 8.5% per annum, which was determined by
negotiation between Z-KAT and the special independent committee
of our board of directors, and is being repaid through
collections from ongoing sales of Z-KATs CAS products.
Employee
Loans and Notes Receivable for Restricted Stock
During 2006, our company made $200,000 in employee loans to
Dr. Ferré and $25,000 in employee loans to
Mr. Abovitz. Each of the loans accrued interest at a rate
of 4.0% per annum, compounded annually. The interest is paid
biweekly. These employee loans were due upon the earlier of one
year from the date of the employee loan or a liquidation event.
Dr. Ferré and Mr. Abovitz fully repaid the loans
in April 2007. In May 2007 and June 2007, we made new loans
totaling $200,000 to Dr. Ferré on substantially the
same terms as his previous loans. We also issued a $25,000 loan
to Mr. Abovitz in June 2007 on substantially the same terms
as his previous loans.
To date, we have issued the following shares of restricted
common stock to Dr. Ferré or an affiliate of
Dr. Ferré during the course of his employment with us:
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In July 2005, we issued 363,779 shares of restricted common
stock to Dr. Ferré and 49,504 shares of
restricted common stock to MMF Holdings, LLC, an affiliate of
Dr. Ferré, at a purchase price of $1.27 per share in
exchange for a promissory note from the Dr. Ferré in
the principal amount of $525,945, approximately 50% of which is
nonrecourse. The promissory note accrued interest at a rate of
8% per annum, and 363,779 shares of the restricted stock was
pledged as collateral against the promissory note. Twenty-five
percent of the restricted stock vested immediately with the
remainder vesting monthly over 48 months as service is
provided.
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In May 2006, we issued 82,508 shares of restricted common
stock to Dr. Ferré at a purchase price of $1.27 per
share in exchange for a promissory note from the
Dr. Ferré in the principal amount of $105,000,
approximately 50% of which is nonrecourse. The promissory note
accrued interest at a rate of 8% per annum, and the restricted
stock was pledged as collateral against the promissory note.
Twenty-five percent of the restricted stock vested immediately
with the remainder vesting monthly over 48 months as
service is provided.
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In March 2007, we issued 82,508 shares of restricted common
stock to Dr. Ferré at a purchase price of $2.48 per
share in exchange for a promissory note from Dr. Ferré
in the principal amount of $205,000, approximately 50% of which
is nonrecourse. The promissory note accrued interest at a rate
of 8% per annum, and the restricted stock was pledged as
collateral against the promissory notes. Twenty-five percent of
the restricted stock vested immediately with the remainder
vesting monthly over 48 months as service is provided.
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In August 2007, we issued 247,524 shares of restricted
common stock to Dr. Ferré. The 247,524 shares of
restricted common stock vests quarterly over 48 months as
service is provided.
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On September 5, 2007, we forgave outstanding loans of
approximately $1.1 million, including accrued interest of
$113,000, to Dr. Ferré, of this amount, which represents
all loans outstanding to Dr. Ferré. Of this amount,
$949,000 was associated with the issuances of the restricted
stock and $200,000 was associated with employee loans as
discussed above. In connection with the forgiveness of the
loans, 35,244 shares of common stock were surrendered by
Dr. Ferré to us to pay for the payroll taxes
associated with the taxable income from the forgiveness of the
loans. Also, on September 5, 2007, the board of directors
granted options to Dr. Ferré to purchase 35,244 shares
of common stock at an exercise price of $11.12. During the life
of the outstanding loans, Dr. Ferré repaid no
principal and $2,075 in accrued interest on loans associated
with employee loans
116
and no principal or accrued interest on loans associated with
the issuance of restricted stock. In addition, in August 2007,
we forgave a $25,000 outstanding loan to Mr. Abovitz. All
common share and per share amounts have been retroactively
adjusted to give effect to a one-for-3.03 reverse stock split of
our common stock effected on February 8, 2008.
Investor
Agreements
We have entered into a registration rights agreement with the
purchasers of our outstanding preferred stock, including
directors, executive officers and employees who purchased our
preferred stock. Pursuant to this registration rights agreement,
as of January 1, 2008, the holders of 10,945,081 shares of
our common stock, issuable upon the automatic conversion of our
preferred stock, are entitled to rights with respect to the
registration of their shares following this offering under the
Securities Act. For a description of these registration rights,
see Description of Capital Stock Registration
Rights.
Until the closing of this offering, the election of the members
of our board of directors will be governed by a stockholders
agreement that we entered into with purchasers of our
outstanding preferred stock, including directors, executive
officers and other employees who purchased our preferred stock,
and related provisions of our second amended and restated
certificate of incorporation. The holders of a majority of our
common stock have designated Dr. Ferré for election to
our board of directors. The holders of a majority of our
Series A redeemable convertible preferred stock have
designated Mr. Dewey for election to our board of
directors. Certain holders of our Series B redeemable
convertible preferred stock have designated Messrs. Brunk
and Chao for election to our board of directors. Certain holders
of our Series C redeemable convertible preferred stock have
designated Mr. Stansky for election to our board of
directors. Pursuant to the stockholders agreement, the
board has appointed Mr. Blumenfeld as an additional
director to the board; provided that all future board members
appointed by a majority of the board must be independent. Upon
the closing of this offering, the stockholders agreement will
terminate in its entirety and none of our stockholders will have
any special rights regarding the election or designation of
members of our board of directors.
Recent
Sales of Preferred Stock
Some of our directors, executive officers and stockholders
beneficially owning more than 5% of our common stock have
participated in transactions in which they purchased shares of
our preferred stock. As part of our offering of Series A
redeemable convertible preferred stock in December 2004, we
issued and sold an aggregate of 2,500,000 shares of our
Series A redeemable convertible preferred stock at a price
of $1.00 per share and warrants to purchase 272,259 shares of
common stock at a price of $0.03 per warrant for aggregate
consideration of approximately $2.5 million. In addition,
we issued 1,998,745 shares of Series A redeemable
convertible preferred stock and warrants to purchase 190,457
shares of common stock at $3.00 per share to
Z-KAT
in
exchange for the license of intellectual property and transfer
of other assets. Pursuant to an exchange agreement between us,
Z-KAT
and
certain creditors of Z-KAT, Z-KAT transferred
1,748,745 shares of our Series A redeemable
convertible preferred stock and warrants to purchase 190,457
shares of common stock to their creditors in exchange for such
creditors cancellation of Z-KATs outstanding debt.
As part of our offering of Series B redeemable convertible
preferred stock in July 2005, we issued and sold an aggregate of
15,151,516 shares of our Series B redeemable
convertible preferred stock at a price of $1.32 per share
for aggregate consideration of approximately $20 million.
As part of our offering of Series C redeemable convertible
preferred stock in February 2007, we issued and sold an
aggregate of 13,513,514 shares of our Series C
redeemable convertible preferred stock at a price of $2.22 per
share for aggregate consideration of approximately
$30 million. Upon completion of this offering, these shares
of preferred stock will automatically convert into shares of
common stock on a
one-for-3.03
basis. Set forth below is information regarding the
participation of our directors, executive officers and 5%
stockholders in the transactions described above. It does not
reflect their current ownership. All common share and per share
amounts have been retroactively adjusted to give effect to a
one-for-3.03 reverse stock split of our common stock effected on
February 8, 2008.
117
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Shares of
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Shares of
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Shares of
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Series A
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Warrants to
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Series B
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Series C
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Redeemable
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Purchase
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Redeemable
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Redeemable
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Convertible
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Aggregate
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Shares of
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Aggregate
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Convertible
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Aggregate
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Convertible
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Aggregate
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Preferred
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Consideration
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Common
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Consideration
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Preferred
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Consideration
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Preferred
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Consideration
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Purchaser
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Stock
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Paid
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Stock
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Paid
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Stock
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Paid
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Stock
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Paid
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Directors and executive officers
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Christopher C. Dewey
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1,020,857
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(1)
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$
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397,649
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(1)
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111,182
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(1)
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$
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1,312
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(1)
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575,758
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$
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760,000
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649,336
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$
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1,441,526
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Maurice R. Ferré, M.D.
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51,707
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(2)
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(2)
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5,631
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(2)
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(2)
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Frederic H. Moll, M.D.
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103,569
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(3)
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(3)
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11,279
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(3)
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(3)
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37,879
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$
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50,000
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63,940
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$
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141,947
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5% Stockholders
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Z-KAT, Inc.(4)
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250,000
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MK Investment Co.(5)
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3,787,879
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$
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5,000,000
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1,641,557
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$
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3,644,256
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Entities affiliated with Tudor Investment Corporation(6)
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4,504,505
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$
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10,000,000
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Entities affiliated with Lumira Capital Corp.(7)
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3,787,879
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$
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5,000,000
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1,351,351
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$
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3,000,000
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David A. Tepper
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1,068,220
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$
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1,068,220
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108,910
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$
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3,300
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705,894
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$
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931,780
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691,368
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$
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1,534,837
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Smithfield Fiduciary LLC
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1,697,652
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$
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2,240,900
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735,713
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$
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1,633,283
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Aperture Capital II, L.P.
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1,515,152
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$
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2,000,000
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900,901
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$
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2,000,000
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(1)
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As part of our offering of Series A redeemable convertible
preferred stock in December 2004, Mr. Dewey purchased 397,649
shares of Series A redeemable convertible preferred stock and
warrants to purchase 43,308 shares of common stock at a price of
$0.03 per warrant for aggregate consideration of approximately
$398,961. In addition, in December 2004 we acquired various
assets, including intellectual property rights and technologies
from Z-KAT, in exchange for shares of our common stock,
convertible preferred stock and warrants to purchase our common
stock at an exercise price of $3.00 per share. Subsequently,
Z-KAT transferred to Mr. Dewey 623,208 shares of
Series A redeemable convertible preferred stock and warrants to
purchase 67,874 shares of our common stock at an exercise price
of $3.00 per share in exchange for the cancellation of
$625,264 of outstanding Z-KAT debt as described in the
Recent Sales of Preferred Stock section above.
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(2)
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In connection with agreements relating to our formation, we
acquired various assets, including intellectual property rights
and technologies from Z-KAT, in exchange for shares of our
common stock, convertible preferred stock and warrants to
purchase our common stock at an exercise price of $3.00 per
share. Subsequently, Z-KAT transferred to Dr. Ferré
51,707 shares of Series A redeemable convertible preferred stock
and warrants to purchase 5,631 shares of our common stock at an
exercise price of $3.00 per share in exchange for
cancellation of $51,878 of outstanding Z-KAT debt as described
in the Recent Sales of Preferred Stock section above.
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(3)
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In connection with agreements relating to our formation, we
acquired various assets, including intellectual property rights
and technologies from Z-KAT, in exchange for shares of our
common stock, convertible preferred stock and warrants to
purchase our common stock at an exercise price of $3.00 per
share. Subsequently, Z-KAT transferred to Dr. Moll 109,663
shares of Series A redeemable convertible preferred stock and
warrants to purchase 11,279 shares of our common stock at an
exercise price of $3.00 per share in exchange for
cancellation of $103,911 of outstanding Z-KAT debt as described
in the Recent Sales of Preferred Stock section above.
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(4)
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In connection with agreements relating to our formation we
acquired various assets, including intellectual property rights
and technologies from Z-KAT, in exchange for shares of our
common stock, convertible preferred stock and warrants to
purchase our common stock at our exercise price of
$3.00 per share. In turn, Z-KAT received approximately
1,998,745 shares of Series A redeemable convertible preferred
stock and warrants to purchase 190,457 shares of our common
stock. Subsequently, Z-KAT transferred 1,748,745 shares of
Series A redeemable convertible preferred stock and warrants to
repurchase 190,439 shares of common stock to certain of its
creditors in exchange for the cancellation of outstanding debt.
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118
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Christopher C. Dewey, one of our directors, is acting Chief
Executive Officer and a director of Z-KAT, Inc.
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(5)
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Marcelo G. Chao, one of our directors, is a Managing Director of
The Exxel Group, an affiliate of MK Investment Co.
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(6)
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Consists of 3,356,991 shares of Series C redeemable
convertible preferred stock held by The Raptor Global Portfolio
Ltd, 726,460 shares Series C redeemable convertible
preferred stock held by The Tudor BVI Global Portfolio Ltd.,
391,171 shares of Series C redeemable convertible
preferred stock held by Tudor Proprietary Trading LLC, and
29,883 shares of Series C redeemable convertible
preferred stock held by The Altar Rock Fund L.P. Michael
Stansky, one of our directors, is a Managing Director of Tudor
Investment Corporation.
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(7)
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Consists of 2,334,186 shares of Series B redeemable
convertible preferred stock and 832,736 shares of
Series C redeemable convertible preferred stock held by MDS
Life Sciences Technology Fund II NC LP, 822,380 shares
of Series B redeemable convertible preferred stock and
293,390 shares of Series C redeemable convertible
preferred stock held by MDS Life Sciences Technology
Fund II Quebec Limited Partnership, and 631,313 shares
of Series B redeemable convertible preferred stock and
225,225 shares of Series C redeemable convertible
preferred stock by MLII Co-Investment Fund NC Limited
Partnership. Gerald A. Brunk, one of our directors, is a
Managing Director of Lumira Capital Corp.
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Other
Transactions
We have entered into employment agreements with our executive
officers. For a description of these employment agreements, see
the section of this prospectus entitled
Management Employment Agreement.
We have granted stock options to our directors and executive
officers. For a description of these options, see the section of
this prospectus entitled Management
Compensation Discussion and Analysis.
We intend to enter into indemnification agreements with our
directors and executive officers. For a description of these
agreements, see the section of this prospectus entitled
Management Limitations of Liability and
Indemnification.
119
PRINCIPAL
AND SELLING STOCKHOLDERS
The following table sets forth information regarding the
beneficial ownership of our common stock as of January 1,
2008 and as adjusted to reflect the sale of the common stock in
this offering, after giving effect to a one-for-3.03 reverse
stock split of our common stock effected on February 8,
2008, for:
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each of our directors;
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each of our named executive officers;
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all of our directors and executive officers as a group; and
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each person, or group of affiliated persons, known by us to
beneficially own more than 5% of our common stock.
|
The percentage ownership information shown in the table is based
upon 18,438,284 shares of common stock outstanding as of
January 1, 2008, assuming the conversion of all outstanding
shares of our preferred stock as of January 1, 2008 and the
issuance of 5,100,000 shares of common stock in this
offering.
Information with respect to beneficial ownership has been
furnished by each director, executive officer or beneficial
owner of more than 5% of our common stock. We have determined
beneficial ownership in accordance with the SECs rules.
These rules generally attribute beneficial ownership of
securities to persons who possess sole or shared voting power or
investment power with respect to those securities. In addition,
the rules include shares of common stock issuable pursuant to
the exercise of stock options or warrants that are either
immediately exercisable or exercisable within 60 days of
January 1, 2008, which is March 1, 2008. These shares
are deemed to be outstanding and beneficially owned by the
person holding those options or warrants for the purpose of
computing the percentage ownership of that person, but they are
not treated as outstanding for the purpose of computing the
percentage ownership of any other person. Unless otherwise
indicated, the persons or entities identified in this table have
sole voting and investment power with respect to all shares
shown as beneficially owned by them, subject to applicable
community property laws.
Except as otherwise noted below, the address for each person or
entity listed in the table is
c/o MAKO
Surgical Corp., 2555 Davie Road, Ft. Lauderdale, FL 33317.
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Number
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of Shares
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Shares Beneficially
|
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to be
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Owned After
|
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Number of
|
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|
Percentage of Shares
|
|
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Sold
|
|
|
Offering
|
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Shares
|
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Beneficially Owned
|
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in the
|
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with the
|
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|
Beneficially
|
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Before
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After
|
|
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Over-
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Over-Allotment
|
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Name and Address of Beneficial Owner
|
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Owned
|
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|
Offering
|
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Offering
|
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|
Allotment(20)
|
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|
Number
|
|
|
Percent
|
|
|
Beneficial owners of 5% or more
|
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|
|
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Z-KAT, Inc.(1)
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1,409,900
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10.57
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%
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7.65
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%
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66,667
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(21)
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1,343,233
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7.02
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%
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Attn: Priscilla Dole
Sycamore Ventures Ptc Ltd.
845 Alexander Road
Princeton, NJ 08540
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MK Investment Co.(2)
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1,791,892
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13.43
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%
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9.72
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%
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1,791,892
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9.36
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%
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c/o Del
Plata Consulting Services
Zonamerica, Ruta 8, KM 17.5
Montevido, Uruguay, 91600
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Entities affiliated with Tudor Investment Corporation(3)
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1,486,634
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11.15
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%
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8.06
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%
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1,486,634
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7.77
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%
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Attn: David Ginsberg
50 Rowes Wharf, 6th Floor
Boston, MA 02110
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Entities affiliated with Lumira Capital Corp.(4)
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1,696,113
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12.72
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%
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9.20
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%
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|
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1,696,113
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8.86
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%
|
Attn: Gerry Brunk
20 Bay Street, 11th Floor
Toronto, Ontario, Canada M5J 2N8
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120
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
Shares Beneficially
|
|
|
|
|
|
|
|
|
|
|
|
|
to be
|
|
|
Owned After
|
|
|
|
Number of
|
|
|
Percentage of Shares
|
|
|
Sold
|
|
|
Offering
|
|
|
|
Shares
|
|
|
Beneficially Owned
|
|
|
in the
|
|
|
with the
|
|
|
|
Beneficially
|
|
|
Before
|
|
|
After
|
|
|
Over-
|
|
|
Over-Allotment
|
|
Name and Address of Beneficial Owner
|
|
Owned
|
|
|
Offering
|
|
|
Offering
|
|
|
Allotment(20)
|
|
|
Number
|
|
|
Percent
|
|
|
David Tepper(5)
|
|
|
922,599
|
|
|
|
6.86
|
%
|
|
|
4.97
|
%
|
|
|
|
|
|
|
922,599
|
|
|
|
4.79
|
%
|
c/o Appaloosa
Management, LP
26 Main Street
Chatham, NJ 07928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Smithfield Fiduciary LLC(6)
|
|
|
803,090
|
|
|
|
6.02
|
%
|
|
|
4.36
|
%
|
|
|
|
|
|
|
803,090
|
|
|
|
4.20
|
%
|
c/o Highbridge
Capital Management, LLC
Attn: Adam Chill
9 West 57th St., 27th Floor
New York, NY 10019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aperture Capital II, L.P.(7)
|
|
|
797,377
|
|
|
|
5.98
|
%
|
|
|
4.32
|
%
|
|
|
|
|
|
|
797,377
|
|
|
|
4.17
|
%
|
Attn: Matthew Tierney
645 Madison Avenue, 20th Floor
New York, NY 10022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors and Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S. Morry Blumenfeld, Ph.D.(8)
|
|
|
622,892
|
|
|
|
4.67
|
%
|
|
|
3.38
|
%
|
|
|
|
|
|
|
622,892
|
|
|
|
3.25
|
%
|
Gerald A. Brunk(9)
|
|
|
1,696,113
|
|
|
|
12.72
|
%
|
|
|
9.20
|
%
|
|
|
|
|
|
|
1,696,113
|
|
|
|
8.86
|
%
|
Marcelo G. Chao(10)
|
|
|
1,791,892
|
|
|
|
13.43
|
%
|
|
|
9.72
|
%
|
|
|
|
|
|
|
1,791,892
|
|
|
|
9.36
|
%
|
Christopher C. Dewey(11)
|
|
|
2,252,300
|
|
|
|
16.75
|
%
|
|
|
12.14
|
%
|
|
|
66,667
|
|
|
|
2,185,633
|
|
|
|
11.36
|
%
|
Charlie W. Federico
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frederic H. Moll, M.D.(12)
|
|
|
81,074
|
|
|
|
|
*
|
|
|
*
|
|
|
|
|
|
|
|
81,074
|
|
|
|
*
|
|
Michael P. Stansky(13)
|
|
|
1,486,634
|
|
|
|
11.15
|
%
|
|
|
8.06
|
%
|
|
|
|
|
|
|
1,486,634
|
|
|
|
7.77
|
%
|
Maurice R. Ferré, M.D.(14)
|
|
|
817,680
|
|
|
|
6.13
|
%
|
|
|
4.43
|
%
|
|
|
|
|
|
|
817,680
|
|
|
|
4.27
|
%
|
Fritz L. LaPorte(15)
|
|
|
104,418
|
|
|
|
|
*
|
|
|
*
|
|
|
|
|
|
|
|
104,418
|
|
|
|
*
|
|
Rony A. Abovitz(16)
|
|
|
147,150
|
|
|
|
1.09
|
%
|
|
|
*
|
|
|
|
|
|
|
|
147,150
|
|
|
|
*
|
|
Menashe R. Frank(17)
|
|
|
62,024
|
|
|
|
|
*
|
|
|
*
|
|
|
|
|
|
|
|
62,024
|
|
|
|
*
|
|
Steven J. Nunes(18)
|
|
|
16,501
|
|
|
|
|
*
|
|
|
*
|
|
|
|
|
|
|
|
16,501
|
|
|
|
*
|
|
All current directors and executive officers as a group
(12 persons)(19)
|
|
|
9,078,678
|
|
|
|
65.78
|
%
|
|
|
48.03
|
%
|
|
|
66,667
|
|
|
|
9,012,011
|
|
|
|
45.98
|
%
|
|
|
|
*
|
|
Less than 1.0%
|
|
(1)
|
|
The board of directors of Z-KAT, Inc. is comprised of John
Whitman, Mike Fong, Ellen Shih, Fernando Tapia, Mark Sinnreich
and Christopher C. Dewey, one of our directors. Mr. Dewey
is also acting Chief Executive Officer of Z-KAT, Inc.
Mr. Dewey and the other members of Z-KATs board of
directors may be deemed to share voting and investment power
over the shares held by this entity. Each of these individuals
disclaims beneficial ownership of such shares, except to the
extent of his or her pecuniary interest.
|
|
(2)
|
|
The directors of MK Investment Co. are Mirta Carballal, Diego
Muñoz, and Alfredo Arocena. In addition, Marcelo G. Chao,
one of our directors, is a Managing Director of The Exxel Group,
an affiliate of MK Investment Co. Mr. Chao and the
directors of MK Investment Co. may be deemed to share voting and
investment power over the shares held by this entity. Each of
these individuals disclaims beneficial ownership of such shares,
except to the extent of his or her pecuniary interest.
|
|
(3)
|
|
Consists of 1,107,917 shares held by The Raptor Global
Portfolio Ltd., 368,855 shares held by The Tudor BVI Global
Portfolio L.P. and 9,862 shares held by The Altar Rock
Fund L.P. The general partner of the Tudor BVI Global
Portfolio L.P. is The Tudor BVI GP Ltd. The directors of The
Tudor BVI GP Ltd. and The Raptor Global Portfolio Ltd. are
Jean-Pierre Jacquemoud, Karl Erbo Graf Kageneckm,
|
121
|
|
|
|
|
Bernard Grigsby, David P. dAmbrumenilm and InterCaribbean
Services Ltd. Tudor Investment Corporation acts as investment
advisor to The Raptor Global Portfolio Ltd. and The Tudor BVI
Global Portfolio L.P. and as general partner to the Altar Rock
Fund L.P. The directors of Tudor Investment Corporation are Paul
Tudor Jones, II, James J. Pallotta, Andrew S. Paul, John R.
Torell, John G. Macfarlane, III, Mark F. Dalton, Mark
Nicholson, Mark V. Houghton-Berry, Robert P. Forlenza and
Richard L. Fisher. The Raptor Global Portfolio Ltd., The Tudor
BVI GP Ltd. and Tudor Investment Corporation may be deemed to
share voting and investment power over the shares held by these
entities. Michael P. Stansky, one of our directors, is a
Managing Director of Tudor Investment Corporation. Each of
Mr. Stansky and the other individuals listed above
disclaims beneficial ownership of such shares, except to the
extent of his, her or its pecuniary interest.
|
|
(4)
|
|
Consists of (a) 1,045,188 shares held by MDS Life Sciences
Technology Fund II NC Limited Partnership
(LST II.NC), the general partner of which is
LSTF II (NCGP), Inc., (b) 368,240 shares held by MDS Life
Sciences Technology Fund II Quebec Limited Partnership
(LST II.Q), the general partner of which is MDS
LSTF II (QGP) Inc., and (c) 282,685 shares held by
MLII Co-Investment Fund NC Limited Partnership
(MLII.NC), the general partner of which is MLII
(NCGP) Inc. Lumira Capital Management Corp. (Lumira
Management), a subsidiary of Lumira Capital Corp., may be
deemed to share voting and investment power over the shares held
by LST II.NC pursuant to a management agreement with
LSTII.NC. Lumira Management also provides services to each of
LST II.Q and MLII.NC. The directors of Lumira Capital Corp.
are Michael Burns, Kenneth Horton, James Oborne and Peter
van der Velden. Mr. Brunk is Senior Vice
President/Managing Director of Lumira Capital Corp. The
directors of Lumira Capital Management Corp., LSTF II (NCGP)
Inc. and MLII (NCGP) Inc. are Stephen Cummings and Peter van der
Velden. The directors of MDS LSTF II (QGP) Inc. are Bernard
Coupal, Murray Ducharme, Maurice Forget, Jean Page and Peter van
der Velden. LSTF II (NCGP) Inc., MDS LSTF II (QGP)
Inc., MLII (NCGP) Inc. and each of the individuals may be deemed
to share voting and investment power over these shares.
Mr. Brunk and each of the other individuals disclaim
beneficial ownership of such shares, except to the extent of
his, her or its pecuniary interest.
|
|
(5)
|
|
Includes 108,910 shares that Mr. Tepper has the right
to acquire through the exercise of warrants.
|
|
(6)
|
|
Highbridge Capital Management, LLC is the trading manager of
Smithfield Fiduciary LLC and may be deemed to share voting
control and investment power over the securities held by
Smithfield Fiduciary LLC. Glenn Dubin and Henry Swieca control
Highbridge Capital Management, LLC and may also be deemed to
share voting and investment power over the securities held by
Smithfield Fiduciary LLC. Each of Highbridge Capital Management,
LLC, Glenn Dubin and Henry Swieca disclaims benefical ownership
of the securities held by Smithfield Fiduciary LLC.
|
|
(7)
|
|
Aperature Venture Partners LLC is the general partner of
Aperature Capital II, L.P. Paul E. Tierney, Jr., Thomas P.
Cooper, Eric H. Sillman and Matthew S. Tierney are members of
Aperature Venture Partners LLC and may be deemed to share voting
and investment power over the shares held by Aperature Capital
II.
|
|
(8)
|
|
Consists solely of 134,383 shares held by MediTech Advisors LLC
and 488,509 shares held by Ziegler MediTech Equity Partners
LP. The partners of MediTech Advisors LLC are Eitan Machover,
Samuel Cubac, Grosvenor LLC and Allandale Ltd. The members of
Grosvenor LLC are Mr. Blumenfeld and certain of his family
members. The general partner of Ziegler MediTech Equity Partners
LP is Ziegler MediTech Partners, LLC. The board of managers of
Ziegler MediTech Partners LLC consists of Dr. Blumenfeld,
Eitan Machover, Sam Cubac, S. Charles OMeara, Donald I.
Grande and Thomas S. Ross. The partners of MediTech Advisors LLC
and Mr. Blumenfeld and the other directors of Ziegler
MediTech Partners LLC may be deemed to share voting and
investment power over the shares held by MediTech Advisors LLC
and Ziegler MediTech Equity Partners LP. Each of these
individuals disclaims beneficial ownership of such shares,
except to the extent of his, her or its pecuniary interest.
|
|
(9)
|
|
Consists solely of shares identified in footnote 4.
Mr. Brunk is a Senior Vice President/Managing Director of
Lumira Capital Corp., and disclaims beneficial ownership of
these shares except to the extent of his pecuniary interest.
|
122
|
|
|
(10)
|
|
Consists solely of shares identified in footnote 2.
Mr. Chao is a Managing Director of The Exxel Group, an
affiliate of MK Investment Co., and disclaims beneficial
ownership of these shares except to the extent of his pecuniary
interest.
|
|
(11)
|
|
Consists of 842,400 shares held by Mr. Dewey, which
includes 111,182 shares that Mr. Dewey has the right
to acquire through the exercise of warrants, and the shares
identified in footnote 1. Mr. Dewey disclaims beneficial
ownership of the shares identified in footnote 1 except to the
extent of his pecuniary interest.
|
|
(12)
|
|
Includes 11,279 shares that Mr. Moll has the right to
acquire through the exercise of warrants.
|
|
(13)
|
|
Consists solely of shares identified in footnote 3.
Mr. Stansky is a Managing Director of Tudor Investment
Corporation, and disclaims beneficial ownership of these shares
except to the extent of his pecuniary interest.
|
|
(14)
|
|
Consists of 741,075 shares of restricted common stock (of
which 467,973 shares are unvested) issued to
Dr. Ferré in connection with his employment,
17,065 shares of Series A redeemable convertible
preferred stock purchased by Dr. Ferré, and
49,504 shares of restricted common stock held by MMF
Holdings, an entity owned by Dr. Ferrés parents,
4,405 shares that Dr. Ferré has the right to acquire
through the exercise of options and 5,631 shares that
Dr. Ferré has the right to acquire through the
exercise of warrants. As permitted under the lock-up agreement
entered into by Dr. Ferré in connection with our
initial public offering, Dr. Ferré intends to pledge
up to 125,000 shares of his vested restricted common stock to a
third party lender as collateral to secure any amounts that may
become outstanding under a personal loan, provided that the
lender will also be subject to the lock-up agreement with
respect to Dr. Ferrés shares and the terms of the
loan documents will not permit a default to occur during the
lock-up period.
|
|
(15)
|
|
Includes 104,418 shares that Mr. LaPorte has the right
to acquire through the exercise of options.
|
|
(16)
|
|
Includes 147,150 shares that Mr. Abovitz has the right
to acquire through the exercise of options.
|
|
(17)
|
|
Includes 62,024 shares that Mr. Frank has the right to
acquire through the exercise of options.
|
|
(18)
|
|
Includes 16,501 shares that Mr. Nunes has the right to
acquire through the exercise of options.
|
|
(19)
|
|
Includes exercisable options to purchase 332,295 shares of
common stock and warrants exercisable to purchase
128,092 shares of common stock.
|
|
(20)
|
|
The underwriters may purchase up to 698,333 additional shares of
our common stock from us and 66,667 additional shares of our
common stock from the selling stockholder to cover
over-allotments, if any. If the Underwriters partially exercise
their over-allotment option, then we and the selling stockholder
will sell additional shares on a pro rata basis.
|
|
(21)
|
|
These shares were issued to Z-KAT, Inc., the selling
stockholder, in exchange for the contribution of certain assets
to us pursuant to a contribution agreement in December 2004. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Acquisitions of
Assets from Predecessor. See also Certain
Relationships and Related Person Transactions Z-KAT
Transactions.
|
123
DESCRIPTION
OF CAPITAL STOCK
Upon completion of this offering and the filing of our third
amended and restated certificate of incorporation, our
authorized capital stock will consist of 135,000,000 shares
of common stock, par value $0.001 per share, and
27,000,000 shares of preferred stock, par value $0.001 per
share.
The following is a summary of the rights of our common stock and
preferred stock. This summary is not complete. For more detailed
information, please see our third amended and restated
certificate of incorporation and third amended and restated
bylaws, which are filed as exhibits to the registration
statement of which this prospectus is a part.
Common
Stock
Outstanding Shares.
Based on
2,393,203 shares of common stock outstanding as of
January 1, 2008, which includes 562,857 shares of
unvested restricted common stock, and assuming the conversion of
all outstanding preferred stock into 10,945,081 shares of
common stock upon the completion of this offering, the issuance
of 5,100,000 shares of common stock in this offering, and
no exercise of outstanding options or warrants, there will be
18,438,284 shares of common stock outstanding upon
completion of this offering. As of January 1, 2008,
assuming the conversion of all outstanding preferred stock into
common stock upon the completion of this offering, we had
approximately 64 record holders of our common stock.
As of January 1, 2008, there were 1,916,464 shares of
common stock subject to outstanding options, and
462,716 shares of common stock subject to outstanding
warrants.
Voting Rights.
Each holder of common stock is
entitled to one vote for each share of common stock held on all
matters submitted to a vote of the stockholders, including the
election of directors. Our third amended and restated
certificate of incorporation and third amended and restated
bylaws do not provide for cumulative voting rights. Because of
this, the holders of a majority of the shares of common stock
entitled to vote in any election of directors can elect all of
the directors standing for election, if they should so choose.
Dividends.
Subject to preferences that may be
applicable to any then outstanding preferred stock, the holders
of our outstanding shares of common stock are entitled to
receive dividends, if any, as may be declared from time to time
by our board of directors out of legally available funds.
Liquidation.
In the event of our liquidation,
dissolution or winding up, holders of common stock will be
entitled to share ratably in the net assets legally available
for distribution to stockholders after the payment of all of our
debts and other liabilities, subject to the satisfaction of any
liquidation preference granted to the holders of any outstanding
shares of preferred stock.
Rights and Preferences.
Holders of our common
stock have no preemptive, conversion or subscription rights, and
there are no redemption or sinking fund provisions applicable to
our common stock. The rights, preferences and privileges of the
holders of common stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series
of our preferred stock that we may designate and issue in the
future.
Fully Paid and Nonassessable.
All of our
outstanding shares of common stock are, and the shares of common
stock to be issued in this offering will be, fully paid and
nonassessable.
Preferred
Stock
Upon the closing of this offering, all outstanding shares of our
preferred stock will convert into shares of common stock. See
Note 7 to Financial Statements for a description of the
currently outstanding preferred stock. Following this offering,
our second amended and restated certificate of incorporation
will be amended and restated to delete all references to such
shares of preferred stock. Under the third amended and restated
certificate of incorporation, our board of directors will have
the authority, without further action by the stockholders, to
issue up to 27,000,000 shares of preferred stock in one or more
series, to establish from time
124
to time the number of shares to be included in each such series,
to fix the rights, preferences and privileges of the shares of
each wholly unissued series and any qualifications, limitations
or restrictions thereon, and to increase or decrease the number
of shares of any such series, but not below the number of shares
of such series then outstanding.
Our board of directors may authorize the issuance of preferred
stock with voting or conversion rights that could adversely
affect the voting power or other rights of the holders of the
common stock. The issuance of preferred stock, while providing
flexibility in connection with possible acquisitions and other
corporate purposes, could, among other things, have the effect
of delaying, deferring or preventing a change in our control and
may adversely affect the market price of the common stock and
the voting and other rights of the holders of common stock. We
have no current plans to issue any shares of preferred stock.
Warrants
As of January 1, 2008, warrants exercisable for a total of
462,716 shares of our common stock were outstanding. Of
these, warrants to purchase 190,457 shares of our common
stock were issued to Z-KAT in exchange for the license of
intellectual property and transfer of other assets. Pursuant to
an exchange agreement between us, Z-KAT and certain creditors of
Z-KAT, Z-KAT transferred the warrants for our common stock and a
certain portion of the transferred Series A convertible
preferred stock to the creditors in exchange for such
creditors cancellation of outstanding debt. The remaining
warrants to purchase 272,259 shares of our common stock were
purchased by purchasers of our Series A convertible
preferred stock for cash consideration of $0.03 per share. These
warrants are immediately exercisable at an exercise price of
$3.00 per share and will expire ten years after the date of
issuance. Upon completion of this offering, these warrants will
represent the right to purchase up to an aggregate of
462,716 shares of our common stock at an exercise price of
$3.00 per share. These warrants have a net exercise provision
under which the holder may, in lieu of payment of the exercise
price in cash, surrender the warrant and receive a net amount of
shares of common stock based on the fair market value of our
common stock at the time of exercise of the warrant after
deduction of the aggregate exercise price. This warrant also
contains provisions for the adjustment of exercise price and the
aggregate number of shares issuable upon the exercise of the
warrant in the event of stock dividends, stock splits or stock
combinations, recapitalizations, reorganizations or
reclassifications.
Registration
Rights
Under our registration rights agreement with purchasers of our
Series A redeemable convertible preferred stock,
Series B redeemable convertible preferred stock and
Series C redeemable convertible preferred stock, the
holders of 10,945,081 shares of common stock, issuable upon
conversion of 4,498,745 shares of Series A redeemable
convertible preferred stock, 15,151,516 shares of
Series B redeemable convertible preferred stock and
13,513,514 shares of Series C redeemable convertible
preferred stock have the following registration rights with
respect to their registrable shares of common stock:
Demand Registration Rights.
At any time
beginning six months after the consummation of this offering,
the holders of at least 10% of the registrable shares of common
stock can request that we file up to two registration statements
registering all or a portion of their registrable shares,
provided that the net offering price for such registration is at
least $5,000,000. We will not be required to effect a demand
registration during the period beginning 90 days prior to
the anticipated effective date of a proposed underwritten public
offering of securities and 120 days following the
effectiveness of a registration statement relating to an
underwritten public offering of our securities. Under specified
circumstances, we also have the right to defer filing of a
requested registration statement for a period of not more than
120 days, which right may not be exercised more than one
time during any period of 12 consecutive months. These
registration rights are subject to additional conditions and
limitations, including the right of the underwriters to limit
the number of shares included in any such registration under
certain circumstances.
Form S-3
Registration Rights.
If we are eligible to file a
registration statement on
Form S-3,
each holder of registrable shares has the right to demand that
we file a registration statement, including a shelf registration
125
statement, for such holder on
Form S-3
so long as the aggregate offering price of securities to be sold
under the registration statement on
Form S-3
is at least $500,000. There is no limit to the number of
registrations on
Form S-3
that holders may request of us, provided that we are not
required to effect more than two registrations during any six
consecutive month period.
Piggyback Registration
Rights.
After completion of this offering,
whenever we propose to file a registration statement under the
Securities Act, other than with respect to a registration
related to employee benefit plans, debt securities, or corporate
reorganizations, the holders of registrable shares are entitled
to notice of the registration and have the right to include
their registrable shares in such registration. The underwriters
of any underwritten offering will have the right to limit the
number of shares having registration rights to be included in
the registration statement, but not below 30% of the total
number of registrable shares requested for inclusion by holders
common stock issued upon conversion of Series B and
Series C redeemable convertible preferred stock.
Expenses of Registration.
We will pay all fees
and expenses, other than underwriting discounts and commissions,
relating to all demand registrations,
Form S-3
registrations and piggyback registrations.
Registrable Shares of Common Stock.
The
registration rights described above apply only to shares of
common stock issued upon conversion of any Series A
redeemable convertible preferred stock, Series B redeemable
convertible preferred stock or Series C redeemable
convertible preferred stock and equity securities issued as a
dividend, or otherwise with respect to, any shares of
Series A redeemable convertible preferred stock,
Series B redeemable convertible preferred stock or
Series C redeemable convertible preferred stock.
Registrable shares do not include any securities that have
previously been sold pursuant to a registration statement filed
under the Securities Act or under Rule 144 promulgated
under the Securities Act. Moreover, as to each holder, such
holders shares of registrable shares cease to be
registrable shares when they become eligible for sale in
accordance with Rule 144(k) promulgated under the
Securities Act.
Delaware
Anti-Takeover Law and Provisions of our Third Amended and
Restated Certificate of Incorporation and Third Amended and
Restated Bylaws
Delaware Anti-Takeover Law.
We are subject to
Section 203 of the Delaware General Corporation Law.
Section 203 generally prohibits a public Delaware
corporation from engaging in a business combination
with an interested stockholder for a period of three
years after the date of the transaction in which the person
became an interested stockholder, unless:
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prior to the date of the transaction, the board of directors of
the corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an
interested stockholder;
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the interested stockholder owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of
shares outstanding (a) shares owned by persons who are
directors and also officers and (b) shares owned by
employee stock plans in which employee participants do not have
the right to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange
offer; or
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on or subsequent to the date of the transaction, the business
combination is approved by the board and authorized at an annual
or special meeting of stockholders, and not by written consent,
by the affirmative vote of at least 66 2/3% of the outstanding
voting stock which is not owned by the interested stockholder.
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Section 203 generally defines a business combination to
include:
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any merger or consolidation involving the corporation and the
interested stockholder;
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any sale, transfer, pledge or other disposition involving the
interested stockholder of 10% or more of either the assets of
the corporation or the aggregate market value of all the
outstanding stock of the corporation;
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subject to exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder;
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subject to exceptions, any transaction involving the corporation
with the effect of increasing the proportionate share of stock
of the corporation; or
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the receipt by the interested stockholder of the benefit of any
loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation.
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In general, Section 203 defines an interested stockholder
as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or
person affiliated with or controlling or controlled by the
entity or person.
Third Amended and Restated Certificate of Incorporation and
Third Amended and Restated Bylaws.
Provisions of
our third amended and restated certificate of incorporation and
third amended and restated bylaws, which will become effective
upon the completion of this offering, may delay or discourage
transactions involving an actual or potential change in our
control or change in our management, including transactions in
which stockholders might otherwise receive a premium for their
shares, or transactions that our stockholders might otherwise
deem to be in their best interests. Therefore, these provisions
could adversely affect the price of our common stock. Among
other things, our third amended and restated certificate of
incorporation and third amended and restated bylaws:
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permit our board of directors to issue up to
27,000,000 shares of preferred stock, with any rights,
preferences and privileges as they may designate, including the
right to approve an acquisition or other change in our control;
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provide that the authorized number of directors may be changed
only by resolution of the board of directors;
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provide that all vacancies, including newly created
directorships, may, except as otherwise required by law, be
filled by the affirmative vote of a majority of directors then
in office, even if less than a quorum;
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divide our board of directors into three classes;
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require that any action to be taken by our stockholders must be
effected at a duly called annual or special meeting of
stockholders and not be taken by written consent;
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provide that stockholders seeking to present proposals before a
meeting of stockholders or to nominate candidates for election
as directors at a meeting of stockholders must provide notice in
writing in a timely manner, and also specify requirements as to
the form and content of a stockholders notice;
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do not provide for cumulative voting rights (therefore allowing
the holders of a majority of the shares of common stock entitled
to vote in any election of directors to elect all of the
directors standing for election, if they should so choose);
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provide that special meetings of our stockholders may be called
only by the board of directors pursuant to a resolution adopted
by a majority of the board of directors; and
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provide that stockholders will be permitted to amend our amended
and restated bylaws only upon receiving at least 66 2/3% of the
votes entitled to be cast by holders of all outstanding shares
then entitled to vote generally in the election of directors,
voting together as a single class.
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127
Except as otherwise provided, the amendment of any of these
provisions would require approval by the holders of at least a
majority of our then outstanding common stock, voting as a
single class.
Nasdaq
Global Market Listing
Our common stock has been approved for listing on the Nasdaq
Global Market under the symbol MAKO.
Transfer
Agent and Registrar
The transfer agent and registrar for our common stock is Mellon
Investor Services LLC. The transfer agent and registrars
address is 480 Washington Blvd., Jersey City, New Jersey, 07310.
128
SHARES
ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, there has been no public
market for our common stock. Future sales of substantial amounts
of common stock in the public market could adversely affect
prevailing market prices. In addition, since only a limited
number of shares will be available for sale shortly after this
offering because of contractual and legal restrictions on resale
described below, sales of substantial amounts of common stock in
the public market after the restrictions lapse could adversely
affect the prevailing market price for our common stock as well
as our ability to raise equity capital in the future.
Based on the number of shares of common stock outstanding as of
January 1, 2008, upon completion of this offering,
18,438,284 shares of our common stock will be outstanding,
assuming no exercise of the underwriters over-allotment
option and no exercise of options or warrants. All of the shares
sold in this offering will be freely tradable unless held by an
affiliate of ours. Except as set forth below, the remaining
shares of common stock outstanding after this offering will be
restricted as a result of securities laws or
lock-up
agreements. Based on application of Rule 144, as recently
amended, Rule 701 and the lock-up agreements, as discussed
below, the remaining shares will generally become available for
sale in the public market as follows:
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47,328 of the restricted shares will be eligible for immediate
sale upon the completion of this offering;
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4,674,868 restricted shares held by non-affiliates will be
eligible for sale after 180 days from the date of this
prospectus as described below under Lock-Up
Agreements; and
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8,616,088 restricted shares held by affiliates will be eligible
for sale from time to time after 180 days from the date of this
prospectus as described below under Lock-Up
Agreements and upon expiration of their respective holding
periods, but could be sold earlier if the holders exercise any
available registration rights.
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Rule 144
On November 15, 2007, the SEC adopted amendments to
Rule 144 that will be effective for any sales of restricted
securities made under Rule 144 beginning on
February 15, 2008. The recently adopted amendments, among
other things, shorten the holding periods for restricted
securities for both non-affiliates and affiliates under
Rule 144. Rule 144, as amended, provides that
non-affiliates that have held restricted securities of a
reporting company for at least six months and have not had an
affiliate relationship with us during the preceding three months
may sell their securities without restriction or limitation,
other than that Rule 144s public information
requirements must be satisfied during the six months following
satisfaction of the six-month holding period requirement. The
amendments to Rule 144 permit affiliates that have held
restricted securities for at least six months to sell such
restricted securities in accordance with the traditional
conditions of Rule 144, including the current public
information requirement, the volume limitations, manner of sale
provisions and notice requirements. In particular, an affiliate
who has beneficially owned shares of our common stock for at
least six months would be entitled to sell within any
three-month period a number of shares that does not exceed the
greater of:
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1% of the number of shares of our common stock then outstanding,
which will equal approximately 184,382 shares immediately
after this offering; or
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the average weekly trading volume of our common stock on the
Nasdaq Global Market during the four calendar weeks preceding
the filing of a notice on Form 144 with respect to the sale.
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Rule 701
In general, under Rule 701 of the Securities Act, any of
our employees, directors, officers, consultants or advisors who
purchased shares from us in connection with a compensatory stock
or option plan or other written agreement is eligible to resell
those shares in reliance on Rule 144, but without
compliance with
129
certain restrictions, including the holding period contained in
Rule 144. However, substantially all shares issued under
Rule 701 are subject to
lock-up
agreements and will only become eligible for sale at the
expiration of such agreements.
Lock-Up
Agreements
We, along with our directors, executive officers, the selling
stockholder and substantially all of our other stockholders,
optionholders and warrantholders have agreed with the
underwriters that for a period of 180 days following the
date of this prospectus, we or they will not offer, sell,
assign, transfer, pledge, contract to sell or otherwise dispose
of or hedge any shares of our common stock or any securities
convertible into or exchangeable for shares of common stock,
subject to specified exceptions. J.P. Morgan Securities
Inc. and Morgan Stanley & Co. Incorporated may, in
their sole discretion, at any time without prior notice, release
all or any portion of the shares from the restrictions in any
such agreement.
The
180-day
restricted period described in the preceding paragraph will be
extended if:
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during the last 17 days of the
180-day
restricted period we issue a release regarding earnings or
regarding material news or events relating to us; or
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prior to the expiration of the
180-day
restricted period, we announce that we will release earnings
results during the
16-day
period beginning on the last day of the
180-day
period,
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in which case the restrictions described in the preceding
paragraph will continue to apply until the expiration of the
18-day
period beginning on the issuance of the release or the
occurrence of the material news or material event.
As permitted under the lock-up agreement entered into by
Dr. Ferré in connection with our initial public
offering, Dr. Ferré intends to pledge up to 125,000
shares of his vested restricted common stock to a third party
lender as collateral to secure any amounts that may become
outstanding under a personal loan, provided that the lender
executes a lock-up agreement containing the same 180-day period
set forth above with respect to such collateralized shares and
the terms of the loan documents will not permit a default to
occur during the same
180-day
restricted period.
At our request, the underwriters have reserved up to 5% of the
5,100,000 shares of common stock offered by this prospectus
for sale, at the initial public offering price, to our
directors, officers, employees, business associates and related
persons. The number of shares of common stock available for sale
to the general public will be reduced to the extent these
individuals purchase such reserved shares. Any of these reserved
shares purchased will be subject to the before mentioned
180-day
lock-up
restriction.
Registration
Rights
Upon completion of this offering, the holders of
10,945,081 shares of our common stock issued upon
conversion of our outstanding preferred stock will be entitled
to rights with respect to the registration of their shares under
the Securities Act, subject to the
180-day
lock-up
arrangement described above. Registration of these shares under
the Securities Act would result in the shares becoming freely
tradable without restriction under the Securities Act, except
for shares purchased by affiliates, immediately upon the
effectiveness of this registration. Any sales of securities by
these stockholders could have a material adverse effect on the
trading price of our common stock. See the section of this
prospectus entitled Description of Capital
Stock Registration Rights.
Equity
Incentive Plans
We intend to file with the SEC a registration statement under
the Securities Act covering the shares of common stock reserved
for issuance under our 2008 Omnibus Incentive Plan. The
registration statement is expected to be filed and become
effective as soon as practicable after the completion of this
offering.
130
Accordingly, shares registered under the registration statement
will be available for sale in the open market following its
effective date, subject to the
180-day
lock-up
arrangement described above, if applicable.
131
MATERIAL
U.S. FEDERAL INCOME TAX CONSIDERATIONS
FOR
NON-U.S.
HOLDERS OF COMMON STOCK
The following is a summary of some U.S. federal income and
estate tax consequences of the acquisition, ownership and
disposition of shares of our common stock purchased pursuant to
this offering by a holder that, for U.S. federal income tax
purposes, is not a U.S. person, as we define
that term below. A beneficial owner of our common stock who is
not a U.S. person is referred to below as a
non-U.S. holder.
This summary is based upon current provisions of the Internal
Revenue Code of 1986, as amended, Treasury regulations
promulgated thereunder, judicial opinions, administrative
pronouncements and published rulings of the U.S. Internal
Revenue Service, or IRS, all as in effect as of the date hereof.
These authorities may be changed, possibly retroactively,
resulting in U.S. federal tax consequences different from
those set forth below. We have not sought, and will not seek,
any ruling from the IRS or opinion of counsel with respect to
the statements made in the following summary, and there can be
no complete assurance that the IRS will not take a position
contrary to such statements or that any such contrary position
taken by the IRS would not be sustained.
This summary is limited to
non-U.S. holders
who purchase shares of our common stock issued pursuant to this
offering and who hold our common stock as a capital asset for
U.S. federal income tax purposes. This summary also does
not address the tax considerations arising under the laws of any
state, local or
non-U.S. jurisdiction,
or under U.S. federal estate or gift tax laws, except as
specifically described below. In addition, this summary does not
address tax considerations that may be applicable to an
investors particular circumstances nor does it address the
special tax rules applicable to special classes of
non-U.S. holders,
including, without limitation:
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banks, insurance companies or other financial institutions;
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partnerships or other entities treated as partnerships for
U.S. federal income tax purposes;
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U.S. expatriates;
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tax-exempt organizations;
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tax-qualified retirement plans;
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brokers or dealers in securities or currencies;
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traders in securities that elect to use a mark-to-market method
of accounting for their securities holdings; or
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persons that will hold common stock as a position in a hedging
transaction, straddle, conversion, or
other integrated transaction for tax purposes.
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If a partnership, including any entity treated as a partnership
for U.S. federal income tax purposes, is a holder, the tax
treatment of a partner in the partnership will generally depend
upon the status of the partner and the activities of the
partnership. A holder that is a partnership, and partners in
such partnership, should consult their own tax advisors
regarding the tax consequences of the purchase, ownership and
disposition of shares of our common stock.
For purposes of this discussion, a U.S. person means a
person who is for U.S. federal income tax purposes:
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a citizen or resident of the U.S.;
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a corporation, including any entity treated as a corporation for
U.S. federal income tax purposes created or organized under
the laws of the U.S., any state within the U.S., or the District
of Columbia;
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an estate the income of which is subject to U.S. federal
income taxation regardless of its source; or
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a trust, if its administration is subject to the primary
supervision of a U.S. court and one or more
U.S. persons have the authority to control all of its
substantial decisions, or other trusts considered
U.S. persons for U.S. federal income tax purposes.
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132
YOU ARE URGED TO CONSULT YOUR TAX ADVISOR WITH RESPECT TO THE
APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO YOUR
PARTICULAR SITUATION AS WELL AS ANY TAX CONSEQUENCES ARISING
UNDER THE FEDERAL ESTATE OR GIFT TAX RULES OR UNDER THE
LAWS OF ANY STATE, LOCAL,
NON-U.S. OR
OTHER TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.
Dividends
If distributions are paid on shares of our common stock, the
distributions will constitute dividends for U.S. federal
income tax purposes to the extent paid from our current or
accumulated earnings and profits, as determined under
U.S. federal income tax principles. To the extent a
distribution exceeds our current and accumulated earnings and
profits, it will constitute a return of capital that is applied
against and reduces, but not below zero, the adjusted tax basis
of your shares in our common stock. Any remainder will
constitute gain on the common stock. Dividends paid to a
non-U.S. holder
generally will be subject to withholding of U.S. federal
income tax at the rate of 30% or such lower rate as may be
specified by an applicable income tax treaty, the benefits of
which a
non-U.S. holder
is eligible. If the dividend is effectively connected with the
non-U.S. holders
conduct of a trade or business in the U.S. or, if a tax
treaty requires, attributable to a U.S. permanent
establishment maintained by such
non-U.S. holder,
the dividend will not be subject to any withholding tax,
provided certification requirements are met, as described below,
but will be subject to U.S. federal income tax imposed on
net income on the same basis that applies to U.S. persons
generally. A corporate holder under certain circumstances also
may be subject to a branch profits tax equal to 30%, or such
lower rate as may be specified by an applicable income tax
treaty, the benefits of which a
non-U.S. holder
is eligible, on a portion of its effectively connected earnings
and profits for the taxable year.
Non-U.S. holders
should consult their own tax advisors regarding the potential
applicability of any income tax treaty.
To claim the benefit of a tax treaty or to claim exemption from
withholding because the income is effectively connected with the
conduct of a trade or business in the U.S., a
non-U.S. holder
must provide a properly executed IRS
Form W-8BEN
for treaty benefits or
W-8ECI
for
effectively connected income, or such successor forms as the IRS
designates, prior to the payment of dividends. These forms must
be periodically updated.
Non-U.S. holders
may obtain a refund of any excess amounts withheld by timely
filing an appropriate claim for refund.
Gain on
Disposition
A
non-U.S. holder
generally will not be subject to U.S. federal income tax,
including by way of withholding, on gain recognized on a sale or
other disposition of shares of our common stock unless any one
of the following is true:
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the gain is effectively connected with the
non-U.S. holders
conduct of a trade or business in the U.S. or, if a tax
treaty applies, attributable to a U.S. permanent
establishment or a fixed base maintained by such
non-U.S. holder;
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the
non-U.S. holder
is a nonresident alien individual present in the U.S. for
183 days or more in the taxable year of the disposition and
certain other requirements are met; or
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our common stock constitutes a U.S. real property interest
by reason of our status as a U.S. real property
holding corporation, or USRPHC, for U.S. federal
income tax purposes at any time during the shorter of
(1) the period during which you hold our common stock or
(2) the five-year period ending on the date you dispose of
our common stock.
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We believe that we are not currently, and will not become, a
USRPHC. However, because the determination of whether we are a
USRPHC depends on the fair market value of our U.S. real
property interests relative to the fair market value of our
other business assets, we cannot assure you that we will not
become a USRPHC in the future. As a general matter, as long as
our common stock is regularly traded on an established
securities market, however, it will not be treated as a
U.S. real property interest with respect to any
non-U.S. holder
that holds no more than 5% of such regularly traded common
stock. If we are determined to
133
be a USRPHC and the foregoing exception does not apply, among
other things, a purchaser may be required to withhold 10% of the
proceeds payable to a
non-U.S. holder
from a disposition of our common stock, and the
non-U.S. holder
generally will be taxed on its net gain derived from the
disposition at the graduated U.S. federal income tax rates
applicable to U.S. persons.
Unless an applicable treaty provides otherwise, gain described
in the first bullet point above will be subject to the
U.S. federal income tax imposed on net income on the same
basis that applies to U.S. persons generally but will
generally not be subject to withholding. Corporate holders also
may be subject to a branch profits tax on such gain. Gain
described in the second bullet point above will be subject to a
flat 30% U.S. federal income tax, which may be offset by
certain U.S. source capital losses.
Non-U.S. holders
should consult any potentially applicable income tax treaties
that may provide for different rules.
U.S.
Federal Estate Taxes
Shares of our common stock owned or treated as owned by an
individual who at the time of death is a
non-U.S. holder
are considered U.S. situs assets and will be included in
the individuals estate for U.S. federal estate tax
purposes, unless an applicable estate tax treaty provides
otherwise.
Information
Reporting and Backup Withholding
Information reporting and backup withholding (currently at a 28%
rate of tax) may apply to dividends paid with respect to our
common stock and to proceeds from the sale or other disposition
of our common stock. In certain circumstances,
non-U.S. holders
may avoid information reporting and backup withholding if they
certify under penalties of perjury as to their status as
non-U.S. holders
or otherwise establish an exemption and certain other
requirements are met.
Non-U.S. holders
should consult their own tax advisors regarding the application
of the information reporting and backup withholding rules to
them.
Backup withholding is not an additional tax. Amounts withheld
under the backup withholding rules from a payment to a
non-U.S. holder
can be refunded or credited against the
non-U.S. holders
U.S. federal income tax liability, if any, provided that an
appropriate claim is timely filed with the IRS.
134
UNDERWRITING
J.P. Morgan Securities Inc. and Morgan Stanley & Co.
Incorporated are acting as joint book-running managers of this
offering and, together with Cowen and Company, LLC and Wachovia
Capital Markets, LLC, are acting as the managing underwriters of
this offering. Under the terms and subject to the conditions
contained in an underwriting agreement dated the date of this
prospectus, the underwriters named below have severally agreed
to purchase, and we have agreed to sell to them, the number of
shares of common stock indicated in the table below:
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Number
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Underwriters
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of Shares
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J.P. Morgan Securities Inc.
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1,912,500
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Morgan Stanley & Co. Incorporated
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1,912,500
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Cowen and Company, LLC
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791,000
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Wachovia Capital Markets, LLC
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459,000
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National Securities Corporation
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25,000
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Total
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5,100,000
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The underwriters are offering the shares of common stock subject
to their acceptance of the shares from us and the selling
stockholder and subject to prior sale. The underwriting
agreement provides that the obligations of the several
underwriters to pay for and accept delivery of the shares of
common stock offered by this prospectus are subject to the
approval of certain legal matters by their counsel and to other
conditions. The underwriters are obligated to take and pay for
all of the shares of common stock offered by this prospectus if
any such shares are taken. However, the underwriters are not
required to take or pay for the shares covered by the
underwriters over-allotment option described below. The
underwriters initially propose to offer part of the shares of
common stock directly to the public at the public offering price
listed on the cover page of this prospectus, less underwriting
discounts and commissions, and part of the shares of common
stock to certain dealers at a price that represents a concession
not in excess of $0.42 a share under the public offering price.
After the initial offering of the shares of common stock, the
offering price and other selling terms may from time to time be
varied by the representatives.
We and the selling stockholder have granted to the underwriters
an option, exercisable for 30 days from the date of this
prospectus, to purchase up to an aggregate of 765,000 additional
shares of common stock from us and the selling stockholder at
the public offering price, less underwriting discounts and
commissions. The underwriters may exercise this option solely
for the purpose of covering over-allotments, if any, made in
connection with the offering of the shares of common stock
offered by this prospectus. To the extent the option is
exercised, each underwriter will become obligated, subject to
certain conditions, to purchase approximately the same
percentage of the additional shares of common stock as the
number listed next to the underwriters name in the
preceding table bears to the total number of shares of common
stock listed next to the names of all underwriters in the
preceding table. If the underwriters over-allotment option
is exercised in full, the total price to the public would be
$58,650,000, the total underwriters discounts and
commissions paid by us and the selling stockholder would be
$4,058,833 and $46,667, respectively, and the total proceeds to
us and the selling stockholder would be $53,924,497 and
$620,003, respectively.
The following table shows the per share and total underwriting
discounts and commissions that we and the selling stockholder
are to pay to the underwriters in connection with this offering.
These amounts are shown assuming both no exercise and full
exercise of the underwriters over-allotment option.
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Paid by Us
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Paid by Selling Stockholder
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Total
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No
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Full
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No
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Full
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No
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Full
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Exercise
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Exercise
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Exercise
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Exercise
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Exercise
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Exercise
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Per Share
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$
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0.70
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$
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0.70
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$
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0.00
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$
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0.70
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$
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0.70
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$
|
0.70
|
|
Total
|
|
$
|
3,570,000
|
|
|
$
|
4,058,833
|
|
|
$
|
0.00
|
|
|
$
|
46,667
|
|
|
$
|
3,570,000
|
|
|
$
|
4,105,500
|
|
135
In addition, we estimate that the expenses of this offering
other than underwriting discounts and commissions payable by us
will be approximately $2.75 million.
The underwriters have informed us that they do not intend sales
to discretionary accounts to exceed 5% of the total number of
shares of common stock offered by them.
We, all of our directors and officers, the selling stockholder
and holders of substantially all of our outstanding stock and
holders of securities exercisable for or convertible into shares
of common stock have agreed that, subject to specified
exceptions, without the prior written consent of
J.P. Morgan Securities Inc. and Morgan Stanley &
Co. Incorporated, on behalf of the underwriters, we and they
will not, during the period beginning on the date of this
prospectus and ending 180 days thereafter:
|
|
|
|
|
offer, pledge, sell, announce the intention to sell, contract to
sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant
to purchase, lend, or otherwise transfer or dispose of, directly
or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock;
|
|
|
|
enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences
of ownership of common stock; or
|
|
|
|
make any demand for or exercise any right with respect to, the
registration of any shares of common stock or any security
convertible into or exercisable or exchangeable for common stock;
|
whether any such transaction described above is to be settled by
delivery of common stock or such other securities, in cash or
otherwise.
The restrictions described in the preceding paragraphs do not
apply to:
|
|
|
|
|
the sale by us or the selling stockholder of shares to the
underwriters in connection with the offering;
|
|
|
|
transactions by any person other than us relating to shares of
common stock or other securities convertible or exchangeable
into common stock acquired in open market transactions after the
completion of the offering of the shares; and
|
|
|
|
the transfer of shares of common stock or any security
convertible or exchangeable into shares of common stock as a
bona fide gift, as a distribution to general or limited
partners, stockholders, members or affiliates of our
stockholders, or by will or intestate succession to a member of
the immediate family of our stockholders, or to a trust for the
benefit of such immediate family member.
|
With respect to the last bullet, it shall be a condition to the
transfer or distribution that the transferee provide prior
written notice of such transfer or distribution to
J.P. Morgan Securities Inc. and Morgan Stanley &
Co. Incorporated, execute a copy of the
lock-up
agreement, that no filing by any donee or transferee with the
SEC shall be required or shall be made voluntarily in connection
with such transfer or distribution, other than a filing on
Form 5, and no such transfer or distribution may include a
disposition for value.
The
180-day
restricted period described in the preceding paragraph will be
extended if:
|
|
|
|
|
during the last 17 days of the
180-day
restricted period we issue an earnings release or material news
or a material event relating to us occurs; or
|
|
|
|
prior to the expiration of the
180-day
restricted period, we announce that we will release earnings
results during the
16-day
period beginning on the last day of the
180-day
restricted period,
|
in which case the restrictions described in the preceding
paragraph will continue to apply until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
occurrence of the material news or material event.
In addition, as permitted under the lock-up agreement entered
into by Dr. Ferré in connection with our initial
public offering, Dr. Ferré intends to pledge up to
125,000 shares of his vested restricted common stock to a third
party lender as collateral to secure any amounts that may become
outstanding under a personal loan,
136
provided that the lender will also execute a lock-up agreement
subjecting such collateralized shares to the same before
mentioned
180-day
restricted period and the terms of loan documents will not
permit a default to occur during the same
180-day
restricted period.
In order to facilitate this offering of common stock, the
underwriters may engage in transactions that stabilize, maintain
or otherwise affect the price of the common stock. Specifically,
the underwriters may sell more shares than they are obligated to
purchase under the underwriting agreement, creating a short
position. A short sale is covered if the short position is no
greater than the number of shares available for purchase by the
underwriters under the over-allotment option. The underwriters
can close out a covered short sale by exercising the over-
allotment option or by purchasing shares in the open market. In
determining the source of shares to close out a covered short
sale, the underwriters will consider, among other things, the
open market price of shares compared to the price available
under the over-allotment option. The underwriters may also sell
shares in excess of the over-allotment option, creating a naked
short position. The underwriters must close out any naked short
position by purchasing shares in the open market. A naked short
position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of
the common stock in the open market after pricing that could
adversely affect investors who purchase in this offering. In
addition, to stabilize the price of the common stock, the
underwriters may bid for and purchase shares of common stock in
the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for
distributing the common stock in the offering, if the syndicate
repurchases previously distributed common stock to cover
syndicate short positions or to stabilize the price of the
common stock. These activities may raise or maintain the market
price of the common stock above independent market levels or
prevent or retard a decline in the market price of the common
stock. The underwriters are not required to engage in these
activities and may end any of these activities at any time.
At our request, the underwriters have reserved up to 5% of the
5,100,000 shares of common stock offered by this prospectus
for sale, at the initial public offering price, to our
directors, officers, employees, business associates and related
persons. The number of shares of common stock available for sale
to the general public will be reduced to the extent these
individuals purchase such reserved shares. Any reserved shares
that are not so purchased will be offered by the underwriters to
the general public on the same basis as the other shares offered
by this prospectus. Additionally, any of these directed shares
purchased by our directors, executive officers, employees and
business associates, such as clients or suppliers, will be
subject to a
180-day
lock-up
restriction. See
Lock-up
Agreements.
Our common stock has been approved for listing on the Nasdaq
Global Market under the symbol MAKO.
We, the selling stockholder and the underwriters have agreed to
indemnify each other against certain liabilities, including
liabilities under the Securities Act.
Prior to this offering, there has been no public market for the
shares of common stock. The initial public offering price will
be determined by negotiations between us, the selling
stockholder and the representatives of the underwriters. Among
the factors to be considered in determining the initial public
offering price will be our future prospects and those of our
industry in general; sales, earnings and other financial
operating information in recent periods; and the price-earnings
ratios, price-sales ratios and market prices of securities and
certain financial and operating information of companies engaged
in activities similar to ours. An active trading market for the
shares may not develop, and it is possible that after the
offering the shares will not trade in the market above their
initial offering price. A prospectus in electronic format may be
made available on the web sites maintained by one or more of the
underwriters, and one or more of the underwriters may distribute
prospectuses electronically. The underwriters may agree to
allocate a number of shares to underwriters for sale to their
online brokerage account holders. Internet distributions will be
allocated by the underwriters that make Internet distributions
on the same basis as other allocations.
Our director, Christopher C. Dewey, also serves as a director of
National Securities Corporation, an underwriter in this
offering. Mr. Dewey beneficially owns more than 10% of our
outstanding common stock.
137
Under the provisions of Rule 2720 of the Conduct Rules, or
Rule 2720, of the National Association of Securities
Dealers, or NASD, when a Financial Industry Regulatory
Authority, or FINRA, member such as National Securities
Corporation distributes securities of a company in which it or
its affiliates owns more than 10% of the companys common
stock, the public offering price of the securities can be no
higher than that recommended by a qualified independent
underwriter, as defined in Rule 2720. In accordance with
such requirements, J.P. Morgan Securities Inc. has agreed
to serve as a qualified independent underwriter and has
conducted due diligence and has recommended a maximum price for
the shares.
LEGAL
MATTERS
The validity of the shares of common stock being offered by this
prospectus will be passed upon for us by Hogan &
Hartson LLP. The underwriters are being represented by
Latham & Watkins LLP, Washington, D.C.
EXPERTS
Ernst & Young LLP, independent registered public
accounting firm, has audited our financial statements at
December 31, 2005 and 2006 and for the years then ended,
and for the period from November 12, 2004 (inception) to
December 31, 2004 and the financial statements of our
Predecessor, Z-KAT, Inc., for the period from January 1,
2004 to November 11, 2004, as set forth in their report.
Weve included our financial statements and those of our
Predecessor in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLPs
report, given on their authority as experts in accounting and
auditing.
Taylor Consulting Group, Inc., an independent valuation services
firm, has given its opinion, set forth in its valuation reports
dated March 19, 2007 and August 21, 2007 as to the
fair value of our common stock as of the dates set forth in the
valuation reports. In addition, Taylor Consulting Group, Inc.
also provided a reasonableness letter dated March 1, 2007
wherein the reasonableness of our boards past fair value
determinations, described elsewhere in this prospectus is
confirmed. Lastly, Taylor Consulting Group, Inc. has consented
to the references in this registration statement and to its
valuation reports and March 1, 2007 reasonableness letter.
WHERE YOU
CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on
Form S-1
under the Securities Act of 1933, as amended, with respect to
the shares of common stock being offered by this prospectus.
This prospectus does not contain all of the information in the
registration statement and its exhibits. For further information
with respect to MAKO Surgical Corp. and the common stock offered
by this prospectus, we refer you to the registration statement
and its exhibits. Statements contained in this prospectus as to
the contents of any contract or any other document referred to
are not necessarily complete, and in each instance, we refer you
to the copy of the contract or other document filed as an
exhibit to the registration statement. Each of these statements
is qualified in all respects by this reference.
You can read our SEC filings, including the registration
statement, over the Internet at the SECs website at
http://www.sec.gov.
You may also read and copy any document we file with the SEC at
its public reference facilities at 100 F Street NE,
Washington, D.C. 20549. You may also obtain copies of these
documents at prescribed rates by writing to the Public Reference
Section of the SEC at 100 F Street NE,
Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330
for further information on the operation of the public reference
facilities.
Upon completion of this offering, we will be subject to the
information reporting requirements of the Securities Exchange
Act of 1934, as amended, and we will file reports, proxy
statements and other information with the SEC. These reports,
proxy statements and other information will be available for
inspection and copying at the public reference room and website
of the SEC referred to above. We also maintain a website at
http://www.makosurgical.com,
at which you may access these materials free of charge as soon
as reasonably practicable after they are electronically filed
with, or furnished to, the SEC. The information contained in, or
that can be accessed through, our website is not part of this
prospectus.
138
MAKO
SURGICAL CORP.
Index to
the Financial Statements
|
|
|
|
|
|
|
|
F-2
|
|
Financial Statements
|
|
|
|
|
The Company
|
|
|
|
|
Audited Financial Statements
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-8
|
|
|
|
|
F-9
|
|
Unaudited Interim Condensed Financial Statements:
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
|
|
|
F-9
|
|
Predecessor
|
|
|
|
|
Audited Financial Statements
|
|
|
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-8
|
|
|
|
|
F-9
|
|
F-1
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
MAKO Surgical Corp.
We have audited the accompanying balance sheets of MAKO Surgical
Corp. (the Company) as of December 31, 2005 and
2006, and the related statements of operations, redeemable
convertible preferred stock and stockholders deficit, and
cash flows of Z-KAT, Inc. (the Predecessor) for the
period from January 1, 2004 through November 11, 2004
and of MAKO Surgical Corp. from November 12, 2004
(inception) through December 31, 2004 and the years ended
December 31, 2005 and 2006. These financial statements are
the responsibility of the Companys and the
Predecessors management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys and the Predecessors internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing auditing procedures that are appropriate in
the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys and the
Predecessors internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of MAKO Surgical Corp. at December 31, 2005 and 2006, and
the results of operations and cash flows of Z-KAT, Inc. for the
period from January 1, 2004 through November 11, 2004
and of MAKO Surgical Corp. for the period from November 12,
2004 (inception) through December 31, 2004 and the years
ended December 31, 2005 and 2006, in conformity with
U.S. generally accepted accounting principles.
As discussed in Note 2 to the financial statements, MAKO
Surgical Corp. adopted SFAS No. 123(R),
Share-Based Payment, applying the modified
retrospective method on January 1, 2006.
|
|
|
Fort Lauderdale, Florida
August 27, 2007
Except Note 10, as to which the date is
February 8, 2008
|
|
/s/ Ernst & Young LLP
Certified Public Accountants
|
F-2
MAKO
SURGICAL CORP.
Balance
Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
As of December 31,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,145,266
|
|
|
$
|
2,108,015
|
|
|
$
|
14,050,865
|
|
Short-term investments
|
|
|
10,097,020
|
|
|
|
1,399,763
|
|
|
|
6,072,925
|
|
Accounts receivable
|
|
|
|
|
|
|
578,340
|
|
|
|
752,692
|
|
Inventory
|
|
|
326,450
|
|
|
|
926,031
|
|
|
|
1,461,103
|
|
Due from related party
|
|
|
|
|
|
|
97,736
|
|
|
|
1,625
|
|
Employee loans
|
|
|
|
|
|
|
225,155
|
|
|
|
|
|
Prepaids and other assets
|
|
|
68,861
|
|
|
|
84,835
|
|
|
|
394,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
16,637,597
|
|
|
|
5,419,875
|
|
|
|
22,733,935
|
|
Deferred cost of revenue
|
|
|
|
|
|
|
210,349
|
|
|
|
564,164
|
|
Restricted cash
|
|
|
|
|
|
|
125,000
|
|
|
|
125,000
|
|
Property and equipment, net
|
|
|
200,846
|
|
|
|
1,216,464
|
|
|
|
1,915,042
|
|
Intangible assets, net
|
|
|
596,630
|
|
|
|
5,656,186
|
|
|
|
5,616,589
|
|
Note receivablerelated party
|
|
|
|
|
|
|
125,707
|
|
|
|
87,930
|
|
Deferred initial public offering costs
|
|
|
|
|
|
|
|
|
|
|
1,647,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
17,435,073
|
|
|
$
|
12,753,581
|
|
|
$
|
32,689,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
79,896
|
|
|
$
|
433,319
|
|
|
$
|
984,231
|
|
Accrued compensation and employee benefits
|
|
|
125,095
|
|
|
|
510,547
|
|
|
|
437,294
|
|
Other accrued liabilities
|
|
|
55,436
|
|
|
|
1,015,458
|
|
|
|
1,805,646
|
|
Due to related party
|
|
|
27,970
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
|
|
|
|
|
29,167
|
|
|
|
75,000
|
|
Accrued license fee
|
|
|
|
|
|
|
3,620,551
|
|
|
|
3,843,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
288,397
|
|
|
|
5,609,042
|
|
|
|
7,145,839
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
|
|
|
|
|
670,833
|
|
|
|
1,973,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
|
|
|
|
670,833
|
|
|
|
1,973,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A redeemable convertible preferred stock,
$0.001 par value; 5,000,000 shares authorized;
4,498,745 shares issued and outstanding; liquidation value
of $4,498,745; including accrued cumulative dividends of
$334,590, $681,909 and $958,680 as of December 31, 2005 and
2006 and September 30, 2007 (unaudited), respectively
|
|
|
3,581,216
|
|
|
|
4,171,890
|
|
|
|
4,643,311
|
|
Series B redeemable convertible preferred stock,
$0.001 par value; 16,500,000 shares authorized;
15,151,516 shares issued and outstanding; liquidation value
of $20,000,000; including accrued cumulative dividends of
$561,193, $1,822,901 and $2,819,736 as of December 31, 2005
and 2006 and September 30, 2007 (unaudited), respectively
|
|
|
20,453,060
|
|
|
|
21,738,732
|
|
|
|
22,753,558
|
|
Series C redeemable convertible preferred stock,
$0.001 par value; none authorized, issued and outstanding
as of December 31, 2005 and 2006; 13,600,000 shares
authorized; 13,513,514 shares issued and outstanding;
liquidation value of $30,000,000; including accrued cumulative
dividends of $1,179,760 as of September 30, 2007 (unaudited)
|
|
|
|
|
|
|
|
|
|
|
31,106,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total redeemable convertible preferred stock
|
|
|
24,034,276
|
|
|
|
25,910,622
|
|
|
|
58,503,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders deficit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 50,000,000 shares
authorized as of December 31, 2005 and 2006, and 60,000,000
shares authorized as of September 30, 2007; 1,554,288,
1,555,938 and 1,830,346 shares issued and outstanding as of
December 31, 2005 and 2006 and September 30, 2007
(unaudited), respectively
|
|
|
1,554
|
|
|
|
1,556
|
|
|
|
1,830
|
|
Note receivable from stockholder and related interest
|
|
|
(65,348
|
)
|
|
|
(70,574
|
)
|
|
|
|
|
Accumulated deficit
|
|
|
(6,819,675
|
)
|
|
|
(19,366,087
|
)
|
|
|
(34,942,094
|
)
|
Accumulated other comprehensive income (loss)
|
|
|
(4,131
|
)
|
|
|
(1,811
|
)
|
|
|
7,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(6,887,600
|
)
|
|
|
(19,436,916
|
)
|
|
|
(34,933,047
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders deficit
|
|
$
|
17,435,073
|
|
|
$
|
12,753,581
|
|
|
$
|
32,689,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-3
MAKO
SURGICAL CORP.
Statements
of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
The Company
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
|
|
|
|
November 12,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 through
|
|
|
|
2004 through
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 11,
|
|
|
|
December 31,
|
|
|
Years Ended December 31,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2004
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
1,279,339
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
62,571
|
|
|
$
|
34,831
|
|
|
$
|
321,703
|
|
Tactile Guidance System
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
69,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
1,648,342
|
|
|
|
|
|
|
|
|
|
|
|
|
62,571
|
|
|
|
34,831
|
|
|
|
355,382
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
924,268
|
|
|
|
|
|
|
|
|
|
|
|
|
18,780
|
|
|
|
9,033
|
|
|
|
88,181
|
|
Tactile Guidance System
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,767
|
|
|
|
19,767
|
|
|
|
187,117
|
|
Development
|
|
|
131,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
29,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
1,085,523
|
|
|
|
|
|
|
|
|
|
|
|
|
76,547
|
|
|
|
28,800
|
|
|
|
291,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
562,819
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,976
|
)
|
|
|
6,031
|
|
|
|
63,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
2,642,028
|
|
|
|
|
630,048
|
|
|
|
2,735,901
|
|
|
|
5,022,685
|
|
|
|
3,153,989
|
|
|
|
7,695,767
|
|
Research and development
|
|
|
1,453,685
|
|
|
|
|
402,899
|
|
|
|
2,581,828
|
|
|
|
5,192,453
|
|
|
|
3,324,771
|
|
|
|
5,344,947
|
|
Depreciation and amortization
|
|
|
429,694
|
|
|
|
|
5,727
|
|
|
|
98,519
|
|
|
|
644,082
|
|
|
|
418,219
|
|
|
|
915,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
4,525,407
|
|
|
|
|
1,038,674
|
|
|
|
5,416,248
|
|
|
|
10,859,220
|
|
|
|
6,896,979
|
|
|
|
13,956,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(3,962,588
|
)
|
|
|
|
(1,038,674
|
)
|
|
|
(5,416,248
|
)
|
|
|
(10,873,196
|
)
|
|
|
(6,890,948
|
)
|
|
|
(13,892,057
|
)
|
Interest and other income
|
|
|
868
|
|
|
|
|
|
|
|
|
269,231
|
|
|
|
476,578
|
|
|
|
410,531
|
|
|
|
860,019
|
|
Interest and other expense
|
|
|
(479,959
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(220,219
|
)
|
|
|
(142,664
|
)
|
|
|
(228,998
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(4,441,679
|
)
|
|
|
|
(1,038,674
|
)
|
|
|
(5,147,017
|
)
|
|
|
(10,616,837
|
)
|
|
|
(6,623,081
|
)
|
|
|
(13,261,036
|
)
|
Accretion of preferred stock
|
|
|
(36,452
|
)
|
|
|
|
(10,062
|
)
|
|
|
(257,474
|
)
|
|
|
(267,319
|
)
|
|
|
(198,798
|
)
|
|
|
(223,415
|
)
|
Dividends on preferred stock
|
|
|
(743,643
|
)
|
|
|
|
(11,977
|
)
|
|
|
(883,806
|
)
|
|
|
(1,609,027
|
)
|
|
|
(1,197,418
|
)
|
|
|
(2,453,366
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(5,221,774
|
)
|
|
|
$
|
(1,060,713
|
)
|
|
$
|
(6,288,297
|
)
|
|
$
|
(12,493,183
|
)
|
|
$
|
(8,019,297
|
)
|
|
$
|
(15,937,817
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share Basic and diluted attributable to
common stockholders
|
|
$
|
(0.63
|
)
|
|
|
$
|
(2.39
|
)
|
|
$
|
(4.18
|
)
|
|
$
|
(8.03
|
)
|
|
$
|
(5.16
|
)
|
|
$
|
(10.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding Basic and diluted
|
|
|
8,234,560
|
|
|
|
|
443,868
|
|
|
|
1,502,761
|
|
|
|
1,555,287
|
|
|
|
1,555,068
|
|
|
|
1,581,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-4
MAKO
SURGICAL CORP.
Statements of Redeemable Convertible Preferred Stock and
Stockholders Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Convertible
|
|
|
Non-redeemable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
|
|
|
Non-redeemable
|
|
|
Preferred
|
|
|
|
|
|
Common
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Convertible Preferred
|
|
|
Preferred
|
|
|
Stock
|
|
|
Common
|
|
|
Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
|
Predecessor:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2004
|
|
|
17,491,042
|
|
|
$
|
13,606,102
|
|
|
|
3,205,581
|
|
|
$
|
3,205
|
|
|
|
7,311,897
|
|
|
$
|
7,312
|
|
|
$
|
10,870,971
|
|
|
$
|
(23,409,631
|
)
|
|
$
|
(12,528,143
|
)
|
Retirement of Series B redeemable convertible preferred
stock and associated dividends in asset sale
|
|
|
(588,235
|
)
|
|
|
(594,722
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,292,892
|
|
|
|
2,293
|
|
|
|
|
|
|
|
|
|
|
|
2,293
|
|
Issuance of Series C redeemable convertible preferred stock
to consultant in exchange for services and exchange of common
stock
|
|
|
353,743
|
|
|
|
378,482
|
|
|
|
|
|
|
|
|
|
|
|
(293,897
|
)
|
|
|
(294
|
)
|
|
|
(303,380
|
)
|
|
|
|
|
|
|
(303,674
|
)
|
Issuance of warrants for Series C redeemable convertible
stock per bridge note debt issuances
|
|
|
|
|
|
|
224,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,861
|
|
|
|
|
|
|
|
33,861
|
|
Accretion to redemption value of Series B and C redeemable
convertible preferred stock
|
|
|
|
|
|
|
36,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,452
|
)
|
|
|
|
|
|
|
(36,452
|
)
|
Accrued dividends on Series B and C redeemable convertible
preferred stock
|
|
|
|
|
|
|
743,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(743,643
|
)
|
|
|
|
|
|
|
(743,643
|
)
|
Net loss and comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,441,679
|
)
|
|
|
(4,441,679
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 11, 2004
|
|
|
17,256,550
|
|
|
$
|
14,394,595
|
|
|
|
3,205,581
|
|
|
$
|
3,205
|
|
|
|
9,310,892
|
|
|
$
|
9,311
|
|
|
$
|
9,821,357
|
|
|
$
|
(27,851,310
|
)
|
|
$
|
(18,017,437
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(continued)
F-5
MAKO
SURGICAL CORP.
Statements of Redeemable Convertible Preferred Stock and
Stockholders Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Receivable
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Convertible Preferred
|
|
|
Common
|
|
|
Stock
|
|
|
Paid-in
|
|
|
from
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stockholder
|
|
|
Deficit
|
|
|
Loss
|
|
|
Deficit
|
|
|
The Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for consulting services
|
|
|
|
|
|
$
|
|
|
|
|
47,442
|
|
|
$
|
47
|
|
|
$
|
31,578
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
31,625
|
|
Issuance of common stock at formation and for asset contribution
with
Z-KAT
|
|
|
|
|
|
|
|
|
|
|
1,409,900
|
|
|
|
1,410
|
|
|
|
2,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,272
|
|
Issuance of Series A redeemable convertible preferred stock
per asset contribution with Z-KAT
|
|
|
1,998,745
|
|
|
|
652,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series A redeemable convertible preferred stock
and common stock warrants, net of issuance costs of $57,000
|
|
|
2,400,490
|
|
|
|
2,244,872
|
|
|
|
|
|
|
|
|
|
|
|
106,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106,610
|
|
Subscription receivable for Series A redeemable convertible
preferred stock and common stock warrants
|
|
|
(53,000
|
)
|
|
|
(53,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(174
|
)
|
Employee share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148,300
|
|
Accretion to redemption value of Series A redeemable
convertible preferred stock
|
|
|
|
|
|
|
10,062
|
|
|
|
|
|
|
|
|
|
|
|
(10,062
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,062
|
)
|
Accrued dividends on Series A redeemable convertible
preferred stock
|
|
|
|
|
|
|
11,977
|
|
|
|
|
|
|
|
|
|
|
|
(11,977
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,977
|
)
|
Net loss and comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,038,674
|
)
|
|
|
|
|
|
|
(1,038,674
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
4,346,235
|
|
|
|
2,866,250
|
|
|
|
1,457,342
|
|
|
|
1,457
|
|
|
|
267,137
|
|
|
|
|
|
|
|
(1,038,674
|
)
|
|
|
|
|
|
|
(770,080
|
)
|
Issuance of common stock for consulting services
|
|
|
|
|
|
|
|
|
|
|
47,442
|
|
|
|
47
|
|
|
|
60,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,376
|
|
Issuance of common stock for stockholder note and accrued
interest
|
|
|
|
|
|
|
|
|
|
|
49,504
|
|
|
|
50
|
|
|
|
65,298
|
|
|
|
(65,348
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Receipt of subscription receivable for Series A redeemable
convertible preferred stock and common stock warrants
|
|
|
53,000
|
|
|
|
53,000
|
|
|
|
|
|
|
|
|
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
174
|
|
Issuance of Series A redeemable convertible preferred stock
and warrants for common stock for cash, net of issuance costs of
$7,000
|
|
|
99,510
|
|
|
|
92,446
|
|
|
|
|
|
|
|
|
|
|
|
640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
640
|
|
Issuance of Series B redeemable convertible preferred stock
for cash, net of issuance costs of $119,000
|
|
|
15,151,516
|
|
|
|
19,881,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113,718
|
|
Accretion to redemption value of Series A and B redeemable
convertible preferred stock
|
|
|
|
|
|
|
257,474
|
|
|
|
|
|
|
|
|
|
|
|
(257,474
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(257,474
|
)
|
Accrued dividends on Series A and B redeemable convertible
preferred stock
|
|
|
|
|
|
|
883,806
|
|
|
|
|
|
|
|
|
|
|
|
(249,822
|
)
|
|
|
|
|
|
|
(633,984
|
)
|
|
|
|
|
|
|
(883,806
|
)
|
Change in unrealized loss on available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,131
|
)
|
|
|
(4,131
|
)
|
Net loss and comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,147,017
|
)
|
|
|
|
|
|
|
(5,147,017
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,151,148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
19,650,261
|
|
|
|
24,034,276
|
|
|
|
1,554,288
|
|
|
|
1,554
|
|
|
|
|
|
|
|
(65,348
|
)
|
|
|
(6,819,675
|
)
|
|
|
(4,131
|
)
|
|
|
(6,887,600
|
)
|
Issuance of common stock upon exercise of options
|
|
|
|
|
|
|
|
|
|
|
1,650
|
|
|
|
2
|
|
|
|
1,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,100
|
|
Employee share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170,033
|
|
Interest on note receivable from stockholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,226
|
|
|
|
(5,226
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Addendum to asset contribution with Z-KAT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(176,357
|
)
|
|
|
|
|
|
|
(44,691
|
)
|
|
|
|
|
|
|
(221,048
|
)
|
Stock issuance costs for Series C redeemable convertible
preferred stock sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,538
|
)
|
|
|
|
|
|
|
(8,538
|
)
|
Accretion to redemption value of Series A & B
redeemable convertible preferred stock
|
|
|
|
|
|
|
267,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(267,319
|
)
|
|
|
|
|
|
|
(267,319
|
)
|
Accrued dividends on Series A and B redeemable convertible
preferred stock
|
|
|
|
|
|
|
1,609,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,609,027
|
)
|
|
|
|
|
|
|
(1,609,027
|
)
|
Change in unrealized loss on available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,320
|
|
|
|
2,320
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,616,837
|
)
|
|
|
|
|
|
|
(10,616,837
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,614,517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
19,650,261
|
|
|
$
|
25,910,622
|
|
|
|
1,555,938
|
|
|
$
|
1,556
|
|
|
$
|
|
|
|
$
|
(70,574
|
)
|
|
$
|
(19,366,087
|
)
|
|
$
|
(1,811
|
)
|
|
$
|
(19,436,916
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(continued)
F-6
MAKO
SURGICAL CORP.
Statements of Redeemable Convertible Preferred Stock and
Stockholders Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Receivable
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Convertible Preferred
|
|
|
Common
|
|
|
Stock
|
|
|
Paid-in
|
|
|
from
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stockholder
|
|
|
Deficit
|
|
|
Income(loss)
|
|
|
Deficit
|
|
|
The Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
19,650,261
|
|
|
$
|
25,910,622
|
|
|
|
1,555,938
|
|
|
$
|
1,556
|
|
|
$
|
|
|
|
$
|
(70,574
|
)
|
|
$
|
(19,366,087
|
)
|
|
$
|
(1,811
|
)
|
|
$
|
(19,436,916
|
)
|
Issuance of Series C redeemable convertible preferred
stock, net of issuance costs of $84,000 (unaudited)
|
|
|
13,513,514
|
|
|
|
29,916,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock upon exercise of options (unaudited)
|
|
|
|
|
|
|
|
|
|
|
1,306
|
|
|
|
1
|
|
|
|
1,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,662
|
|
Employee share-based compensation expense (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
335,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
335,545
|
|
Interest on note receivable from stockholder (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,760
|
|
|
|
(3,760
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Modification of restricted stock (unaudited)
|
|
|
|
|
|
|
|
|
|
|
300,084
|
|
|
|
300
|
|
|
|
394,480
|
|
|
|
74,334
|
|
|
|
|
|
|
|
|
|
|
|
469,114
|
|
Return of 35,244 shares due to modification of CEO restricted
stock (unaudited)
|
|
|
|
|
|
|
|
|
|
|
(35,244
|
)
|
|
|
(35
|
)
|
|
|
(391,892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(391,927
|
)
|
Vesting of restricted common stock (unaudited)
|
|
|
|
|
|
|
|
|
|
|
8,262
|
|
|
|
8
|
|
|
|
18,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,264
|
|
Accretion to redemption value of Series A,B and C
redeemable convertible preferred stock (unaudited)
|
|
|
|
|
|
|
223,415
|
|
|
|
|
|
|
|
|
|
|
|
(223,415
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(223,415
|
)
|
Accrued dividends on Series A, B and C redeemable
convertible preferred stock (unaudited)
|
|
|
|
|
|
|
2,453,366
|
|
|
|
|
|
|
|
|
|
|
|
(138,395
|
)
|
|
|
|
|
|
|
(2,314,971
|
)
|
|
|
|
|
|
|
(2,453,366
|
)
|
Change in unrealized gain on available-for-sale securities
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,028
|
|
|
|
9,028
|
|
Net loss (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,261,036
|
)
|
|
|
|
|
|
|
(13,261,036
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,252,008
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007 (unaudited)
|
|
|
33,163,775
|
|
|
$
|
58,503,707
|
|
|
|
1,830,346
|
|
|
$
|
1,830
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(34,942,094
|
)
|
|
$
|
7,217
|
|
|
$
|
(34,933,047
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-7
MAKO
SURGICAL CORP.
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
The Company
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
|
|
|
|
November 12,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 through
|
|
|
|
2004 through
|
|
|
Years Ended
|
|
|
Nine Months
|
|
|
|
November 11,
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
Ended September 30,
|
|
|
|
2004
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,441,679
|
)
|
|
|
$
|
(1,038,674
|
)
|
|
$
|
(5,147,017
|
)
|
|
$
|
(10,616,837
|
)
|
|
$
|
(6,623,081
|
)
|
|
$
|
(13,261,036
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
181,754
|
|
|
|
|
5,727
|
|
|
|
80,149
|
|
|
|
175,311
|
|
|
|
100,929
|
|
|
|
455,196
|
|
Amortization of intangible assets
|
|
|
426,849
|
|
|
|
|
|
|
|
|
18,370
|
|
|
|
470,082
|
|
|
|
317,290
|
|
|
|
475,838
|
|
Stock-based compensation
|
|
|
36,154
|
|
|
|
|
179,925
|
|
|
|
174,094
|
|
|
|
170,033
|
|
|
|
125,444
|
|
|
|
748,589
|
|
Inventory writedown
|
|
|
207,542
|
|
|
|
|
|
|
|
|
|
|
|
|
35,821
|
|
|
|
26,019
|
|
|
|
7,918
|
|
Loss on disposal of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,533
|
|
|
|
|
|
|
|
|
|
Loss on asset impairment
|
|
|
11,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,759
|
|
Accrued interest expense on debt
|
|
|
205,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest expense on warrants
|
|
|
114,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest expense on deferred license fee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
210,913
|
|
|
|
139,456
|
|
|
|
223,117
|
|
Warrant liability fair-value adjustment
|
|
|
137,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts
|
|
|
63,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumption of development costs from Z-KAT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(469,407
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(578,340
|
)
|
|
|
(11,302
|
)
|
|
|
(174,352
|
)
|
Inventory
|
|
|
30,445
|
|
|
|
|
|
|
|
|
(87,950
|
)
|
|
|
(605,402
|
)
|
|
|
(782,495
|
)
|
|
|
(542,990
|
)
|
Due from related parties
|
|
|
(593,052
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(97,736
|
)
|
|
|
|
|
|
|
96,111
|
|
Employee loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(225,155
|
)
|
|
|
(225,425
|
)
|
|
|
225,155
|
|
Prepaid and other assets
|
|
|
89,467
|
|
|
|
|
(11,549
|
)
|
|
|
(28,729
|
)
|
|
|
214,498
|
|
|
|
(42,667
|
)
|
|
|
(551,594
|
)
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(405,349
|
)
|
|
|
(125,000
|
)
|
|
|
|
|
Accounts payable
|
|
|
212,859
|
|
|
|
|
65,179
|
|
|
|
14,717
|
|
|
|
353,423
|
|
|
|
609,458
|
|
|
|
550,912
|
|
Accrued compensation and employee benefits
|
|
|
304
|
|
|
|
|
150,500
|
|
|
|
(25,405
|
)
|
|
|
385,452
|
|
|
|
18,854
|
|
|
|
(73,253
|
)
|
Other accrued liabilities
|
|
|
172,891
|
|
|
|
|
91,677
|
|
|
|
(8,271
|
)
|
|
|
509,851
|
|
|
|
173,451
|
|
|
|
790,188
|
|
Due to related party
|
|
|
|
|
|
|
|
278,569
|
|
|
|
|
|
|
|
(115,026
|
)
|
|
|
(15,343
|
)
|
|
|
|
|
Deferred revenue
|
|
|
622,396
|
|
|
|
|
|
|
|
|
|
|
|
|
700,000
|
|
|
|
|
|
|
|
1.348,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(2,991,478
|
)
|
|
|
|
(278,646
|
)
|
|
|
(5,010,042
|
)
|
|
|
(9,415,928
|
)
|
|
|
(6,314,412
|
)
|
|
|
(9,668,109
|
)
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
(11,099,419
|
)
|
|
|
(600,000
|
)
|
|
|
(600,000
|
)
|
|
|
(15,356,999
|
)
|
Proceeds from sales and maturities of short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
998,268
|
|
|
|
9,299,577
|
|
|
|
8,399,580
|
|
|
|
10,692,865
|
|
Proceeds from sale of assets
|
|
|
312,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
(39,081
|
)
|
|
|
|
(583
|
)
|
|
|
(175,180
|
)
|
|
|
(1,193,462
|
)
|
|
|
(638,860
|
)
|
|
|
(1,153,774
|
)
|
Acquisition of intangible assets
|
|
|
|
|
|
|
|
(60,000
|
)
|
|
|
(555,000
|
)
|
|
|
(2,120,000
|
)
|
|
|
(2,120,000
|
)
|
|
|
(450,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
273,040
|
|
|
|
|
(60,583
|
)
|
|
|
(10,831,331
|
)
|
|
|
5,386,115
|
|
|
|
5,040,720
|
|
|
|
(6,267,908
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock and warrants
|
|
|
|
|
|
|
|
7,610
|
|
|
|
640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred initial public offering costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,647,172
|
)
|
Proceeds from issuance of Series A redeemable convertible
preferred stock, net of stock issuance costs
|
|
|
|
|
|
|
|
2,290,698
|
|
|
|
145,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of Series B redeemable convertible
preferred stock, net of stock issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
19,881,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of Series C redeemable convertible
preferred stock, net of stock issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,538
|
)
|
|
|
|
|
|
|
29,916,304
|
|
Proceeds from issuance of bridge notes
|
|
|
3,152,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common stock options for cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,100
|
|
|
|
1,100
|
|
|
|
1,662
|
|
Payment of CEO payroll taxes relating to restricted common stock
modification
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(391,927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
3,152,850
|
|
|
|
|
2,298,308
|
|
|
|
20,027,560
|
|
|
|
(7,438
|
)
|
|
|
1,100
|
|
|
|
27,878,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
434,412
|
|
|
|
|
1,959,079
|
|
|
|
4,186,187
|
|
|
|
(4,037,251
|
)
|
|
|
(1,272,592
|
)
|
|
|
11,942,850
|
|
Cash and cash equivalents at beginning of period
|
|
|
257,939
|
|
|
|
|
|
|
|
|
1,959,079
|
|
|
|
6,145,266
|
|
|
$
|
6,145,266
|
|
|
$
|
2,108,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
692,351
|
|
|
|
$
|
1,959,079
|
|
|
$
|
6,145,266
|
|
|
$
|
2,108,015
|
|
|
$
|
4,872,674
|
|
|
$
|
14,050,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
$
|
(452,073
|
)
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Short-term note payable
|
|
|
(994,343
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term note payable
|
|
|
(1,055,389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B redeemable convertible preferred stock
|
|
|
(500,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends payable, Series B redeemable convertible
preferred stock
|
|
|
(94,722
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of preferred stock
|
|
|
36,452
|
|
|
|
|
10,062
|
|
|
|
257,474
|
|
|
|
267,319
|
|
|
|
198,798
|
|
|
|
223,415
|
|
Accrued dividends on preferred stock
|
|
|
743,643
|
|
|
|
|
11,977
|
|
|
|
883,806
|
|
|
|
1,609,027
|
|
|
|
1,197,418
|
|
|
|
2,453,366
|
|
Issuance of common stock warrants
|
|
|
|
|
|
|
|
99,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing of intellectual property
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,409,638
|
|
|
|
3,409,638
|
|
|
|
|
|
Deferred license fee payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,409,638
|
|
|
|
3,409,638
|
|
|
|
|
|
Common stock issued for note receivable
|
|
|
|
|
|
|
|
|
|
|
|
63,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on note receivable for common stock
|
|
|
|
|
|
|
|
|
|
|
|
2,348
|
|
|
|
5,226
|
|
|
|
3,855
|
|
|
|
3,760
|
|
Receipt of 35,244 shares of restricted common stock as
reimbursement for payment of CEO payroll taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
391,927
|
|
Acquisition of assets from affiliate in exchange for stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
|
|
|
|
|
110,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A redeemable convertible preferred stock
|
|
|
|
|
|
|
|
373,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
|
|
|
|
4,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,707
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
MAKO
SURGICAL CORP.
Notes to Financial Statements
Period from January 1, 2004 through November 11,
2004 (Predecessor) and
Period from November 12, 2004 through December 31,
2004 and
Years Ended December 31, 2005 and 2006
All
amounts as of September 30, 2007 and for the nine months
ended
September 30, 2006 and 2007 are unaudited
|
|
1.
|
Description
of the Business
|
MAKO Surgical Corp. (the Company or
MAKO) is an early-stage medical device company
providing innovative surgical solutions to the orthopedic knee
arthroplasty market. The Company was incorporated in the State
of Delaware on November 12, 2004 and is headquartered in
Ft. Lauderdale, Florida.
Predecessor
Financial Statements
Z-KAT, Inc. (the Predecessor or Z-KAT)
was formed in 1997 to develop and commercialize
computer-assisted surgery (CAS) applications.
Z-KAT
purchased, developed and commercialized certain CAS intellectual
property and technology assets and also purchased and developed,
but did not commercialize, certain haptic robotic intellectual
property and technology assets. At the direction of its board of
directors and shareholders,
Z-KAT
formed
MAKO in November 2004, initially as a wholly owned subsidiary,
to develop and commercialize unique applications combining CAS
with haptic robotics in the medical field of orthopedics. The
Company issued 100 shares of its common stock to Z-KAT in
connection with its formation. As more fully described in
Note 4, in December 2004, pursuant to a contribution
agreement (the Contribution Agreement), the Company
acquired substantially all of
Z-KATs
tangible assets, primarily furniture, office equipment and a
majority of Z-KATs CAS technology assets not required for
Z-KATs retained CAS business, and all of its haptic
robotic research and development technology inventory. MAKO was
granted a limited license to
Z-KATs
CAS and haptic robotic intellectual property portfolio for
exclusive use in the field of orthopedics, subject to a prior
license to a strategic partner of Z-KAT to use Z-KATs CAS
intellectual property, but not its haptic robotic intellectual
property, in the field of orthopedics. The contribution
agreement, including the
Z-KAT
license, was made, in exchange for MAKO common stock,
Series A redeemable convertible preferred stock and
warrants to purchase common stock.
Z-KAT,
through its retained business, continued the commercialization
of its CAS technology and retained its right to use or license
its CAS and haptic robotics intellectual property portfolio
outside of the field of orthopedics. In connection with the
Contribution Agreement, it was agreed that MAKO would reimburse
Z-KAT
for
certain payroll and direct and indirect expenses incurred from
October 1, 2004 through November 11, 2004 relating to
MAKO prior to its legal formation on November 12, 2004.
Such expenses totaled approximately $250,000 and have been
eliminated from
Z-KATs
results of operations for the period January 1, 2004
through November 11, 2004 and included in MAKOs
results of operations for the period November 12, 2004
through December 31, 2004. The operating management team
and all staff of
Z-KAT
transferred to MAKO in connection with its formation. Subsequent
to and pursuant to the Contribution Agreement, MAKO employees
have provided limited continuing commercial services to the
retained business of
Z-KAT.
Because, pursuant to the contribution transaction, MAKO acquired
substantially all of Z-KATs tangible assets and all of
Z-KATs employees, including management, and received all
necessary intellectual property rights, without all of which
MAKO could not operate,
Z-KAT
is
considered the predecessor company of MAKO. The accompanying
financial statements for the period from January 1, 2004
through November 11, 2004 (the Predecessor Financial
Statements) were prepared to present the statements of
operations, redeemable convertible preferred stock and
stockholders deficit and cash flows of Z-KAT.
Company
Financial Statements
The accompanying consolidated financial statements for the
period from November 12, 2004 (Inception) through
December 31, 2004, and as of December 31, 2005 and
2006 and for the years then ended (the
F-9
MAKO
SURGICAL CORP.
Notes to
Financial Statements (Continued)
Company Financial Statements) present the balance
sheets and statements of operations, redeemable convertible
preferred stock and stockholders deficit and cash flows of
MAKO as a stand-alone entity.
Because the Predecessor Financial Statements cover the period
from January 1, 2004 through November 11, 2004 and, as
described above, business operations were significantly
different from the Company as they involved different
utilization of the CAS technology that was contributed to MAKO,
the Predecessor and the Company Financial Statements are not
comparable and, accordingly, are presented in the accompanying
financial statements separated by a vertical or horizontal black
line.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Unaudited
Condensed Interim Financial Information
The accompanying balance sheet as of September 30, 2007,
the statements of operations and cash flows for the nine months
ended September 30, 2006 and 2007, and the statement of
redeemable convertible preferred stock and stockholders
deficit for the nine months ended September 30, 2007 are
unaudited. The unaudited condensed interim financial statements
have been prepared on the same basis as the annual financial
statements and, in the opinion of management, reflect all
adjustments, which include only normal recurring adjustments,
necessary to present fairly the Companys financial
position and results of operations and cash flows for the
interim periods presented. The financial data and other
information disclosed in these notes to the financial statements
related to the interim periods are unaudited and conform to the
requirements of the Securities and Exchange Commission for
unaudited interim financial information. The results of the nine
months ended September 30, 2007 are not necessarily
indicative of the results to be expected for the year ending
December 31, 2007 or for any other interim period or for
any other future year.
Basis
of Presentation and Use of Estimates
The financial statements have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. The accounting estimates that require
managements most significant, difficult and subjective
judgments include revenue recognition, allowance for doubtful
accounts, accrual for warranty costs, inventory impairment
charges, valuation allowance for deferred tax assets, impairment
of long-lived assets and the determination of stock-based
compensation. Actual results could differ significantly from
these estimates.
In the year ended December 31, 2006, MAKO emerged from the
development stage.
Liquidity
and Operations
The Company has incurred net losses and negative cash flow from
operating activities each year since inception. In order to
continue its operations and achieve its business objectives, the
Company must achieve profitability or obtain additional debt or
equity financing. There can be no assurance that the Company
will be able to obtain additional debt or equity financing on
terms acceptable to the Company, or at all. The failure of the
Company to obtain sufficient funds on acceptable terms when
needed could have a material adverse effect on the
Companys business, results of operations and financial
condition. See Note 7 for further discussion regarding
equity financing in 2007. The failure of the Company to win
widespread acceptance of its products by hospitals, physicians
and patients could have a material adverse effect on the
Companys business, results of operations, future cash
flows and financial condition.
F-10
MAKO
SURGICAL CORP.
Notes to
Financial Statements (Continued)
Concentrations
of Credit Risk and Other Risks and Uncertainties
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist primarily of
cash and cash equivalents and short-term investments. Cash and
cash equivalents are deposited in demand and money market
accounts at two large financial institutions. Such deposits are
generally in excess of insured limits. The Company has not
experienced any losses on its deposits of cash and cash
equivalents.
The Company is subject to risks common to companies in the
medical device industry including, but not limited to: new
technological innovations, dependence on key personnel,
dependence on key suppliers, protection of proprietary
technology, compliance with government regulations, uncertainty
of widespread market acceptance of products, product liability
and the need to obtain additional financing. The Companys
products include components subject to rapid technological
change. Certain components used in manufacturing have relatively
few alternative sources of supply, and establishing additional
or replacement suppliers for such components cannot be
accomplished quickly. The inability of any of these suppliers to
fulfill the Companys supply requirements may negatively
impact future operating results. While the Company has ongoing
programs to minimize the adverse effect of such uncertainty and
considers technological change in estimating its inventory net
realizable value, uncertainty continues to exist.
The Companys current version of its Tactile Guidance
System (TGS) and its unicompartmental implant have
been cleared by the U.S. Food and Drug Administration
(FDA). Certain products currently under development
by the Company, such as future versions of our TGS and implants,
will require clearance by the FDA or other international
regulatory agencies prior to commercial sales. There can be no
assurance that the Companys products will receive the
necessary clearance. If the Company were to be denied such
clearance or such clearance was delayed, it could have a
material adverse impact on the Company.
The Company may perform credit evaluations of its
customers financial condition and, generally, requires no
collateral from its customers. The Company provides an allowance
for doubtful accounts when required but has not experienced any
losses to date. To date, the majority of revenue recognized by
the Company was from a single customer.
FASB Statement No. 131,
Disclosures about Segments of an
Enterprise and Related Information
, establishes standards
for reporting information about operating segments. Operating
segments are defined as components of an enterprise about which
separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision
making group, in deciding how to allocate resources and in
assessing performance. The Companys chief operating
decision maker is its CEO. The Companys CEO reviews
financial information presented on an aggregate basis for
purposes of allocating resources and evaluating financial
performance. The Company has one business activity and there are
no segment managers who are held accountable for operations,
operating results and plans for products or components below the
aggregate Company level. Accordingly, the Company reports as a
single operating segment. To date, all of the
F-11
MAKO
SURGICAL CORP.
Notes to
Financial Statements (Continued)
Companys revenues and its Predecessors revenues are
from companies located in the United States. The following table
presents information about the Companys and
Predecessors revenues by customer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
The Company
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2004
|
|
|
|
November 12, 2004
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
through
|
|
|
|
through
|
|
|
Year Ended December 31,
|
|
|
Ended September 30,
|
|
|
|
November 11, 2004
|
|
|
|
December 31, 2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Company A
|
|
$
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
59,543
|
|
|
$
|
34,831
|
|
|
$
|
253,072
|
|
Company B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,498
|
|
Company C
|
|
|
962,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company D
|
|
|
175,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Others
|
|
|
510,761
|
|
|
|
|
|
|
|
|
|
|
|
|
3,028
|
|
|
|
|
|
|
|
53,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
$
|
1,648,342
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
62,571
|
|
|
$
|
34,831
|
|
|
$
|
355,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
The Company considers all highly liquid investments with an
original maturity at date of purchase of 90 days or less to
be cash equivalents.
Restricted
Cash
Restricted cash amounts include amounts deposited as collateral
in connection with the Companys facility operating lease
which requires that specific cash amounts be set aside.
Restricted cash amounts were $0, $125,000, and $125,000 at
December 31, 2005 and 2006, and September 30, 2007
(unaudited), respectively.
Fair
Value of Financial Instruments
Carrying amounts of certain of the Companys financial
instruments, including cash and cash equivalents, accounts and
notes receivable, accrued license fee and others approximate
fair value due to their short maturities or market rates of
interest.
Short-Term
Investments
The Companys short-term investments are classified as
available-for-sale. Available-for-sale securities are carried at
fair value based on quoted market prices, with the unrealized
gains and losses included in other comprehensive income (loss)
within stockholders deficit. Realized gains and losses and
declines in value judged to be other-than-temporary on
available-for-sale securities are included in interest and other
expense. Interest and dividends on securities classified as
available-for-sale are included in interest and other income.
The cost of securities sold is based on the specific
identification method.
F-12
MAKO
SURGICAL CORP.
Notes to
Financial Statements (Continued)
The amortized cost and fair value of short-term investments,
with gross unrealized gains and losses, were as follows:
As of
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Corporate bond
|
|
$
|
302,797
|
|
|
$
|
|
|
|
$
|
(1,504
|
)
|
|
$
|
301,293
|
|
Variable auction rate securities
|
|
|
9,602,354
|
|
|
|
|
|
|
|
(2,354
|
)
|
|
|
9,600,000
|
|
Certificate of deposit
|
|
|
196,000
|
|
|
|
|
|
|
|
(273
|
)
|
|
|
195,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,101,151
|
|
|
$
|
|
|
|
$
|
(4,131
|
)
|
|
$
|
10,097,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Variable auction rate securities
|
|
$
|
1,301,574
|
|
|
$
|
|
|
|
$
|
(1,574
|
)
|
|
$
|
1,300,000
|
|
Certificate of deposit
|
|
|
100,000
|
|
|
|
|
|
|
|
(237
|
)
|
|
|
99,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,401,574
|
|
|
$
|
|
|
|
$
|
(1,811
|
)
|
|
$
|
1,399,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
September 30, 2007 (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Variable auction rate securities
|
|
$
|
1,550,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,550,000
|
|
U.S. treasury notes
|
|
|
4,515,708
|
|
|
|
7,217
|
|
|
|
|
|
|
|
4,522,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,065,708
|
|
|
$
|
7,217
|
|
|
$
|
|
|
|
$
|
6,072,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006 and September 30, 2007
(unaudited), all securities have maturities or interest reset
dates of less than one year. Realized gains and losses to date
have not been significant.
Allowance
for Doubtful Accounts
Predecessor
The Predecessors allowance for doubtful accounts is based
on its assessment of the collectibility of customer accounts. No
allowance was required at January 1, 2004, as the
Predecessors collectibility of customer accounts was
certain. The activity for the Predecessors allowance for
doubtful accounts for the period from January 1, 2004
through November 11, 2004 is as follows.
|
|
|
|
|
Balance at January 1, 2004
|
|
$
|
|
|
Provision for doubtful accounts
|
|
|
63,472
|
|
Write offs
|
|
|
|
|
|
|
|
|
|
Balance at November 11, 2004
|
|
$
|
63,472
|
|
|
|
|
|
|
The
Company
The allowance for doubtful accounts is based on the
Companys assessment of the collectibility of customer
accounts. The Company regularly reviews the allowance by
considering factors such as historical
F-13
MAKO
SURGICAL CORP.
Notes to
Financial Statements (Continued)
experience, credit quality, the age of the accounts receivable
balances, and current economic conditions that may affect a
customers ability to pay. The Company has not experienced
any collectibility issues to date and has no allowance,
provision for doubtful accounts receivable or write offs to date
in the accompanying financial statements.
Accrual
for Warranty Costs
Upon installation of a TGS unit, the Company establishes an
accrual for the estimated costs associated with providing a
standard one-year warranty for defects in materials and
workmanship. Due to the Companys limited history of
commercial placements of TGS units, the estimation of warranty
costs is subjective.
Inventory
Inventory is stated at the lower of cost or market value on a
first-in,
first-out basis. Inventory costs include direct materials and
direct labor. The Company reviews its inventory periodically to
determine net realizable value and considers product upgrades in
its periodic review of realizability. The Company writes down
inventory, if required, based on forecasted demand and
technological obsolescence. These factors are impacted by market
and economic conditions, technology changes and new product
introductions and require estimates that may include uncertain
elements. Writedowns of inventory for the period from
January 1, 2004 through November 11, 2004, the period
from November 12, 2004 through December 31, 2004, the
years ended December 31, 2005 and 2006, and the nine months
ended September 30, 2006 and 2007 (unaudited) were
approximately $208,000 (Predecessor), $0, $0, $36,000, $26,000
and $8,000, respectively.
Property
and Equipment
Property and equipment are stated at cost, net of accumulated
depreciation. Depreciation of property and equipment is computed
using the straight-line method over their estimated useful lives
of two to seven years. Leasehold improvements and assets
recorded under capital leases are amortized on a straight-line
basis over the lesser of their useful life or the term of the
lease and are included in depreciation expense in the
accompanying statements of operations. Upon retirement or sale,
the cost and related accumulated depreciation are removed from
the balance sheet and the resulting gain or loss is reflected in
operations. Maintenance and repairs are charged to operations as
incurred.
Depreciation expense for the period from January 1, 2004
through November 11, 2004, the period from
November 12, 2004 through December 31, 2004, the years
ended December 31, 2005 and 2006, and the nine months ended
September 30, 2006 and 2007 (unaudited) was approximately
$182,000 (Predecessor), $6,000, $80,000, $175,000, $101,000 and
$455,000, respectively.
Intangible
Assets
The Companys intangible assets are comprised of licenses
to intellectual property rights. These intangible assets are
carried at cost, net of accumulated amortization. Amortization
is recorded using the straight-line method, over their
respective useful lives (generally the life of underlying
patents), which range from approximately 10 to 19 years.
Impairment
of Long-Lived Assets
The Company evaluates its long-lived assets for indicators of
impairment by comparison of the carrying amounts to future net
undiscounted cash flows expected to be generated by such assets
when events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. Should an impairment
exist, the impairment loss would be measured based on the excess
carrying value of the asset over
F-14
MAKO
SURGICAL CORP.
Notes to
Financial Statements (Continued)
the assets fair value or discounted estimate of future
cash flows. The Company and the Predecessor have not recorded
any such impairment losses to date.
Revenue
Recognition
Predecessor
The Predecessors revenue was generated from the sale of
image-guided surgery products, development services and license
fees. Predecessor revenue from the sale of image-guided surgery
products was recognized as revenue, when persuasive evidence of
an arrangement existed, delivery has occurred or service has
been rendered, the price is fixed or determinable and
collectibility is reasonably assured. Predecessor revenue from
development services and license fees was deferred and
recognized over the term of the service period and license
period, respectively. License revenue was included in other
revenue in the Predecessor Financial Statements. Predecessor
revenue from royalties was recognized as earned and was also
included in other revenue in the Predecessor Financial
Statements.
The
Company
Revenue is generated from unit sales of the TGS, including
installation services, training, upgrades and enhancements, from
sales of implants and disposable products, and by providing
extended warranty services. The Companys TGS product,
upgrades and enhancements to those products include software
that is essential to the functionality of the product and,
accordingly, the Company accounts for the sale of the TGS
pursuant to Statement of Position
No. 97-2,
Software Revenue Recognition
(SOP 97-2),
as amended.
The Company recognizes product revenues for sales of the TGS
when there is persuasive evidence of an arrangement, the fee is
fixed or determinable, collection of the fee is probable and
delivery has occurred as prescribed by
SOP 97-2.
For all sales, the Company uses either a signed agreement or a
binding purchase order as evidence of an arrangement. Such
arrangements typically require customer acceptance of the system
which is evidenced by the receipt by the Company of a form
executed by the customer indicating their acceptance of the TGS
unit. Such arrangements require the Company to provide upgrades
and enhancements to the TGS unit on a when and if available
basis. As of September 30, 2007, three TGS customers are
entitled to receive an upgrade to version 2.0 of the TGS at no
additional charge, and one customer has the right to receive it
at a discounted price. All of these customer upgrade rights to
receive the upgrades through version 2.0 of the TGS are on a
when and if available basis. The Company is not obligated to
provide upgrades for the two TGS units under consignment
programs for clinical and technical feedback.
Payments received upon customer acceptance of TGS units are
recognized as deferred revenue. The direct cost of revenue
associated with the sale of TGS units is recognized as deferred
cost of revenue. Costs associated with establishing an accrual
for the TGS standard one-year warranty liability and royalties
related to the sale of TGS units covered by licensing
arrangements are expensed as incurred. We anticipate ultimately
recognizing a positive margin on the sales of TGS units to date
including the satisfaction of the remaining upgrades through the
final deliverable of version 2.0 of the TGS, which is
anticipated to be in the first half of 2009. To date, deferred
revenue and deferred cost of revenue does not include any
amounts related to providing upgrades and enhancements to the
TGS units. If the Company is not able to deliver version 2.0 of
the TGS, customers would retain the original TGS unit sold and
the Company would not be obligated to refund the purchase price
of the TGS unit.
For arrangements with multiple elements, the Company allocates
arrangement consideration to TGS units, upgrades, enhancements
and services based upon vendor specific objective evidence
(VSOE) of fair value of the respective elements. As
the Company is in the early stages of commercialization, VSOE of
fair value does not exist for all the undelivered elements.
Accordingly, all revenue and cost of revenue associated with the
F-15
MAKO
SURGICAL CORP.
Notes to
Financial Statements (Continued)
sale of the TGS are deferred until the earlier of
(1) delivery of all elements or (2) establishment of
VSOE of fair value for all undelivered elements.
Product revenue from the sale of implants and disposable
products (the Products) is recognized as revenue in
accordance with Staff Accounting Bulletin (SAB)
No. 104,
Revenue Recognition
, when persuasive
evidence of an arrangement exists, delivery has occurred or
service has been rendered, the price is fixed or determinable
and collectibility is reasonably assured. The Products are a
separate unit of accounting from the TGS as (1) they have
value to the customer on a standalone basis, (2) objective
and reliable evidence of the fair value of the item exists and
(3) no right of return exists once the Products are
implanted or consumed. Accordingly, as the Companys
implants and disposable products are sold on a procedural basis,
the revenue and costs associated with the sale of Products are
recognized at the time of sale (i.e., at the time of the
completion of the related surgical procedure).
Service revenue, which consists of extended warranty services on
the TGS hardware, is deferred and recognized ratably over the
service period until no further obligation exists. Costs
associated with providing services are expensed when incurred.
The Companys agreements with customers do not contain
product return rights beyond the customer acceptance period
which is typically defined as a certain number of surgical
procedures over certain period which typically does not exceed
three months.
For purposes of obtaining clinical and technical feedback on the
current version of our TGS, we also enter into consignment
programs with certain customers. Under the terms of such
programs, the Company retains title to the TGS unit, while the
customer has use of the TGS and purchases the Companys
implants and disposables products. The Company may provide
unspecified upgrades to the product during the term of each
program when and if available. The TGS units associated with the
Companys consignment programs are recorded within property
and equipment and are depreciated over their estimated useful
life of two years. Depreciation and warranty expense
attributable to the TGS consignment units are recorded within
cost of revenue. The revenues associated with the sale of
Products to customers under consignment programs are recognized
as revenue when persuasive evidence of an arrangement exists,
delivery has occurred or service has been rendered, the price is
fixed or determinable and collectibility is reasonably assured.
Deferred
Revenue and Deferred Cost of Revenue
Deferred revenue consists of deferred product revenue and
deferred service revenue. Deferred product revenue arises from
timing differences between the shipment of product and
satisfaction of all revenue recognition criteria consistent with
the Companys revenue recognition policy. Deferred service
revenue results from the advance payment for services to be
delivered over a period of time, usually in one year increments.
Service revenue is recognized ratably over the service period.
Deferred cost of revenue consists of the direct costs associated
with the manufacture of units for which the revenue has been
deferred in accordance with the Companys revenue
recognition policy. Deferred revenue and associated deferred
cost of revenue expected to be realized within one year are
classified as current liabilities and current assets,
respectively.
Shipping
and Handling Costs
Costs incurred for shipping and handling are included in cost of
revenue at the time the related revenue is recognized. Amounts
billed to customers for shipping and handling are reported as
revenue.
Research
and Development Costs
Costs related to research, design and development of products
are charged to research and development expense as incurred.
These costs include direct salary costs for research and
development personnel, costs for materials used in research and
development activities and costs for outside services.
F-16
MAKO
SURGICAL CORP.
Notes to
Financial Statements (Continued)
Software
Development Costs
Software development costs are included in research and
development and are expensed as incurred. After technological
feasibility is established, material software development costs
are capitalized. The capitalized cost is then amortized on a
straight-line basis over the estimated product life, or on the
ratio of current revenues to total projected product revenue,
whichever is greater. To date, the period between achieving
technological feasibility, which the Company has defined as the
establishment of a working model which typically occurs when the
verification and validation testing is complete, and the general
availability of such software has been short and software
development costs qualifying for capitalization have been
insignificant. Accordingly, MAKO has not capitalized any
software development costs to date.
Stock-Based
Compensation
Predecessor
In the Predecessor Financial Statements, activity under the
stock-based employee compensation plans was accounted for using
the intrinsic value method prescribed by Accounting Principles
Board Opinion (APB) No. 25,
Accounting for
Stock Issued to Employees, and Financial Accounting Standards
Board Interpretation
(FIN) No. 44,
Accounting for Certain Transactions Involving Stock
Compensation
(an Interpretation of APB No. 25), and the
disclosure-only provisions of Statement of Financial Accounting
Standards (SFAS) No. 123,
Accounting for
Stock-Based Compensation
(SFAS 123). In the
Predecessor Financial Statements, no stock-based employee
compensation cost is reflected in net loss, as all options under
the Predecessor stock-based employee compensation plans were
granted at an exercise price equal to or greater than the
estimated fair value of the underlying Predecessor common stock
on the date of grant. Pro forma information is required by
SFAS 123 as if the Predecessor had accounted for its
stock-based awards to employees under the fair value method
prescribed by SFAS 123. The fair value of the Predecessor
stock-based awards to its employees was estimated using a
Black-Scholes-Merton option pricing model. Forfeitures of
options are reflected in the pro forma charges as they occur.
The Predecessor recognizes the pro forma charge on a
straight-line basis. The effect on net loss if the Predecessor
had elected to recognize stock-based compensation expense based
on the fair value of the options granted at the date of grant as
prescribed by SFAS 123 was insignificant and, accordingly,
pro forma disclosures have not been presented.
The
Company
Effective January 1, 2006, the Company adopted the fair
value provisions of SFAS No. 123 Revised,
Share-Based Payment
(SFAS 123(R)).
SFAS 123(R) requires the recognition of compensation
expense, using a fair-value based method, for costs related to
all share-based payments including stock options.
SFAS 123(R) requires companies to estimate the fair value
of share-based payment awards on the date of grant using an
option-pricing model.
The Company adopted SFAS 123(R) using the modified
retrospective transition method, which requires the restatement
of financial statements for prior periods. Prior to the adoption
of SFAS 123(R), the Company accounted for stock-based
compensation arrangements by recording compensation expense
based on the estimated fair-value of stock-based awards in
accordance with SFAS 123. The impact of SFAS 123(R) on
prior periods was not significant.
The Company accounts for stock-based compensation arrangements
with non-employees in accordance with the Emerging Issues Task
Force (EITF) Abstract
No. 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling
Goods or Services.
The Company records the expense of such
services based on the estimated fair value of the equity
instrument using the Black-Scholes-Merton pricing model. The
value of the equity instrument is charged to expense over the
term of the service agreement.
F-17
MAKO
SURGICAL CORP.
Notes to
Financial Statements (Continued)
See Note 8 for a detailed discussion of the various stock
option plans and related share-based compensation.
Advertising
Costs
Advertising costs are expensed as incurred. Advertising costs
have been insignificant to date.
Income
Taxes
Deferred tax assets and liabilities are determined based on the
differences between financial reporting and tax bases of assets
and liabilities, using tax rates expected to be in effect when
the differences will reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
Operating
Leases
Rental payments and incentives, if any, are recognized on a
straight-line basis over the life of a lease. See Note 6
for further discussion on operating leases.
Net
Loss Per Share
Predecessor
The Predecessor calculated net loss per share in accordance with
SFAS No. 128,
Earnings per Share
. Basic
earnings per share (EPS) is calculated by dividing the net
income or loss available to common stockholders adjusted for
redeemable convertible preferred stock accretion and dividends
by the weighted average number of common shares outstanding for
the period, without consideration for common stock equivalents.
Diluted EPS is computed by dividing the net income or loss
available to common stockholders adjusted by the weighted
average number of common shares outstanding for the period and
the weighted average number of dilutive common stock equivalents
outstanding for the period determined using the treasury-stock
method. For purposes of this calculation, stock options totaling
2,471,094, warrants totaling 4,402,000, Series B redeemable
convertible preferred stock totaling 9,126,307, and
Series C redeemable convertible preferred stock totaling
5,512,897 for the period from January 1, 2004 through
November 11, 2004 are considered to be common stock
equivalents but are excluded in the calculation of diluted
earnings per share as their effect is dilutive. Accordingly,
basic and diluted EPS are the same for the 2004 period presented.
The
Company
The Company calculated net loss per share in accordance with
SFAS No. 128,
Earnings per Share
. Basic
earnings per share (EPS) is calculated by dividing the net
income or loss available to common stockholders adjusted for
redeemable convertible preferred stock accretion and dividends
by the weighted average number of common shares outstanding for
the period, without consideration for common stock equivalents.
Diluted EPS is computed by dividing the net income or loss
available to common stockholders adjusted by the weighted
average number of common shares outstanding for the period and
the weighted average number of dilutive common stock equivalents
outstanding for the period determined using the treasury-stock
method. For purposes of this calculation, stock options
(totaling 360,904, 629,567 and 947,950 as of December 31,
2004, 2005 and 2006, respectively, and 941,927 and 1,921,139 as
of September 30, 2006 and 2007 (unaudited), respectively),
warrants (to purchase 462,716 shares of common stock as of
December 31, 2004, 2005 and 2006, and
September 30, 2006 and 2007 (unaudited)), and redeemable
convertible preferred stock (totaling 4,346,235, 19,650,261 and
19,650,261 as of December 31, 2004, 2005 and 2006,
respectively, and 19,650,261 and 33,163,775 as of
September 30, 2006 and 2007 (unaudited), respectively) are
considered to be common
F-18
MAKO
SURGICAL CORP.
Notes to
Financial Statements (Continued)
stock equivalents but are excluded in the calculation of diluted
earnings per share as their effect is dilutive. Accordingly,
basic and diluted EPS are the same for all periods presented.
Comprehensive
Loss
Comprehensive loss is defined as the change in equity from
transactions and other events and circumstances other than those
resulting from investments by owners and distributions to
owners. For the period from January 1, 2004 through
November 11, 2004, the period from November 12, 2004
through December 31, 2004, the years ended
December 31, 2005 and 2006, and the nine months ended
September 30, 2006 and 2007 (unaudited), the Company
recorded comprehensive losses of approximately $4,442,000
(Predecessor), $1,039,000, $5,151,000, $10,615,000, $6,621,000
and $13,252,000, respectively. For the periods from
January 1, 2004 through November 11, 2004
(Predecessor) and November 12, 2004 through
December 31, 2004, net loss is the only component of
comprehensive loss.
Recent
Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board
(FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
, an
interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting
for uncertainty in income taxes by prescribing the recognition
threshold a tax position is required to meet before being
recognized in the financial statements. It also provides
guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for fiscal years beginning
after December 15, 2006. The Company adopted the provisions
of FIN 48 effective January 1, 2007. No cumulative
adjustment to the Companys accumulated deficit was
required upon adoption and the effect of adoption was immaterial.
In September 2006, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 108,
Considering the
Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements
(SAB 108). SAB 108 provides guidance
on the consideration of the effects of prior year misstatements
in quantifying current year misstatements for the purpose of a
materiality assessment. SAB 108 establishes an approach
that requires quantification of financial statement errors based
on the effects on each of the Companys balance sheets and
statement of operations and the related financial statement
disclosures. SAB 108 was adopted by the Company effective
January 1, 2007. The Company has determined that the
adoption of SAB 108 had no material effect on its results
of operations and financial position.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS 157).
SFAS 157 provides guidance for using fair value to measure
assets and liabilities. It also responds to investors
requests for expanded information about the extent to which
companies measure assets and liabilities at fair value, the
information used to measure fair value, and the effect of fair
value measurements on earnings. SFAS 157 applies whenever
other standards require (or permit) assets or liabilities to be
measured at fair value, and does not expand the use of fair
value in any new circumstances. SFAS 157 is effective for
financial statements issued for fiscal years beginning after
November 15, 2007 and is required to be adopted by the
Company effective January 1, 2008. The Company is currently
evaluating the effect that the adoption of SFAS 157 will
have on its results of operations and financial position.
In February 2007, the FASB issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial
LiabilitiesIncluding an amendment of FASB Statement
No. 115
(SFAS 159). SFAS 159
provides companies with an option to report selected financial
assets and liabilities at fair value. The objective of
SFAS 159 is to reduce both complexity in accounting for
financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently. Most of
the provisions in Statement 159 are elective; however, the
amendment to FASB Statement No. 115,
Accounting for
Certain Investments in Debt and Equity Securities
, applies
to all entities with available-for-sale and trading securities.
SFAS 159 is effective as of the beginning of an
entitys first fiscal year beginning after
November 15, 2007. The Company
F-19
MAKO
SURGICAL CORP.
Notes to
Financial Statements (Continued)
is currently evaluating the effect that the adoption of
SFAS 159 will have on its results of operations and
financial position.
Reclassifications
Certain reclassifications have been made to the prior
periods statements of operations and notes to the
financial statements to conform to the current periods
presentation.
|
|
3.
|
Selected
Balance Sheet Components
|
The following table provides details of selected balance sheet
items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Inventory
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
317,700
|
|
|
$
|
396,772
|
|
|
$
|
864,964
|
|
Work-in-process
|
|
|
|
|
|
|
371,764
|
|
|
|
72,573
|
|
Finished goods
|
|
|
8,750
|
|
|
|
157,495
|
|
|
|
523,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total inventory
|
|
$
|
326,450
|
|
|
$
|
926,031
|
|
|
$
|
1,461,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in finished goods at September 30, 2007 is the
cost of a TGS unit of approximately $211,000 related to a recent
sales agreement for which customer acceptance is pending.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
Estimated
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Useful Life
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consigned TGS units and instruments
|
|
$
|
|
|
|
$
|
279,631
|
|
|
$
|
736,469
|
|
|
|
2 years
|
|
TGS demo system
|
|
|
|
|
|
|
|
|
|
|
204,749
|
|
|
|
2 years
|
|
Computer equipment and software
|
|
|
177,013
|
|
|
|
625,618
|
|
|
|
874,400
|
|
|
|
35 years
|
|
Laboratory and manufacturing equipment
|
|
|
66,795
|
|
|
|
287,821
|
|
|
|
413,371
|
|
|
|
5 years
|
|
Office furniture and equipment
|
|
|
42,914
|
|
|
|
249,763
|
|
|
|
346,472
|
|
|
|
7 years
|
|
Leasehold improvements
|
|
|
|
|
|
|
32,420
|
|
|
|
53,566
|
|
|
|
Lease term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
286,722
|
|
|
|
1,475,253
|
|
|
|
2,629,027
|
|
|
|
|
|
Less accumulated depreciation and amortization
|
|
|
(85,876
|
)
|
|
|
(258,789
|
)
|
|
|
(713,985
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
200,846
|
|
|
$
|
1,216,464
|
|
|
$
|
1,915,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Other accrued liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued development services
|
|
$
|
|
|
|
$
|
362,866
|
|
|
$
|
197,693
|
|
Accrued legal fees
|
|
|
|
|
|
|
53,513
|
|
|
|
618,949
|
|
Other
|
|
|
55,436
|
|
|
|
599,079
|
|
|
|
989,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
55,436
|
|
|
$
|
1,015,458
|
|
|
$
|
1,805,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
MAKO
SURGICAL CORP.
Notes to
Financial Statements (Continued)
Predecessor
CEO
Restricted Stock
In June 2004, the Predecessor issued 2,292,892 shares of
restricted common stock to its CEO (the Predecessor
Restricted Stock) which it was determined by the
Predecessor to have a de minimis value at the date of issuance.
The Predecessor Restricted Stock vests one-third following six
months from the date of issuance and the remaining two-thirds
vests ratably monthly over the next 24 months. None of the
Predecessor Restricted Stock vested during the period from
January 1, 2004 through November 11, 2004.
Predecessor
Sale of Assets to Third Party
In October 2004, the Predecessor entered into an Asset Purchase
Agreement with one of its strategic partners (the
APA). Under the significant terms of the APA, the
Predecessor sold certain assets to the strategic partner and the
strategic partner cancelled certain debt obligations owed to it
by the Predecessor. As a result of the APA, the Predecessor
recorded a deferred gain, which is being recognized to other
revenue over approximately 10 years. During the period from
January 1, 2004 through November 11, 2004,
approximately $18,000 of the deferred gain was recognized in
other revenue.
The
Company
Acquisitions
of Assets From Predecessor
In December 2004, pursuant to the Contribution Agreement, the
Company acquired substantially all of Z-KATs tangible
assets, primarily furniture, office equipment and a majority of
Z-KATs CAS technology assets not required for Z-KATs
retained CAS business, and all of its haptic robotic research
and development technology inventory. The Company was granted a
limited license to Z-KATs CAS and haptic robotic
intellectual property portfolio for exclusive use in the field
of orthopedics, subject to a prior license to a strategic
partner of Z-KAT to use Z-KATs CAS intellectual property,
but not its haptic robotic intellectual property, in the field
of orthopedics (the Z-KAT License). The Contribution
Agreement, including the Z-KAT License, was made in exchange for
approximately 1,410,000 shares of common stock,
1,999,000 shares of Series A redeemable convertible
preferred stock, and warrants to purchase 190,000 shares of
common stock at an exercise price of $3.00 per share. These
share amounts were determined by Z-KATs board of
directors. In making this determination, the Z-KAT board of
directors determined the number of shares to be issued in order
to (1) obtain sufficient subsidiary stock for its
subsequent use in redeeming bridge note debt to its shareholders
and satisfying a substantial portion of its accounts payable and
(2) establish the capital structure of its subsidiary to
allow for the future sale of MAKOs Series A
redeemable convertible preferred stock. This acquisition was
accounted for based on the Z-KAT carrying value of the assets
acquired totaling approximately $652,000 as it was a transaction
between entities under common control. The common stock was
recorded at par and the remainder of the ascribed value was
allocated to the Series A redeemable convertible preferred
stock resulting in a discount to the potential redemption value
of approximately $1,346,000 which is being accreted over the
period from the date of issuance to the redemption date (see
further discussion on redemption rights in Note 7).
Pursuant to the December 2004 contribution of the Z-KAT License,
which was not assigned a value, the Company obtained the right
to manage and maintain the Z-KAT patent portfolio, and assumed
the obligation to paying a ratable portion (among all licensees)
of all maintenance fees, patent costs and applicable royalties
to Z-KATs licensors (except for an annual minimum royalty
payment payable to Z-KATs primary licensor in its retained
CAS business, the CAS Minimum Royalty). Because
there has only been one licensee of the Z-KAT patent portfolio
other than the Company, the Companys ratable portion for
the intellectual property fees, costs and royalties has been 50%
since consummation of the Z-KAT License.
F-21
MAKO
SURGICAL CORP.
Notes to
Financial Statements (Continued)
In August 2006, we created a special independent committee of
our board of directors, comprised of all directors that did not
hold an interest in Z-KAT, to act of behalf of MAKO on all
matters involving Z-KAT. In December 2006, the Company entered
into an Addendum to the Contribution Agreement (the
Addendum). Under the Addendum, the Company loaned
Z-KAT approximately $125,000 (the Z-KAT Note) to
satisfy certain accounts payable, assumed the obligation to pay
the annual minimum royalty payable to the sole excluded CAS
licensor, and purchased certain remaining Z-KAT CAS inventory at
or below historical costs, which is applicable to MAKOs
field of orthopedics (which in 2004 Z-KAT had intended to
utilize in its retained CAS business) for $30,000. Z-KAT also
assigned to MAKO its right to receive required royalty payments
from two prior third-party CAS intellectual property licensees
(the Sublicensee Payments). MAKO secured the right
and assumed the obligation to pay the CAS minimum royalty due to
the importance of maintaining the licensed rights and
Z-KATs illiquid position in 2006. There was no change in
licensed intellectual property rights as a result of the
Addendum. The liabilities assumed and the assets acquired were
recorded at Z-KATs carrying value and resulted in net
liability of approximately $221,000. The Company recorded an
offsetting a charge to reduce additional
paid-in-capital
to zero with the excess charged to accumulated deficit as Z-KAT
continued to be a significant shareholder of the Company. The
CAS Minimum Royalty was initially an obligation retained by
Z-KAT under the Z-KAT License as the intellectual property at
issue had greater applicability to Z-KATs retained CAS
business than MAKOs field of orthopedics. The Z-KAT Note
accrues interest at a rate of 8.5% per annum, which was
determined by negotiation between Z-KAT and the special
independent committee of MAKOs board of directors, and is
being repaid through collections from ongoing sales of
Z-KATs CAS products.
|
|
|
Due From
/ To Related Party
|
At December 31, 2005 and 2006, and September 30, 2007
(unaudited), due from (to) related party represents the net of
amounts due from and due to
Z-KAT
for
the Sublicensee Payments receivable, the
Z-KAT
Note,
accrued Minimum Royalty Payments and other related party
transactions.
|
|
|
Note
Receivable Related Party
|
At December 31, 2005 and 2006, and September 30, 2007
(unaudited), the balance of the
Z-KAT
Note,
with accrued interest, was approximately $0, $126,000, and
$88,000, respectively. The
Z-KAT
Note
is being repaid through collections from
Z-KAT
sales
of its products. As of December 31, 2006 and
September 30, 2007 (unaudited), the Company believes that
the
Z-KAT
Note is fully collectible. As of December 31, 2006 and
September 30, 2007 (unaudited),
Z-KATs
holdings of MAKO common stock on a fully diluted and converted
basis are approximately 13.6% and 8.9%, respectively.
During 2006, the Company issued $225,000 in employee loans to
certain officers of the Company (the Employee
Loans). The Employee Loans accrue interest at a rate of
4.0% per annum, compounded annually. The interest is paid
biweekly. The Employee Loans and accrued interest were due upon
the earlier of one year from the date of the Employee Loan or a
liquidation event, as defined. The Employee Loans were fully
repaid in April 2007. In May and June 2007, the Company issued
$225,000 in employee loans to certain officers of the Company
under terms that were substantially similar to the Employee
Loans issued in 2006. In August and September 2007, the Company
forgave the $225,000 of outstanding loans, including accrued
interest, with a charge to the statement of operations.
|
|
|
Restricted
Stock and Note Receivable from Related Party
|
In July 2005 and May 2006, the Company issued a total of
446,287 shares of restricted common stock to its CEO and
49,504 shares of unrestricted common stock to an entity
affiliated with the CEO in exchange for
F-22
MAKO
SURGICAL CORP.
Notes to
Financial Statements (Continued)
promissory notes from the CEO totaling approximately $631,000
(representing the fair value of the shares on the date of
issuance) approximately 50% of which are nonrecourse. The
promissory notes accrue interest at a rate of 8% per annum, with
25% of the restricted stock vesting immediately and the
remainder vesting monthly over 48 months as service is
provided. The restricted stock was pledged as collateral against
the promissory notes. In March 2007, the Company issued
82,508 shares of restricted common stock to its CEO at a
purchase price of $2.48 per share (the estimated fair value at
the date of issuance) in exchange for a promissory note of
$205,000, 50% of which is nonrecourse and a pledge agreement.
The March 2007 restricted stock, pledge agreement and promissory
note were issued under terms substantially similar to the July
2005 and May 2006 restricted stock issuances. Because it was
unclear as to whether the recourse portion had substance as of
the dates of issuance of the restricted stock and the promissory
notes, the Company has determined to treat the entire amount of
the promissory notes related to the restricted stock as
nonrecourse for accounting purposes. A nonrecourse note issued
for restricted stock is in substance an option to acquire the
stock. Accordingly, the Company recorded compensation expense of
approximately $90,000 and $73,000 in the years ended
December 31, 2005 and 2006 and the promissory notes and the
restricted stock are not recorded in the accompanying financial
statements. At December 31, 2006 the balance of the
unrecognized promissory notes related to the restricted stock
with accrued interest was approximately $699,000. The
unrecognized compensation associated with the restricted stock
is approximately $172,000 as of December 31, 2006. The
compensation expense was determined under the
Black-Scholes-Merton model assuming a risk free interest rate of
0.0% (as the interest rate on the promissory notes was greater
than the risk free interest rate and the excess was not
significant to the Black-Scholes-Merton valuation
risk free interest rate ranging from 4.08% to 4.96% less the
stated interest rate of 8% implicit in the promissory notes), a
volatility factor ranging from 57.1% to 66.5% and a
6.25 year estimated life. The value of the common stock was
initially determined by the Companys board of directors
and was validated as reasonable on a retrospective basis in a
March 2007 valuation by an independent valuation firm, Taylor
Consulting Group, Inc. As the unrestricted stock does not
contain vesting provisions, it is not subject to the pledge
against the promissory notes and collectibility is reasonably
assured, the Company recorded the portion of the promissory
notes associated with the unrestricted stock as a component of
stockholders deficit (principal of $63,000) in the
accompanying financial statements and accrued interest at a rate
of 8% per annum as an increase to additional
paid-in-capital.
In August 2007, the Company issued 247,524 shares of
restricted stock to its CEO at an estimated fair value of $11.12
per share on the date of issuance. The restricted stock will
vest over a four year period.
On September 5, 2007, the Company forgave approximately
$1,149,000 of outstanding loans, including accrued interest of
$113,000, to its CEO. Of this amount, which represents all loans
outstanding to the Companys CEO, $949,000 was associated
with the issuances of the restricted stock and $200,000 was
associated with the employee loans discussed above. In
connection with the forgiveness of the loans, 35,244 shares
of common stock were surrendered by the CEO to the Company to
pay for the payroll taxes associated with the taxable income
from the forgiveness of the loans. The forgiveness of the notes
receivable resulted in a modification to the original award.
Accordingly, the Company accounted for the modification by
determining the amount of the incremental compensation charge to
be recorded in accordance with paragraph 51 of
SFAS 123(R). The original award, which was accounted for as
a stock option, was revalued on the date of modification using
the Black-Scholes-Merton model with current inputs for risk-free
rate, volatility and market value. This calculated amount was
compared to the fair value of the restricted stock award on the
date of modification resulting in the incremental charge. Due to
the forgiveness of the note, the Company ceased to record the
award as a stock option and commenced the recording of the award
as a restricted stock award. Accordingly, on the date of
modification, the Company recognized the incremental charge for
the portion of the vested shares and will record the additional
portion related to the unvested shares over the remaining term.
The forgiveness resulted in a modification to the original terms
of the restricted stock-based award with a charge of
approximately $395,000 recorded in the financial statements in
September 2007. The remaining unrecognized compensation expense
of approximately $533,000 relating to the unvested
F-23
MAKO
SURGICAL CORP.
Notes to
Financial Statements (Continued)
restricted stock will be recorded in the financial statements
over the remaining vesting period, along with the related vested
common stock. The compensation expense associated with the
modification of the terms of the restricted stock was determined
under the Black-Scholes-Merton model assuming a risk free
interest rate of 0.0% (as the interest rate on the promissory
notes was greater than the risk free interest rate and the
excess was not significant to the Black-Scholes-Merton
valuation risk free interest rate of 4.29% less the
stated interest rate of 8% implicit in the promissory notes), a
volatility factor of 54.07% and an estimated life ranging from
4.10 to 5.80 years. The value of the common stock on the
modification date was determined by an August 2007 valuation by
an independent valuation firm, Taylor Consulting Group, Inc. The
restricted stock has the following vested and unvested shares as
of December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Vested shares
|
|
|
217,224
|
|
|
$
|
1.27
|
|
Unvested shares
|
|
|
229,063
|
|
|
$
|
1.27
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
446,287
|
|
|
$
|
1.27
|
|
|
|
|
|
|
|
|
|
|
The restricted stock has the following vested and unvested
shares as of September 30, 2007 (unaudited).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Vested shares
|
|
|
273,102
|
|
|
$
|
1.39
|
|
Unvested shares
|
|
|
467,973
|
|
|
$
|
6.64
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
741,075
|
|
|
$
|
4.55
|
|
|
|
|
|
|
|
|
|
|
Predecessor
The Predecessors intangible assets are comprised of
purchased patents and licenses to intellectual property rights,
including patents (the Predecessor Intangible
Assets) that were acquired in September 2000. The
Predecessor Intangible Assets are amortized on a straight line
basis over their estimated useful lives (generally the life of
underlying patents), which range on average from 13 to
15 years. Amortization expense related to the Predecessor
Intangible Assets was approximately $427,000 for the period
January 1, 2004 through November 11, 2004.
The
Company
The Companys intangible assets are comprised of purchased
patents and licenses to intellectual property rights, (the
Licenses). The Licenses are amortized on a straight
line basis over their estimated useful lives which range on
average from 10 to 19 years. See Note 6 for detailed
discussion of Licenses.
F-24
MAKO
SURGICAL CORP.
Notes to
Financial Statements (Continued)
The following tables present details of MAKOs intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
Amortization
|
|
|
|
Amount
|
|
|
Period
|
|
|
Amount
|
|
|
Period
|
|
|
Amount
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Licenses
|
|
$
|
555,000
|
|
|
|
11.4
|
|
|
$
|
6,084,638
|
|
|
|
10.1
|
|
|
$
|
6,519,638
|
|
|
|
10.0
|
|
Patents
|
|
|
60,000
|
|
|
|
17.8
|
|
|
|
60,000
|
|
|
|
17.8
|
|
|
|
60,000
|
|
|
|
17.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
615,000
|
|
|
|
12
|
|
|
|
6,144,638
|
|
|
|
10.1
|
|
|
|
6,579,638
|
|
|
|
10.1
|
|
Less: accumulated amortization
|
|
|
(18,370
|
)
|
|
|
|
|
|
|
(488,452
|
)
|
|
|
|
|
|
|
(963,049
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
596,630
|
|
|
|
|
|
|
$
|
5,656,186
|
|
|
|
|
|
|
$
|
5,616,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to intangible assets was
approximately $0, $18,000, $470,000, $317,000 and $476,000 for
the period from November 12, 2004 through December 31,
2004, the years ended December 31, 2005 and 2006, and the
nine months ended September 30, 2006 and 2007 (unaudited),
respectively.
The estimated future amortization expense of intangible assets
for the next five years as of December 31, 2006 is as
follows:
|
|
|
|
|
2007
|
|
$
|
611,000
|
|
2008
|
|
|
611,000
|
|
2009
|
|
|
611,000
|
|
2010
|
|
|
611,000
|
|
2011
|
|
|
611,000
|
|
|
|
|
|
|
Total
|
|
$
|
3,055,000
|
|
|
|
|
|
|
|
|
6.
|
Commitments
and Contingencies
|
Operating
Leases
The Company leases its facility under an operating lease that
expires in July 2011. The Company has the option to renew its
facility lease for two consecutive three year periods. Rent
expense on a straight-line basis was $203,000 (Predecessor),
$43,000, $185,000, $250,000, $173,000 and $232,000 for the
period January 1, 2004 through November 11, 2004, the
period November 12, 2004 to December 31, 2004, the
years ended December 31, 2005 and 2006, and the nine months
ended September 30, 2006 and 2007 (unaudited), respectively.
Future minimum lease commitments under the Companys
operating lease as of December 31, 2006 are approximately
as follows:
|
|
|
|
|
2007
|
|
$
|
202,000
|
|
2008
|
|
|
208,000
|
|
2009
|
|
|
215,000
|
|
2010
|
|
|
221,000
|
|
2011
|
|
|
131,000
|
|
|
|
|
|
|
|
|
$
|
977,000
|
|
|
|
|
|
|
F-25
MAKO
SURGICAL CORP.
Notes to
Financial Statements (Continued)
Capital
Leases
In 2006, the Company leased certain furniture under capital
leases that expire in September 2007 and October 2009. The
capital lease furniture has a cost of approximately $169,000 and
is included in office furniture and equipment in Note 3. As
of December 31, 2006, accumulated amortization of
approximately $9,000 was included in accumulated depreciation in
Note 3. For the year ended December 31, 2006,
amortization expense is included in depreciation expense in the
accompanying statement of operations. The future minimum lease
payments under the Companys capital leases as of
December 31, 2006 are included in accrued expenses in the
accompanying balance sheet and are approximately as follows:
|
|
|
|
|
2007
|
|
$
|
54,000
|
|
2008
|
|
|
13,000
|
|
2009
|
|
|
11,000
|
|
|
|
|
|
|
|
|
|
78,000
|
|
Less amounts representing interest
|
|
|
(9,000
|
)
|
|
|
|
|
|
|
|
$
|
69,000
|
|
|
|
|
|
|
License
and Royalty Agreements
In September 2005, the Company entered into a fully paid license
agreement with Integrated Surgical Systems, Inc. (the ISS
License Agreement), in exchange for an upfront license fee
of $190,000 (the ISS License Fee). The ISS License
Fee is included in intangible assets in the accompanying balance
sheets. By its terms, the ISS License continues until all of the
licensed patents have expired, which, based on the licensed
granted patents and presently pending patent applications, is
currently estimated to be February 2019.
In September 2005, the Company entered into a fully paid license
agreement with Trigon Incorporated, doing business as Stelkast
(the Stelkast License Agreement), in exchange for an
upfront license fee of $350,000 (the Stelkast License
Fee). The Stelkast License Fee is included in intangible
assets in the accompanying balance sheets. By its terms, the
Stelkast License Agreement continues until the expiration of any
and all intellectual property rights, including copyright,
licensed thereunder which is not readily determinable, but is
expected to have an expiration no less than 10 years.
As more fully described in Note 4, in December 2004 and
December 2006, respectively, the Company entered into the Z-KAT
License and the Addendum whereby MAKO was granted rights to
certain intellectual property. The Z-KAT License included
sublicenses to third-party intellectual property rights (the
Sublicenses). The Z-KAT License is fully paid up as
to licenses directly to Z-KAT. Under the Sublicenses, the
Company is obligated to make ongoing royalty payments ranging
from 2% to 5% on the sale of certain products and minimum annual
payments totaling $575,000. As of December 31, 2006, the
Company has paid all amounts due under the Sublicenses. By their
terms, the Z-KAT License and the component Sublicenses generally
continue until all of the licensed patents have expired, which,
based on the licensed granted patents and presently pending
patent applications is currently estimated to be December 2024.
In December 2005, the Company entered into a license agreement
with the University of Florida Research Foundation for a license
(the UF License Agreement) in the field of medicine
for certain intellectual property rights related to low friction
and low wear polymer composites (the UF Licensed
Technology) in exchange for a payment of $15,000 (the
UF License Fee). The UF License Fee is included in
intangible assets in the accompanying balance sheets. The UF
License Agreement includes ongoing royalty provisions on the
sale of UF Licensed Technology ranging from 1% to 5%, including
an annual minimum royalty escalating from $25,000 to $100,000
over a four-year period, and $100,000 annually thereafter,
beginning upon the commercialization of the licensed technology,
which has not occurred as of September 30, 2007, and annual
license maintenance fees of $1,000 on the first, second and
third anniversaries, and then
F-26
MAKO
SURGICAL CORP.
Notes to
Financial Statements (Continued)
$5,000 for each anniversary thereafter. By its terms, the UF
License Agreement continues until all of the licensed patents
have expired, which, based on the licensed presently pending
patent applications, is currently estimated to be August 2024.
In March 2006, the Company entered into a license agreement with
International Business Machines Corporation (IBM)
for a license, in the Companys field of business, to
IBMs patent portfolio (the IBM License) in
exchange for a payment of $2 million upon execution of the
agreement (the Upfront License Fee) and a deferred
payment of $4 million payable upon a change of control, as
defined (e.g., initial public offering, acquisition or change in
voting ownership greater than 50.01%) (the Deferred
License Fee). The IBM License requires royalty payments of
2% of the selling price of each TGS unit. The Upfront License
Fee and net present value of the Deferred License Fee are
included in intangible assets in the accompanying balance
sheets. The net present value of the Deferred License Fee
obligation was approximately $3,410,000, net of a discount of
$590,000 and was recorded as a long-term debt obligation as the
Company believed it was probable at the inception of the
agreement that the contingent obligation would become payable.
The net present value of the Deferred License Fee was determined
using an incremental borrowing rate of 8% and an expected
payment date of two years from the effective date of the license
agreement. The discount on the debt obligation is being
amortized over the estimated term of the Deferred License Fee
obligation as interest expense which was approximately $211,000
and $223,000 for the year ended December 31, 2006 and the
nine months ended September 30, 2007 (unaudited),
respectively, in the accompanying statements of operations.
In May 2006, the Company entered into a license agreement with
the Hospital for Special Surgery for a license (the HSS
License Agreement), in the Companys field of
business, for certain cutting technology (the HSS Licensed
Product) in exchange for payments totaling $20,000 (the
HSS License Fee). The HSS License Fee is included in
intangible assets. The HSS License Agreement includes an ongoing
royalty provision of 7% on the sale of HSS Licensed Products, a
commercialization milestone payment of $50,000 and annual
minimum royalty payments escalating to an annual maximum of
$50,000. By its terms, the HSS License Agreement continues until
all of the licensed patents have expired, which, based on the
licensed granted patents and presently pending patent
applications, is currently estimated to be June 2016.
In May 2006, the Company entered into a fully paid up license
agreement with SensAble Technologies (the SensAble License
Agreement) in exchange for an upfront license fee of
$100,000 (the SensAble License Fee). The SensAble
License Fee is included in intangible assets. The SensAble
License Agreement includes an option for the Company to license
additional patent rights for a license fee of $400,000 within a
one year period from the effective date of the SensAble License
Agreement. In May 2007, the Company exercised its option to
license additional patent rights for the license fee of
$400,000. By its terms, the SensAble License Agreement continues
until all of the licensed patents have expired, which is
currently estimated to be July 2019.
In February 2007, the Company entered into a license agreement
(the Encore License Agreement) and a supply
agreement (the Encore Supply Agreement) with Encore
Medical L.P. (Encore). Under the Encore License
Agreement, the Company was granted certain rights to a certain
implant (the Encore Implant) for use with the
Companys TGS in exchange for an upfront license fee of
$50,000 and additional minimum royalties of $150,000 to be paid
over a three year period and ongoing royalties of 5% on the sale
of licensed products. Under the Encore Supply Agreement, Encore
agreed to supply to the Company commercial quantities of the
Encore Implant for resale for a specified period of time for use
with the Companys TGS. By its terms, the Encore License
Agreement continues until the expiration of any and all
intellectual property rights, including copyright, licensed
thereunder which is not readily determinable, but is expected to
have an expiration no less than 10 years.
F-27
MAKO
SURGICAL CORP.
Notes to
Financial Statements (Continued)
As of December 31, 2006, future annual minimum royalty
payments under the licenses and sublicenses are as follows:
|
|
|
|
|
2007
|
|
$
|
584,000
|
|
2008
|
|
|
591,000
|
|
2009
|
|
|
610,000
|
|
2010
|
|
|
630,000
|
|
2011
|
|
|
630,000
|
|
Thereafter
|
|
|
1,447,000
|
|
|
|
|
|
|
|
|
$
|
4,492,000
|
|
|
|
|
|
|
Contingency
In November 2007, the Company received a letter from counsel to
SensAble Technologies, Inc. alleging that the Company infringed
certain of its patents and breached a confidentiality provision
in the SensAble License Agreement. In the letter, SensAble
alleges, among other things, that the Company exceeded the scope
of its licensed field of computer-assisted surgery by using the
technology for, among other things, pre-operative planning and
post-operative
follow-up.
SensAble also alleges that the Company infringed one or more
claims in five U.S. patents that are not among the patents
licensed to the Company pursuant to the SensAble Sublicense
Agreement.
The Company investigated SensAbles allegations, and it
believes that if SensAble initiates a lawsuit against the
Company, a court should find that its TGS does not infringe any
of the SensAble patents identified in the November 2007 letter.
The Company communicated its belief to SensAble. SensAble has
not commenced any legal action against the Company, but may do
so in the future. The letter from counsel to SensAble stated
that unless the Company, among other things, ceases and desists
from alleged infringement of SensAbles patents or pay
additional licensing fees, including a proposed licensing fee of
$30 million for additional patents not included in the
SensAble License Agreement, SensAble intends to bring a lawsuit
against the Company. The Company intends to vigorously defend
itself against these allegations in the event of a lawsuit. The
Company cannot predict the outcome of this matter at this time.
|
|
7.
|
Redeemable
Convertible Preferred Stock
|
Predecessor
As of November 11, 2004, the Predecessor is authorized to
issue 11,000,000 and 18,000,000 shares of Series B and
Series C redeemable convertible preferred stock,
respectively. The Series B redeemable convertible preferred
stock ranks senior to the Predecessors Series A
convertible preferred stock and common stock with respect to
rights to receive dividends and liquidation preference (see
Note 8). The Series C redeemable convertible preferred
stock ranks senior to the Predecessors Series B
redeemable convertible preferred stock, Series A
convertible preferred stock and common stock with respect to
rights to receive dividends and liquidation preference.
Dividends
The holders of Series B and
Series C redeemable convertible preferred stock (the
Series B and C Holders) are entitled to
receive, whether or not declared by the Predecessors board
of directors, cumulative dividends (7% per annum), which are
payable upon a liquidation event or a qualified initial public
offering of the Predecessor. The Predecessor has not declared
any dividends on Series B or Series C redeemable
convertible preferred stock. As of November 11, 2004, the
balances of the Series B and Series C cumulative
dividends are $1,445,000 and $559,000, respectively. The
Series B and Series C cumulative dividends are accrued
and included in the Predecessors statement of redeemable
convertible preferred stock and stockholders deficit.
F-28
MAKO
SURGICAL CORP.
Notes to
Financial Statements (Continued)
Liquidation Preference
The Series B and
Series C Holders are entitled to a liquidation preference
of 1.5 times the respective purchase price per share plus
accrued and unpaid dividends, whether or not declared by the
board of directors. In a liquidation event, after the
Series B and Series C Holders have received payment of
their full liquidation preference, the remaining assets of the
Predecessor are distributed among the Series B and
Series C Holders, the Series A Holders and the common
stock holders on an as-converted pro rata basis.
Mandatory Redemption
The Series B and
Series C redeemable convertible preferred stock is subject
to mandatory redemption, at the option of the holders, on any
date after February 1, 2007 and July 14, 2008,
respectively, upon the affirmative vote of the Series B and
Series C Holders of the preferred stockholders. No
redemption vote has occurred to date. The redemption amount
shall be equal to the original issue price per share plus
accrued and unpaid dividends at the redemption date. The
Predecessor is accreting to additional
paid-in-capital
the carrying value (gross proceeds, net of stock issuance costs)
of the redeemable convertible preferred stock up to its
redemption value over the period from the original issue price.
Voting
Each Series B and Series C
Holder shall be entitled to the number of votes equal to the
number of shares of common stock into which such holders
shares of redeemable convertible preferred stock could be
converted as of the record date. The holders of shares of the
preferred stock shall be entitled to vote on all matters on
which the common stock shall be entitled to vote.
Conversion
At the option of the holder
thereof, each share of Series B and Series C
redeemable convertible preferred stock shall be convertible, at
any time or from time to time, into fully paid and
non-assessable shares of common stock and are subject to
mandatory conversion upon a qualified initial public offering of
the Predecessor. The holders of preferred stock are entitled to
protective provisions which require the affirmative vote of the
holders of at least a majority of the outstanding preferred
stock voting as separate classes for certain actions of the
Predecessor.
The Predecessor accounts for the preferred stock in accordance
with the Security and Exchange Commissions Accounting
Series Release No. 268
Presentation in Financial
Statements of Redeemable Preferred Stocks
(ASR 268) and EITF Topic
No. D-98,
Classification and Measurement of Redeemable Securities
(EITF D-98).
The redeemable convertible preferred stock has a redemption
feature that is outside the control of the Predecessor and,
accordingly, is classified outside stockholders deficit in
the accompanying statement of redeemable convertible preferred
stock and stockholders deficit.
F-29
MAKO
SURGICAL CORP.
Notes to
Financial Statements (Continued)
The
Company
As of December 31, 2004, 2005 and 2006, and
September 30, 2007 (unaudited), MAKO had redeemable
convertible preferred stock outstanding, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Authorized shares
|
|
|
40,000,000
|
|
|
|
40,000,000
|
|
|
|
40,000,000
|
|
|
|
40,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
4,346,235
|
|
|
|
4,498,745
|
|
|
|
4,498,745
|
|
|
|
4,498,745
|
|
Series B
|
|
|
|
|
|
|
15,151,516
|
|
|
|
15,151,516
|
|
|
|
15,151,516
|
|
Series C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,513,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total outstanding shares
|
|
|
4,346,235
|
|
|
|
19,650,261
|
|
|
|
19,650,261
|
|
|
|
33,163,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidation amount:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
$
|
4,346,235
|
|
|
$
|
4,498,745
|
|
|
$
|
4,498,745
|
|
|
$
|
4,498,745
|
|
Series B
|
|
|
|
|
|
|
20,000,000
|
|
|
|
20,000,000
|
|
|
|
20,000,000
|
|
Series C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liquidation amount
|
|
$
|
4,346,235
|
|
|
$
|
24,498,745
|
|
|
$
|
24,498,745
|
|
|
$
|
54,498,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Proceeds, net of issuance costs Series A
|
|
$
|
2,290,698
|
|
|
$
|
145,620
|
|
|
$
|
|
|
|
$
|
|
|
Series B
|
|
|
|
|
|
|
19,881,300
|
|
|
|
|
|
|
|
|
|
Series C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,907,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total proceeds, net of issuance costs
|
|
$
|
2,290,698
|
|
|
$
|
20,026,920
|
|
|
$
|
|
|
|
$
|
29,907,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative undeclared accrued dividends Series A
|
|
$
|
11,977
|
|
|
$
|
334,590
|
|
|
$
|
681,909
|
|
|
$
|
958,680
|
|
Series B
|
|
|
|
|
|
|
561,193
|
|
|
|
1,822,901
|
|
|
|
2,819,736
|
|
Series C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,179,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cumulative undeclared accrued dividends
|
|
$
|
11,977
|
|
|
$
|
895,783
|
|
|
$
|
2,504,810
|
|
|
$
|
4,958,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In February 2007, the Company issued 13,513,514 shares of
Series C redeemable convertible preferred stock at a
purchase price of $2.22 per share. Total net proceeds were
$29,908,000 and are anticipated to fund operations for at least
the next 12 months. The Series C redeemable
convertible preferred stock is senior to the Series B and
Series A redeemable convertible preferred stock and common
stock.
Dividend
Rights
The holders of the Companys Series C, Series B
and Series A redeemable convertible preferred stock are
entitled to receive cash dividends in preference to the holders
of the Companys common stock, at the rate of $0.13 per
share, $0.08 per share and $0.07 per share, respectively, per
year of the outstanding original issue price amounts. Such
dividends are cumulative whether or not declared by the
Companys Board of Directors. The Company has recorded the
cumulative undeclared accrued dividends in the accompanying
statements of redeemable convertible preferred stock and
stockholders deficit with a charge to additional paid-in
capital until it was depleted to zero and the excess charged to
accumulated deficit. As discussed under Conversion Rights, the
cumulative undeclared accrued dividends are not included in the
conversion price upon a qualified public offering unless
declared and unpaid. No dividends have been declared or paid to
date.
F-30
MAKO
SURGICAL CORP.
Notes to
Financial Statements (Continued)
Upon any liquidation, dissolution or winding up of the Company,
the holders of Series C redeemable convertible preferred
stock shall be entitled to an amount equal to the liquidation
amount of Series C redeemable convertible preferred stock
(which was $2.22 per share) plus an amount equal to any
dividends declared but unpaid thereon, if any, in preference to
any distribution to holders of Series B redeemable
convertible preferred stock, Series A redeemable
convertible preferred stock or common stock. If the assets of
the Company are insufficient to pay the Series C
liquidation preference amounts, the available assets shall be
distributed to the holders of Series C redeemable
convertible preferred stock ratably in proportion to the
preference amounts they would otherwise be entitled to receive.
After the holders of Series C redeemable convertible
preferred stock have been paid the amounts to which they shall
be entitled, the holders of Series B redeemable convertible
preferred stock shall be entitled to an amount equal to the
liquidation amount of Series B redeemable convertible
preferred stock (which was $1.32 per share) plus an amount equal
to any dividends declared but unpaid thereon, if any, in
preference to any distribution to Series A or common stock.
If the assets of the Company are insufficient to pay the
Series B redeemable convertible preferred stock liquidation
preference amounts, the available assets shall be distributed to
the holders of Series B redeemable convertible preferred
stock ratably in proportion to the preference amounts they would
otherwise be entitled to receive.
After the holders of Series C redeemable convertible
preferred stock and Series B redeemable convertible
preferred stock have been paid the amounts to which they shall
be entitled, the holders of Series A redeemable convertible
preferred stock shall be entitled to an amount equal to the
liquidation amount of Series A redeemable convertible
preferred stock (which was $1.00 per share) plus an amount equal
to any dividends declared but unpaid thereon, if any, in
preference to any distribution to common stock. If the assets of
the Company are insufficient to pay the Series A redeemable
convertible preferred stock liquidation preference amounts, the
available assets shall be distributed to the holders of
Series A redeemable convertible preferred stock ratably in
proportion to the preference amounts they would otherwise be
entitled to receive.
After payment of the liquidation preference amounts, any
remaining assets of the Company shall be distributed ratably to
the holders of the Companys common stock. The treatment of
any particular transaction or series of related transactions as
a liquidation event may be waived upon the affirmative vote or
written consent of the holders of at least seventy percent
(70%), sixty-six and two-thirds percent
(66
2
/
3
%)
and sixty percent (60%) of the outstanding Series C,
Series B and Series A redeemable convertible preferred
stockholders, respectively, voting as separate classes (the
Respective Preferred Majority).
Each holder of preferred stock shall be entitled to the number
of votes equal to the number of shares of common stock into
which such holders shares of preferred stock could be
converted as of the record date. The holders of shares of the
preferred stock shall be entitled to vote on all matters on
which the common stock shall be entitled to vote. The holders of
preferred stock are entitled to protective provisions which
require the affirmative vote of the holders of at least a
majority of the outstanding preferred stock voting as separate
classes for certain actions of the Company.
At the option of the holder thereof, each share of preferred
stock shall be convertible, at any time or from time to time,
into fully paid and non-assessable shares of common stock
determined by dividing the applicable original issue price for
such series, plus declared and unpaid dividends thereon, by the
applicable conversion price for such series.
F-31
MAKO
SURGICAL CORP.
Notes to
Financial Statements (Continued)
Each share of preferred stock shall automatically be converted
into shares of common stock immediately upon the earlier of
(a) anytime upon the affirmative election of the holders of
at least the Respective Preferred Majority of the
then-outstanding shares of the preferred stock, or
(b) immediately upon the closing of a firmly underwritten
public offering pursuant to an effective registration statement
filed under the Securities Act of 1933, as amended, the public
offering price of which is not less than $13.45 per share (as
adjusted for any stock splits, stock dividends, combinations,
subdivisions or recapitalization) and which results in proceeds
to the Company of at least $25.0 million. As of
December 31, 2005 and 2006, and September 30, 2007
(unaudited), each share of preferred stock would convert into
one share of common stock.
In September 2007, the Board of Directors authorized management
to file a registration statement with the Securities and
Exchange Commission for the Company to sell shares of its common
stock to the public. If the initial public offering is completed
under the terms presently anticipated, all of the Series A
redeemable convertible preferred stock, Series B redeemable
convertible preferred stock and Series C redeemable
convertible preferred stock outstanding at the time of the
offering will automatically convert into 10,945,081 shares
of common stock.
The preferred stock is subject to mandatory redemption, at the
option of the holders, on any date after July 1, 2010 upon
the affirmative vote of the Respective Preferred Majority of the
preferred stockholders. The redemption amount shall be equal to
the original issue price per share plus accrued and unpaid
dividends at the redemption date. The Company is accreting to
additional
paid-in-capital
the carrying value (gross proceeds, net of stock issuance costs)
of the preferred stock up to its redemption value over the
period from the original issue price. During the years ended
December 31, 2005 and 2006, accretion totaled approximately
$257,000 and $267,000, respectively. As of December 31,
2005 and 2006, the unaccreted discount was approximately
$1,354,000 and $1,086,000, respectively. During the nine months
ended September 30, 2007 (unaudited), accretion totaled
approximately $223,000 and as of September 30, 2007
(unaudited), the unaccreted discount was approximately $947,000.
The Company accounts for the preferred stock in accordance with
ASR 268 and EITF D-98. The redeemable convertible preferred
stock has a redemption feature that is outside the control of
the Company and, accordingly, is classified outside
stockholders deficit in the accompanying balance sheets
and statements of redeemable convertible preferred stock and
stockholders deficit.
Common
Stock
As of November 11, 2004, the Predecessor is authorized to
issue 50,000,000 shares of $0.001 par value common
stock. The holder of each share of common stock is entitled to
one vote.
|
|
|
Series A
Convertible Preferred Stock
|
As of November 11, 2004, the Predecessor is authorized to
issue 8,000,000 shares of Series A convertible
preferred stock (the Series A Stock). The
Series A Stock ranks senior to the Predecessors
common stock with respect to rights to receive dividends and
liquidation preference. The holders of Series A Stock (the
Series A Holders) are entitled to receive, when
and if declared by the Predecessors board of directors out
of funds legally available, in preference to the holders of the
Companys common stock. The Predecessor has not declared
any dividends on Series A preferred stock. The
Series A Holders do not have voting rights. The
Series A Holders are entitled to receive a liquidation
preference, before any distribution to common stock holders,
equal to an amount per share equal to the sum of (1) $1.00
per share and (2) any accrued declared but
F-32
MAKO
SURGICAL CORP.
Notes to
Financial Statements (Continued)
unpaid dividends. The Series A preferred stock is subject
to mandatory conversion in the event of (1) an initial
public offering of the Predecessor, (2) change in control,
or (3) the sale of all or substantially all of the
Predecessors assets or stock.
The
Company
Common
Stock
As of December 31, 2006, the Company is authorized to issue
50,000,000 shares of $0.001 par value common stock. As
of September 30, 2007, the Company is authorized to issue
60,000,000 shares of $0.001 par value common stock. Common
stockholders are entitled to dividends as and when 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. The
holder of each share of common stock is entitled to one vote.
Under the Companys 2004 Stock Incentive Plan (see further
discussion under Stock Option Plan), the Company has issued
shares of common stock under restricted stock purchase
agreements to its CEO (see further discussion in Note 4).
In December 2004, the Company issued 189,768 shares of
restricted common stock to certain consultants (the
Consultant Restricted Stock). The Consultant
Restricted Stock vests 25% at the date of issuance, 25% on the
Companys closing of its Series B preferred stock
financing, 25% upon a certain development milestone and 25% upon
a clinical milestone. Upon vesting, the Company recorded
consulting expense equal to the estimated fair value of the
Companys common stock on the date of vesting. Consulting
expense associated with the vesting of the Consultant Restricted
Stock was approximately, $32,000, $60,000, $0, and $0 for the
period from November 12, 2004 through December 31,
2004, the years ended December 31, 2005 and 2006, and the
nine months ended September 30, 2007 (unaudited),
respectively. As of December 31, 2006 and
September 30, 2007 (unaudited), 94,884 shares of the
Consultant Restricted Stock were vested.
As of December 31, 2006, the Company has reserved shares of
common stock for the conversion of redeemable convertible
preferred stock, the exercise of warrants, and the issuance of
options granted under the Companys stock option plans as
follows:
|
|
|
|
|
Preferred stock
|
|
|
6,485,199
|
|
Warrants to purchase common stock
|
|
|
462,716
|
|
Stock option plans
|
|
|
1,856,435
|
|
|
|
|
|
|
|
|
|
8,804,350
|
|
|
|
|
|
|
As of September, 2007 (unaudited), the Company has reserved
shares of common stock for the conversion of redeemable
convertible preferred stock, the exercise of warrants, and the
issuance of options granted under the Companys stock
option plans as follows:
|
|
|
|
|
Preferred stock
|
|
|
10,945,081
|
|
Warrants to purchase common stock
|
|
|
462,716
|
|
Stock option plans
|
|
|
2,830,033
|
|
|
|
|
|
|
|
|
|
14,237,830
|
|
|
|
|
|
|
F-33
MAKO
SURGICAL CORP.
Notes to
Financial Statements (Continued)
Stock
Option Plans
Predecessor
The Predecessor has a Stock Incentive Plan (the
Predecessor Plan). The Predecessor Plan provided for
the granting of incentive stock options and nonqualified stock
options to employees, directors, and consultants of the
Predecessor to purchase shares of the Predecessors common
stock at prices determined by the Board of Directors. The option
expiration dates were determined at the date of grant, were not
to exceed 10 years, and the options generally became
exercisable over a three-year period.
Stock option activity for the period from January 1, 2004
through November 11, 2004 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
Balance at January 1, 2004
|
|
|
2,760,042
|
|
|
$
|
0.53
|
|
Options granted
|
|
|
87,500
|
|
|
$
|
0.20
|
|
Options forfeited
|
|
|
(376,448
|
)
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
Balance at November 11, 2004
|
|
|
2,471,094
|
|
|
$
|
0.55
|
|
|
|
|
|
|
|
|
|
|
The
Company
In 2004, the Companys stockholders approved the 2004 Stock
Incentive Plan (the Plan). Under the Plan, the Board
of Directors is authorized to grant restricted common stock and
options to purchase shares of common stock to employees,
directors and consultants.
Only employees are eligible to receive incentive stock options.
Non-employees may be granted non-qualified options. The Board of
Directors has the authority to set the exercise price of all
options granted, subject to the exercise price of incentive
stock options being no less than 100% of the estimated fair
value, as determined by the Board of Directors, of a share of
common stock on the date of grant; and no less than 85% of the
estimated fair value for a non-qualified stock options, except
for an employee or non-employee with options who owns more than
10% of the voting power of all classes of stock of the Company
in which case the exercise price shall be no less than 110% of
the fair market value per share on the grant date. Options
become exercisable as determined by the Board of Directors.
Generally, the Companys outstanding options vest over four
years. However, certain options granted in 2004 vested on the
date of grant. Continued vesting typically terminates when the
employment or consulting relationship ends.
The maximum term of the options granted to persons who owned 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.
F-34
MAKO
SURGICAL CORP.
Notes to
Financial Statements (Continued)
Activity under the Plan is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Shares / Options
|
|
|
|
|
|
Average
|
|
|
|
Available
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
For Grant
|
|
|
Options
|
|
|
Price
|
|
|
Balance at November 12, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares reserved at Plan inception
|
|
|
602,310
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(360,904
|
)
|
|
|
360,904
|
|
|
$
|
0.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
241,406
|
|
|
|
360,904
|
|
|
$
|
0.67
|
|
Shares reserved
|
|
|
1,254,125
|
|
|
|
|
|
|
|
|
|
Restricted and unrestricted stock issued
|
|
|
(413,283
|
)
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(284,900
|
)
|
|
|
284,900
|
|
|
$
|
1.24
|
|
Options forfeited
|
|
|
16,237
|
|
|
|
(16,237
|
)
|
|
$
|
0.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
813,585
|
|
|
|
629,567
|
|
|
$
|
0.91
|
|
Restricted stock issued
|
|
|
(82,508
|
)
|
|
|
|
|
|
$
|
|
|
Options granted
|
|
|
(344,884
|
)
|
|
|
344,884
|
|
|
$
|
1.27
|
|
Options exercised
|
|
|
|
|
|
|
(1,650
|
)
|
|
$
|
0.67
|
|
Options forfeited
|
|
|
24,851
|
|
|
|
(24,851
|
)
|
|
$
|
0.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
411,044
|
|
|
|
947,950
|
|
|
$
|
1.06
|
|
Shares reserved
|
|
|
973,598
|
|
|
|
|
|
|
$
|
|
|
Restricted stock issued
|
|
|
(330,033
|
)
|
|
|
|
|
|
$
|
|
|
Options granted
|
|
|
(1,001,695
|
)
|
|
|
1,001,695
|
|
|
$
|
8.30
|
|
Options exercised
|
|
|
|
|
|
|
(1,306
|
)
|
|
$
|
1.27
|
|
Options forfeited
|
|
|
27,200
|
|
|
|
(27,200
|
)
|
|
$
|
3.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007 (unaudited)
|
|
|
80,114
|
|
|
|
1,921,139
|
|
|
$
|
4.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the 2007 option grants in the table above are
462,475 options granted at an exercise price of $11.12 per share
which are subject to performance conditions based on the
achievement of certain future performance metrics. Upon
satisfaction of the performance condition, the options will vest
ratably over a period of 4 years. Through
September 30, 2007, the Company began recognizing
compensation expense on 148,139 performance options as both the
terms of the performance conditions have been established and it
is probable that the performance condition will be satisfied.
Once the performance conditions are established and it is
probable the performance conditions will be met, the Company
will began recognizing compensation expense on the remaining
performance options. If the performance conditions are not met,
no compensation cost is recognized and any previously recognized
compensation cost is reversed.
In addition to the option grants in the table above, in August
2007, the Company committed to provide the CEO 198,019 incentive
stock options upon the completion of an initial public offering
(IPO) by March 31, 2008 from a pool of newly
reserved options created at the time of the IPO. The options
will vest over a four year period starting upon the completion
of the IPO. The exercise price of the options will equal the
fair value of the Companys common stock on the date of the
IPO.
F-35
MAKO
SURGICAL CORP.
Notes to
Financial Statements (Continued)
The options outstanding and exercisable, by exercise price, at
December 31, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
|
of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
of
|
|
|
Contractual
|
|
|
Exercise
|
|
Exercise Price
|
|
Options
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Options
|
|
|
Life (Years)
|
|
|
Price
|
|
|
$0.67
|
|
|
347,867
|
|
|
|
7.97
|
|
|
$
|
0.67
|
|
|
|
340,497
|
|
|
|
7.96
|
|
|
$
|
0.67
|
|
$1.27
|
|
|
597,443
|
|
|
|
8.99
|
|
|
$
|
1.27
|
|
|
|
91,838
|
|
|
|
8.58
|
|
|
$
|
1.27
|
|
$1.97
|
|
|
2,640
|
|
|
|
9.96
|
|
|
$
|
1.97
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
947,950
|
|
|
|
8.62
|
|
|
$
|
1.06
|
|
|
|
432,335
|
|
|
|
8.09
|
|
|
$
|
0.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The options outstanding and exercisable, by exercise price, at
September 30, 2007 (unaudited) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
|
of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
of
|
|
|
Contractual
|
|
|
Exercise
|
|
Exercise Price
|
|
Options
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Options
|
|
|
Life (Years)
|
|
|
Price
|
|
|
$0.67
|
|
|
345,392
|
|
|
|
7.22
|
|
|
$
|
0.67
|
|
|
|
342,532
|
|
|
|
7.22
|
|
|
$
|
0.67
|
|
$1.27
|
|
|
583,622
|
|
|
|
8.24
|
|
|
$
|
1.27
|
|
|
|
253,699
|
|
|
|
8.15
|
|
|
$
|
1.27
|
|
$1.97
|
|
|
3,382
|
|
|
|
9.25
|
|
|
$
|
1.97
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
$2.48
|
|
|
315,181
|
|
|
|
9.49
|
|
|
$
|
2.48
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
$9.67
|
|
|
9,900
|
|
|
|
9.68
|
|
|
$
|
9.67
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
$11.12
|
|
|
663,662
|
|
|
|
9.90
|
|
|
$
|
11.12
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,921,139
|
|
|
|
8.84
|
|
|
$
|
4.81
|
|
|
|
596,231
|
|
|
|
7.61
|
|
|
$
|
0.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average fair values of options granted were $0.45,
$0.79, $0.82, and $4.12 per share for the period from
November 12, 2004 through December 31, 2004, the years
ended 2005 and 2006, and the nine months ended
September 30, 2007 (unaudited), respectively. The total
intrinsic value of exercisable options at December 31, 2006
and September 30, 2007 (unaudited) is approximately
$508,000 and $6,480,000.
F-36
MAKO
SURGICAL CORP.
Notes to
Financial Statements (Continued)
A summary of changes in unvested options in the Companys
stock option plans for the year ended December 31, 2006 and
the nine months ended September 30, 2007 (unaudited) is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Grant Date Fair
|
|
|
|
Options
|
|
|
Value
|
|
|
Nonvested, January 1, 2006
|
|
|
278,301
|
|
|
$
|
0.79
|
|
Granted
|
|
|
344,884
|
|
|
$
|
0.82
|
|
Vested
|
|
|
(97,174
|
)
|
|
$
|
0.79
|
|
Forfeited
|
|
|
(10,396
|
)
|
|
$
|
0.67
|
|
|
|
|
|
|
|
|
|
|
Nonvested, December 31, 2006
|
|
|
515,615
|
|
|
$
|
0.82
|
|
Granted
|
|
|
1,001,695
|
|
|
$
|
4.12
|
|
Vested
|
|
|
(163,896
|
)
|
|
$
|
0.79
|
|
Exercised
|
|
|
(1,306
|
)
|
|
$
|
0.82
|
|
Forfeited
|
|
|
(27,200
|
)
|
|
$
|
1.94
|
|
|
|
|
|
|
|
|
|
|
Nonvested, September 30, 2007 (Unaudited)
|
|
|
1,324,908
|
|
|
$
|
3.30
|
|
|
|
|
|
|
|
|
|
|
The total fair value of shares vested was approximately
$159,000, $0, $79,000, and $130,000 during the period from
November 12, 2004 through December 31, 2004, the years
ended December 31, 2005 and 2006, and the nine months ended
September 30, 2007 (unaudited), respectively. Included in
the 2007 option grants in the table above are 314,335 options
issued at an exercise price of $11.12 per share which are
subject to performance conditions for which the performance
condition has not been established and/or it is not probable
that the performance condition will be satisfied as of
September 30, 2007. The weighted average fair value of
these options will be determined and compensation expense will
begin to be recorded once these conditions are satisfied.
The Company utilized the option vesting period for recognizing
compensation expense. For the options that vest upon grant, the
Company records the entire related compensation expense
immediately upon the date of grant. For all other options, the
Company records compensation expense on a straight-line basis
over the vesting period. As of December 31, 2006, and
September 30, 2007 (unaudited), there was total
unrecognized compensation cost of approximately $323,000 and
$2,863,000, respectively, adjusted for estimated forfeitures,
related to non-vested stock-based payments granted to the
Companys employees and non-employee directors. Total
unrecognized compensation cost will be adjusted for future
changes in estimated forfeitures, and is expected to be
recognized over a weighted average period of 2.05 years and
2.46 years as of December 31, 2006 and
September 30, 2007, respectively.
The Company uses the Black-Scholes-Merton pricing model to
determine the fair value of stock options. The determination of
the fair value of stock-based payment awards on the date of
grant using a pricing model is affected by our stock price as
well as assumptions regarding a number of complex and subjective
variables. These variables include our expected stock price
volatility over the term of the awards, actual and projected
employee stock option exercise behaviors, risk-free interest
rates and expected dividends.
F-37
MAKO
SURGICAL CORP.
Notes to
Financial Statements (Continued)
The estimated grant date fair values of the employee stock
options were calculated using the Black-Scholes-Merton valuation
model, based on the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
November 12,
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 through
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
December 31,
|
|
|
Year Ended December 31,
|
|
|
Ended
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Risk-free interest rate
|
|
|
3.89%
|
|
|
|
3.83%-4.59%
|
|
|
|
4.29%-5.23%
|
|
|
|
4.50%-5.14%
|
|
Expected life (in years)
|
|
|
6.25 years
|
|
|
|
6.25 years
|
|
|
|
6.25 years
|
|
|
|
6.25 years
|
|
Expected dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
69.60%
|
|
|
|
65.46%-68.31%
|
|
|
|
59.23%-64.27%
|
|
|
|
56.24%-60.00%
|
|
Risk-Free Interest Rate.
The risk-free rate is
based on U.S. Treasury zero-coupon issues with remaining terms
similar to the expected term on the options.
Weighted-Average Expected Term.
Under the
Plan, the expected term of options granted is determined using
the average period the stock options are expected to remain
outstanding and is based on the options vesting term,
contractual terms and historical exercise and vesting
information used to develop reasonable expectations about future
exercise patterns and post-vesting employment termination
behavior.
Dividend Yield.
The Company has never declared
or paid any cash dividends and does not plan to pay cash
dividends in the foreseeable future, and, therefore, used an
expected dividend yield of zero in the valuation model.
Volatility.
Since the Company is a private
entity with no historical data regarding the volatility of its
common stock, the expected volatility used for the years ended
December 31, 2004, 2005 and 2006, and the nine months ended
September 30, 2007 (unaudited) is based on volatility of
similar entities, referred to as guideline
companies. In evaluating similarity, the Company considered
factors such as industry, stage of life cycle and size.
Forfeitures.
SFAS No. 123(R) also
requires the Company to estimate forfeitures at the time of
grant, and revise those estimates in subsequent periods if
actual forfeitures differ from those estimates. The Company uses
historical data to estimate pre-vesting option forfeitures and
records stock-based compensation expense only for those awards
that are expected to vest. All stock-based payment awards are
amortized on a straight-line basis over the requisite service
periods of the awards, which are generally the vesting periods.
If the Companys actual forfeiture rate is materially
different from its estimate, the stock-based compensation
expense could be significantly different from what the Company
has recorded in the accompanying periods.
Warrants
Predecessor
In connection with the issuance of certain term loans in 2003
and 2004, the Predecessor issued warrants to acquire shares of
its Series C redeemable preferred stock with an exercise
price of $0.90 per share, having a five year term, which
resulted in discount of approximately $109,000, of which $79,000
was amortized to interest expense in the period from
January 1, 2004 through November 11, 2004. Under the
provisions of the term loans, additional Series C
redeemable preferred stock warrants were issued in 2004 as a
result of not repaying the term loans at their maturity. The
value of such additional warrants at issuance totaled
approximately $36,000 was included in interest expense in the
period from January 1, 2004 through November 11, 2004.
As the warrants relate to stock that is classified outside
Stockholders Deficit, they are recorded as a component of
redeemable convertible preferred stock and marked to market
through the statement of operations at each reporting period.
For the period January 1, 2004 through November 11,
2004,
F-38
MAKO
SURGICAL CORP.
Notes to
Financial Statements (Continued)
other non-operating expense of approximately $110,000 was
recorded relating to the change in estimated fair value of such
warrants. The warrants were valued using the
Black-Scholes-Merton model with a risk free interest rate
ranging from 2.8% to 3.8%, a term of five years and a 60%
volatility factor. The fair value of the underlying shares was
estimated by management. As of November 11, 2004, warrants
for approximately 4,402,000 Series C redeemable convertible
preferred shares were outstanding and exercisable, and none have
been exercised.
In December 2004, in connection with the issuance of the
Series A redeemable convertible preferred stock to third
parties, the Company issued at the purchase price of $0.03 per
share warrants to purchase 272,259 shares of common stock.
In addition, the Company issued warrants to Z-KAT to purchase
190,457 shares of common stock as previously discussed in
Note 4. The warrants are immediately exercisable at an
exercise price of $3.00 per share, with the exercise period
expiring in December 2014. The value of such warrants at
issuance totaled approximately $99,000 and was recorded as a
discount to the Series A preferred stock. The warrants were
valued using the Black-Scholes-Merton model with a risk free
interest rate of 3.9%, a term of ten years and a 69.55%
volatility factor. The fair value of the underlying shares was
estimated by management. As of December 30, 2006, and
September 30, 2007 (unaudited) all the warrants were
outstanding and exercisable, and none have been exercised.
The Predecessor accounts for income taxes under SFAS Statement
No. 109, Accounting for Income Taxes (SFAS 109).
Deferred income taxes and liabilities are determined based upon
differences between financial reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to
reverse.
No current or deferred income taxes were recorded in the period
from January 1, 2004 through November 11, 2004 as the
Predecessors income tax benefits were fully offset by a
corresponding increase to the valuation allowance against its
net deferred income tax assets. The Predecessors valuation
allowance increased approximately $1,700,000 from approximately
$8,200,000 on January 1, 2004 to approximately $9,900,000
on November 11, 2004.
The Company accounts for income taxes under SFAS
109. Deferred income taxes and liabilities are determined
based upon differences between financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are
expected to reverse.
No current or deferred income taxes were recorded for the period
from November 12, 2004 to December 31, 2004, the years
ended December 31, 2005 and 2006, and the nine months ended
September 30, 2006 and 2007 (unaudited), as the
Companys income tax benefits were fully offset by a
corresponding increase to the valuation allowance against its
net deferred income tax assets.
At December 31, 2005 and 2006, the Company has federal and
state net operating loss carryforwards of approximately
$5,900,000 and $14,500,000, respectively, available to offset
future taxable income. These net operating loss carryforwards
will expire in varying amounts from 2019 through 2021.
The Tax Reform Act of 1986 limits the annual utilization of net
operating loss and tax credit carryforwards, following an
ownership change of the Company. Should the Company undergo such
an
F-39
MAKO
SURGICAL CORP.
Notes to
Financial Statements (Continued)
ownership change, it is probable that there will be limitations
placed on the amount of net operating loss carryforwards
available for use in future years.
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Companys net deferred income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accrued salaries
|
|
$
|
3,042
|
|
|
$
|
190,468
|
|
Amortization
|
|
|
|
|
|
|
116,371
|
|
Deferred revenue
|
|
|
|
|
|
|
270,025
|
|
Net operating loss carryforwards
|
|
|
2,273,627
|
|
|
|
5,587,028
|
|
Other
|
|
|
6,436
|
|
|
|
202,939
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
2,283,105
|
|
|
|
6,366,831
|
|
Less valuation allowance
|
|
|
(2,274,375
|
)
|
|
|
(6,285,689
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
8,730
|
|
|
|
81,142
|
|
|
|
|
|
|
|
|
|
|
Deferred costs
|
|
|
|
|
|
|
(81,142
|
)
|
Other deferred tax liabilities
|
|
|
(8,730
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(8,730
|
)
|
|
|
(81,142
|
)
|
|
|
|
|
|
|
|
|
|
Total net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Due to uncertainty surrounding realization of the deferred tax
assets in future periods, the Company has recorded a 100%
valuation allowance against its net deferred tax assets. The
valuation allowance increased approximately by $340,000,
$1,934,000 and $4,011,000 during the period from
November 12, 2004 through December 31, 2004 and the
years ended December 31, 2005 and 2006, respectively. If it
is determined in the future that it is more likely than not that
the deferred tax assets are realizable, the valuation allowance
will be reduced.
In July 2006, the FASB issued Interpretation No. 48
(FIN 48),
Accounting for Uncertainty in Income
Taxes
. FIN 48 clarifies the accounting for uncertainty
in income taxes by prescribing the recognition threshold a tax
position is required to meet before being recognized in the
financial statements. It also provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. The
Company adopted the provisions of FIN 48 effective
January 1, 2007. At the date of adoption of FIN 48,
the Company had no unrecognized tax benefits and expected no
significant changes in unrecognized tax benefits in the next
12 months. The adoption of this statement did not result in
a cumulative accounting adjustment and did not impact the
financial position, results of operations or cash flows. In
accordance with FIN 48, paragraph 19, the Company has
decided to classify any interest and penalties as a component of
tax expense. To date, there have been no interest or penalties
charged to us in relation to the underpayment of income taxes.
The Companys primary tax jurisdictions are the United
States, Florida, California, Rhode Island, Ohio, and Tennessee.
The tax years from 2004 through 2006 remain open and are subject
to examination by the appropriate governmental agencies.
F-40
MAKO
SURGICAL CORP.
Notes to
Financial Statements (Continued)
|
|
10.
|
Initial
Public Offering
|
In September 2007, the Companys board of directors and its
shareholders approved the filing of a registration statement
with the Securities and Exchange Commission for an initial
public offering for the sale of 5.1 million of the
Companys common stock with proceeds, before expenses, of
$51.0 million.
In January 2008, the Companys board of directors and its
shareholders approved a one for 3.03 reverse stock split of its
common stock effected on February 8, 2008. Such reverse
stock split has been retroactively reflected in the financial
statements and notes thereto.
F-41
MAKOplasty TM A Restorative
Surgical Solution For Early to
Mid-Stage Osteoarthritic Knee Disease.
Restoring Quality of Life Through Innovation
SM
|
Through and including March 10, 2008 (25 days after
the date of this prospectus), all dealers that buy, sell or
trade our common stock, whether or not participating in this
offering, may be required to deliver a prospectus. This delivery
requirement is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
5,100,000 Shares
MAKO Surgical Corp.
Common Stock
PROSPECTUS
|
|
Cowen
and Company
|
Wachovia Securities
|
February 14, 2008