MAKO Surgical Corp. - FORM 10-Q

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - MAKO Surgical Corp.	Financial_Report.xls
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 302 - MAKO Surgical Corp.	mako121677_ex31-2.htm
EX-31.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 302 - MAKO Surgical Corp.	mako121677_ex31-1.htm
EX-32.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 906 - MAKO Surgical Corp.	mako121677_ex32-2.htm
EX-32.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 906 - MAKO Surgical Corp.	mako121677_ex32-1.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2012

or

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission File Number: 001-33966

MAKO Surgical Corp.

(Exact name of registrant as specified in its charter)


Delaware		20-1901148
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

2555 Davie Road, Fort Lauderdale, Florida 33317

(Address of Principal Executive Offices) (Zip Code)

(954) 927-2044

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o Accelerated Filer x Non-accelerated Filer o Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

Number of shares outstanding of each of the issuer’s classes of common stock as of April 30, 2012:


Class		Outstanding at April 30, 2012
Common Stock		42,573,916

MAKO Surgical Corp.

INDEX TO FORM 10-Q


		Page No.
Part I – Financial Information

Item 1	Financial Statements (unaudited)	1
	Condensed Balance Sheets as of March 31, 2012 and December 31, 2011	1
	Condensed Statements of Operations for the three months ended March 31, 2012 and 2011	2
	Condensed Statements of Comprehensive Loss for the three months ended March 31, 2012 and 2011	3
	Condensed Statements of Cash Flows for the three months ended March 31, 2012 and 2011	4
	Notes to Condensed Financial Statements	5
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3	Quantitative and Qualitative Disclosures about Market Risk	23
Item 4	Controls and Procedures	23

Part II – Other Information

Item 1	Legal Proceedings	24
Item 1A	Risk Factors	24
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3	Defaults Upon Senior Securities	24
Item 4	Mine Safety Disclosures	24
Item 5	Other Information	24
Item 6	Exhibits	25

Signatures		26

Exhibit Index		27

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PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

MAKO SURGICAL CORP.
Condensed Balance Sheets
(in thousands, except share and per share data)
(Unaudited)


	March 31, 2012			December 31, 2011
ASSETS
Current Assets:
Cash and cash equivalents	$	8,693		$	13,438
Short-term investments		36,345			36,354
Accounts receivable, net of allowances of $203 and $158, at March 31, 2012 and December 31, 2011, respectively		12,520			20,783
Inventory		23,248			19,529
Deferred cost of revenue		390			160
Prepaid and other current assets		4,133			1,800
Total current assets		85,329			92,064
Long-term investments		1,754			8,902
Property and equipment, net		21,239			19,389
Intangible assets, net		6,864			7,284
Other assets		119			132
Total assets	$	115,305		$	127,771

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	5,575		$	4,231
Accrued compensation and employee benefits		2,872			7,579
Other accrued liabilities		7,556			10,622
Deferred revenue		5,269			4,826
Total current liabilities		21,272			27,258

Deferred revenue, non-current		75			75
Total liabilities		21,347			27,333

Commitments and contingencies (Note 5)

Stockholders’ equity:
Preferred stock, $0.001 par value; 27,000,000 authorized; 0 shares issued and outstanding as of March 31, 2012 and December 31, 2011		―			―
Common stock, $0.001 par value; 135,000,000 authorized; 42,089,513 and 41,439,057 shares issued and outstanding as of March 31, 2012 and December 31, 2011, respectively		42			41
Additional paid-in capital		294,604			289,352
Accumulated deficit		(200,755	)		(189,025	)
Accumulated other comprehensive gain		67			70
Total stockholders’ equity		93,958			100,438
Total liabilities and stockholders’ equity	$	115,305		$	127,771

See accompanying notes.

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MAKO SURGICAL CORP.

Condensed Statements of Operations
(in thousands, except per share data)
(Unaudited)


	Three Months Ended March 31,
	2012			2011
Revenue:
Procedures	$	11,562		$	6,467
Systems – RIO		5,871			5,364
Service		2,206			1,195
Total revenue		19,639			13,026
Cost of revenue:
Procedures		2,657			1,798
Systems – RIO		2,448			2,038
Service		381			259
Total cost of revenue		5,486			4,095
Gross profit		14,153			8,931
Operating costs and expenses:
Selling, general and administrative		19,788			14,809
Research and development		4,854			4,194
Depreciation and amortization		1,274			975
Total operating costs and expenses		25,916			19,978
Loss from operations		(11,763	)		(11,047	)
Other income, net		58			92
Loss before income taxes		(11,705	)		(10,955	)
Income tax expense		25			40
Net loss	$	(11,730	)	$	(10,995	)
Net loss per share – Basic and diluted	$	(0.28	)	$	(0.27	)
Weighted average common shares outstanding – Basic and diluted		41,694			40,107

See accompanying notes.

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MAKO SURGICAL CORP.

Condensed Statements of Comprehensive Loss
(in thousands)


	Three Months Ended March 31,
	2012			2011
Net loss	$	(11,730	)	$	(10,995	)
Other comprehensive loss:
Unrealized losses on available-for-sale securities		(3	)		(26	)
Comprehensive loss	$	(11,733	)	$	(11,021	)

See accompanying notes.

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MAKO SURGICAL CORP.

Condensed Statements of Cash Flows
(in thousands, except share data)
(Unaudited)


	Three Months Ended March 31,
	2012			2011
Operating activities:
Net loss	$	(11,730	)	$	(10,995	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		1,378			834
Amortization of intangible assets		420			320
Stock-based compensation		2,721			2,300
Inventory write-down		28			―
Amortization of premium on investment securities		128			108
Loss on asset impairment		249			148
Provision for doubtful accounts		45			101
Issuance of restricted stock under development agreement		227			720
Changes in operating assets and liabilities:
Accounts receivable		8,218			3,376
Inventory		(5,041	)		(2,266	)
Deferred cost of revenue		(230	)		(380	)
Prepaid and other current assets		(2,333	)		(876	)
Other assets		13			17
Accounts payable		1,344			(59	)
Accrued compensation and employee benefits		(4,707	)		(3,357	)
Other accrued liabilities		(3,066	)		(732	)
Deferred revenue		443			1,079
Net cash used in operating activities		(11,893	)		(9,662	)
Investing activities:
Purchase of investments		(3,160	)		(15,086	)
Proceeds from sales and maturities of investments		10,186			15,636
Acquisition of property and equipment		(2,183	)		(1,263	)
Net cash provided by (used in) investing activities		4,843			(713	)
Financing activities:
Proceeds from employee stock purchase plan		360			241
Exercise of common stock options and warrants for cash		2,026			516
Payment of payroll taxes relating to vesting of restricted stock		(81	)		(357	)
Net cash provided by financing activities		2,305			400
Net decrease in cash and cash equivalents		(4,745	)		(9,975	)
Cash and cash equivalents at beginning of period		13,438			27,108
Cash and cash equivalents at end of period	$	8,693		$	17,133

Non-cash investing and financing activities:
Receipt of 2,278 and 20,390 shares of common stock delivered in payment of payroll taxes for the three months ended March 31, 2012 and 2011, respectively	$	81		$	357
Transfers of inventory to property and equipment		1,294			1,153
Issuance of restricted stock under development agreement		227			720

See accompanying notes.

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MAKO SURGICAL CORP.

Notes to Condensed Financial Statements
March 31, 2012
(Unaudited)

1. Organization and Basis of Presentation

MAKO Surgical Corp. (the “Company” or “MAKO”) is an emerging medical device company that markets its advanced robotic arm solution and orthopedic implants for orthopedic procedures called MAKOplasty®. The Company was incorporated in the State of Delaware on November 12, 2004 and is headquartered in Fort Lauderdale, Florida. The Company’s common stock trades on The NASDAQ Global Select Market under the ticker symbol “MAKO.”

Basis of Presentation

In the opinion of management, the accompanying unaudited condensed financial statements (“condensed financial statements”) of the Company have been prepared on a basis consistent with the Company’s December 31, 2011 audited financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly state the information set forth herein. These condensed financial statements have been prepared in accordance with the regulations of the Securities and Exchange Commission and, therefore, omit certain information and footnote disclosure necessary to present the statements in accordance with accounting principles generally accepted in the United States. These quarterly condensed financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2011 (the “Form 10-K”). The results of operations for the three months ended March 31, 2012 may not be indicative of the results to be expected for the entire year or any future periods.

Liquidity and Operations

In executing its current business plan, the Company believes its existing cash, cash equivalents and investment balances will be sufficient to meet its anticipated cash requirements for at least the next twelve months. To the extent the Company’s available cash, cash equivalents and investment balances are insufficient to satisfy its operating requirements, the Company will need to seek additional sources of funds, including selling additional equity, debt or other securities or drawing on our available credit facility (see Note 8 for a discussion of the Facility Agreement), or modifying its current business plan. The sale of additional equity or convertible debt securities may result in dilution to the Company’s current stockholders. If the Company raises additional funds through the issuance of debt securities, these securities may have rights senior to those of its common stock and could contain covenants that could restrict the Company’s operations and ability to issue dividends. The Company may also require additional capital beyond its currently forecasted amounts. Any required additional capital, whether forecasted or not, may not be available on reasonable terms, or at all. If the Company is unable to obtain additional financing, the Company may be required to reduce the scope of, delay or eliminate some or all of its planned research, development and commercialization activities, which could materially harm its business and results of operations.

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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, investments, and accounts receivable. The Company’s cash and cash equivalents are held in demand and money market accounts at four large financial institutions. The Company’s investments are held in a variety of interest bearing instruments, including notes and bonds from U.S. government agencies and certificates of deposit at three large financial institutions. Such deposits are generally in excess of insured limits. The Company has not experienced any historical losses on its deposits of cash and cash equivalents.

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 collections become doubtful but has not experienced any significant credit losses to date.

The Company is subject to risks common to emerging companies in the medical device industry including, but not limited to: new technological innovations, dependence on key personnel, dependence on key suppliers, changes in general economic conditions and interest rates, protection of proprietary technology, compliance with new and established domestic and foreign government regulations and taxes, uncertainty of widespread market acceptance of products, access to credit for capital purchases by our customers, product liability and the need to obtain additional financing. The Company’s 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 Company’s 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 the net realizable value of its inventory, uncertainty continues to exist.

The Company expects to derive most of its revenue from capital sales of its RIO® Robotic Arm Interactive Orthopedic (“RIO”) system, current and future MAKOplasty applications to the RIO system, recurring sales of implants and disposable products required for each MAKOplasty procedure, and service plans that are sold with the RIO system. If the Company is unable to achieve broad commercial acceptance of MAKOplasty or obtain regulatory clearances or approvals for future products, including other orthopedic products, its revenue would be adversely affected and the Company would not become profitable.

The Company’s current versions of its RIO system, its MAKOplasty partial knee and total hip arthroplasty applications, and its RESTORIS® MCK multicompartmental knee implant systems and RESTORIS total hip implant systems have been cleared by the U.S. Food and Drug Administration (“FDA”). Certain products currently under development by the Company will require clearance or approval by the FDA or other international regulatory agencies prior to commercial sale. There can be no assurance that the Company’s products will receive the necessary clearances or approvals. If the Company were to be denied any such clearance or approval or such clearance or approval were delayed, it could have a material adverse impact on the Company.

2. Summary of Significant Accounting Policies

Revenue Recognition

Revenue is generated: from (1) unit sales of the Company’s RIO system and MAKOplasty applications (collectively, the “RIO system”), including associated instrumentation, installation services and training; (2) sales of implants and disposable products utilized in MAKOplasty procedures; and (3) sales of warranty and maintenance services. The Company recognizes revenue in accordance with ASC 605-10, Revenue Recognition, when persuasive evidence of an arrangement exists, the fee is fixed or determinable, collection of the fee is probable and delivery has occurred. For all sales, the Company uses either a signed agreement or a binding purchase order as evidence of an arrangement.

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The Company’s multiple-element arrangements are generally comprised of the following elements that qualify as separate units of accounting: (1) RIO system sales; (2) sales of implants and disposable products; and (3) warranty and maintenance services on the RIO system hardware. The Company’s revenue recognition policies generally result in revenue recognition at the following points:


	1.	RIO system sales: Revenues related to RIO system sales are recognized upon installation of the system, training of at least one surgeon, which typically occurs prior to or concurrent with the RIO system installation, and customer acceptance, if required.

	2.	Procedure revenue: Revenues from the sale of implants and disposable products utilized in MAKOplasty procedures are recognized at the time of sale (i.e., at the time of the related surgical procedure).

	3.	Service revenue: Revenues from warranty and maintenance services, including extended warranty services, on the RIO system hardware are deferred and recognized ratably over the service period until no further obligation exists. Sales of the Company’s RIO system generally include a one-year warranty and maintenance obligation for services. Costs associated with providing warranty and maintenance services are expensed to cost of revenue as incurred.

Provisions for discounts and rebates to customers are established as a reduction to revenue in the same period as the related sales are recorded.

A portion of the Company’s end-user customers acquire the RIO system through a leasing arrangement with qualified third-party leasing companies. In these instances, the Company sells the RIO system to the third-party leasing company, and the end-user customer enters into an independent leasing arrangement with the third-party leasing company. The Company recognizes RIO system revenue for a RIO system sale to a third-party leasing company on the same basis as a RIO system sale directly to an end-user customer. The Company sells implants and disposable products utilized in MAKOplasty procedures directly to end-user customers under a separate agreement.

The Company’s domestic sales contracts generally do not provide the customer with a right of return. If such a right is provided, all related revenues would be deferred until such right expires or is waived. The Company’s domestic sales contracts generally do not provide the customer with a customer acceptance period. If such a right is provided, all related revenues would be deferred until the customer has unconditionally accepted the RIO system.

Sales of implants and disposable products to independent international distributors generally provide for a right of return. Accordingly, no revenue is recognized for these sales until the right of return expires or is waived. Sales of the Company’s RIO system to international distributors generally do not provide the distributor with a right of return. If such a right is provided, all related revenues would be deferred until such right expires or is waived. The one-year warranty for RIO system sales to international distributors is limited to replacing parts within the warranty period and does not provide for maintenance services. The Company accrues for the estimated costs of providing the one-year warranty for RIO system sales to international distributors upon installation as a component of cost of revenue - systems in the statements of operations.

The Company’s RIO system includes software that is essential to the functionality of the product. Since the RIO system’s software and non-software components function together to deliver the RIO system’s essential functionality, they are considered one deliverable that is excluded from the software revenue recognition guidance.

The Company allocates arrangement consideration to the RIO systems and associated instrumentation, its implants and disposables and its warranty and maintenance services based upon the relative selling-price method. Under this method, revenue is allocated at the time of sale to all deliverables based on their relative selling price using a specific hierarchy. The hierarchy is as follows: vendor-specific objective evidence (“VSOE”) of fair value of the respective elements, third-party evidence of selling price, or best estimate of selling price (“ESP”).

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The Company allocates arrangement consideration using ESP for its RIO system, ESP for its implants and disposables and VSOE of fair value for its warranty and maintenance services. VSOE of fair value is based on the price charged when the element is sold separately. ESP is established by determining the price at which the Company would transact a sale if the product was sold on a stand-alone basis. The Company determines ESP for its products by considering multiple factors including, but not limited to, geographies, type of customer, and market conditions. The Company regularly reviews ESP and maintains internal controls over the establishment and updates of these estimates.

Costs associated with establishing an accrual for royalties covered by licensing arrangements related to the sale of RIO systems are expensed upon installation and are included in cost of revenue - systems, in the statements of operations.

Deferred Revenue and Deferred Cost of Revenue

Deferred revenue consists of deferred service revenue, deferred system revenue and deferred procedure revenue. Deferred service revenue results from the advance payment for services to be delivered over a period of time, usually in one-year increments. Deferred system revenue arises from timing differences between the installation of RIO systems and satisfaction of all revenue recognition criteria consistent with the Company’s revenue recognition policy. Deferred procedure revenue arises from sales to independent international distributors which provide for a right of return. No revenue is recognized for these sales until the right of return expires or is waived. Deferred revenue expected to be realized within one year is classified as a current liability. Deferred cost of revenue consists of the direct costs associated with the manufacture of RIO systems and implants and disposable products for which the revenue has been deferred in accordance with the Company’s revenue recognition policy. The deferred revenue balance as of March 31, 2012 consisted primarily of deferred service revenue for warranty and maintenance services on the RIO system hardware.

Inventory

Inventory is stated at the lower of cost or market value on a first-in, first-out basis. Inventory costs include direct materials, direct labor and manufacturing overhead. 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.

Net Loss Per Share

The Company calculated net loss per share in accordance with ASC 260, Earnings per Share. Basic earnings per share (“EPS”) is calculated by dividing the net income or loss 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 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. The following table sets forth potential shares of common stock that are not included in the calculation of diluted net loss per share because to do so would be anti-dilutive as of the end of each period presented:


(in thousands)	March 31,
	2012		2011
Stock options outstanding		5,541		5,332
Warrants to purchase common stock		1,053		1,972
Unvested restricted stock		456		537
Total		7,050		7,841

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Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board issued new accounting guidance related to the presentation of comprehensive income that increases comparability between U.S. generally accepted accounting principles and International Financial Reporting Standards. This guidance will require companies to present the components of net income and other comprehensive income (“OCI”) either as one continuous statement or as two consecutive statements, eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. This guidance is effective for the Company’s interim and annual periods beginning January 1, 2012. The Company early adopted this guidance in 2011 and reports OCI in a separate statement. The adoption did not have a material impact on the Company’s results of operations or financial position.

3. Investments

The Company’s investments are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses included in other comprehensive gain (loss) within stockholders’ equity. Realized gains and losses, interest and dividends, amortization of premium and discount on investment securities and declines in value determined to be other-than-temporary on available-for-sale securities are included in other income, net. During the three months ended March 31, 2012 and 2011, realized gains and losses recognized on the sale of investments were not significant. The cost of securities sold is based on the specific identification method.

The amortized cost and fair value of short and long-term investments, with gross unrealized gains and losses, were as follows:

As of March 31, 2012


(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Short-term investments:
U.S. government agencies	$	17,912	$	28	$	(6	)	$	17,934
Certificates of deposit		18,378		39		(6	)		18,411
Long-term investments:
U.S. government agencies		1,010		5		―			1,015
Certificates of deposit		732		7		―			739
Total investments	$	38,032	$	79	$	(12	)	$	38,099

As of December 31, 2011


(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Short-term investments:
U.S. government agencies	$	19,733	$	23	$	(3	)	$	19,753
Certificates of deposit		16,588		24		(11	)		16,601
Long-term investments:
U.S. government agencies		3,761		21		―			3,782
Certificates of deposit		5,104		18		(2	)		5,120
Total investments	$	45,186	$	86	$	(16	)	$	45,256

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As of March 31, 2012 and December 31, 2011, all short-term investments had maturity dates of less than one year. As of March 31, 2012 and December 31, 2011, all long-term investments had maturity dates between one and two years.

The fair values of the Company’s investments based on the level of inputs are summarized below:


(in thousands)			Fair Value Measurements at the Reporting Date Using
	March 31, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Short-term investments:
U.S. government agencies	$	17,934	$	4,261	$	13,673	$	―
Certificates of deposit		18,411		―		18,411		―
Long-term investments:
U.S. government agencies		1,015		507		508		―
Certificates of deposit		739		―		739		―
Total investments	$	38,099	$	4,768	$	33,331	$	―

Level 2 securities are priced using quoted market prices and other observable market inputs for similar securities or discounted cash flow techniques. There have been no transfers between Level 1 and Level 2 measurements during the three months ended March 31, 2012. No investments measured at fair value on a recurring basis used Level 3 or significant unobservable inputs for the three months ended March 31, 2012.

Carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, investments, accounts receivable and other accrued liabilities approximate fair value due to their short maturities or market rates of interest.

4. Inventory

Inventory consisted of the following:


(in thousands)	March 31, 2012		December 31, 2011

Raw materials	$	3,657	$	3,051
Work-in-process		1,347		866
Finished goods		18,244		15,612
Total inventory	$	23,248	$	19,529

The Company reviews its inventory periodically to determine net realizable value and considers product upgrades in its periodic review of realizability. Depending on demand for the Company’s products and technical obsolescence, future write-offs of the Company’s inventory may occur.

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5. Commitments and Contingencies

Purchase Commitments

At March 31, 2012, the Company was committed to make future purchases for inventory and other items that occur in the ordinary course of business under various purchase arrangements with fixed purchase provisions aggregating $16.5 million.

Contingencies

The Company accrues a liability for legal contingencies when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of the loss. The Company reviews these accruals and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. To the extent new information is obtained and the Company’s views on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in the Company’s accrued liabilities would be recorded in the period in which such determination is made. For the matters referenced below, the amount of liability is not probable or the amount cannot be reasonably estimated; and, therefore, accruals have not been made. In addition, in accordance with the relevant authoritative guidance, for matters which the likelihood of material loss is at least reasonably possible, the Company provides disclosure of the possible loss or range of loss; however, if a reasonable estimate cannot be made, the Company will provide disclosure to that effect.

The Company is a defendant in various litigation matters generally arising in the normal course of business. Although it is difficult to predict the ultimate outcomes of these cases, the Company believes that it is not reasonably possible that the ultimate outcomes will materially and adversely affect its business, financial position, results of operations or cash flows.

6. Stockholders’ Equity

Preferred Stock

As of March 31, 2012 and December 31, 2011, the Company was authorized to issue 27,000,000 shares of $0.001 par value preferred stock. As of March 31, 2012 and December 31, 2011, there were no shares of preferred stock issued or outstanding.

Common Stock

As of March 31, 2012 and December 31, 2011, the Company was authorized to issue 135,000,000 shares of $0.001 par value common stock. Common stockholders are entitled to dividends as and if declared by the Board of Directors, subject to the rights of holders of all classes of stock outstanding having priority rights as to dividends. There have been no dividends declared to date on the common stock. The holder of each share of common stock is entitled to one vote.

Stock Option Plans and Stock-Based Compensation

The Company recognizes compensation expense for its stock-based awards in accordance with ASC 718, Compensation-Stock Compensation. ASC 718 requires the recognition of compensation expense, using a fair value based method, for costs related to all stock-based payments including stock options. ASC 718 requires companies to estimate the fair value of stock-based payment awards on the date of grant using an option-pricing model.

During the three months ended March 31, 2012 and 2011, stock-based compensation expense was $2.7 million and $2.3 million, respectively. Included within stock-based compensation expense for the three months ended March 31, 2012 were $2.2 million related to stock option grants, $386,000 related to restricted stock granted to the Company’s CEO at various dates from 2009 through 2011, and $125,000 related to employee stock purchases under the 2008 Employee Stock Purchase Plan.

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The Company’s 2004 Stock Incentive Plan (the “2004 Plan”), its 2008 Omnibus Incentive Plan (the “2008 Plan,” and together with the 2004 Plan, the “Plans”), and its 2008 Employee Stock Purchase Plan are described in the notes to financial statements in the Form 10-K. Generally, the Company’s outstanding stock options vest over four years. Stock options granted to certain non-employee directors generally vest over one year. Continued vesting typically terminates when the employment or consulting relationship ends. Vesting generally begins on the date of grant.

The 2008 Plan contains an evergreen provision whereby the authorized shares increase on January 1st of each year in an amount equal to the least of (1) 4% of the total number of shares of the Company’s common stock outstanding on December 31st of the preceding year, (2) 2.5 million shares and (3) a number of shares determined by the Company’s Board of Directors that is lesser than (1) and (2). The number of additional shares authorized under the 2008 Plan on January 1, 2012 was approximately 1,676,000.

Under the terms of the Plans, the maximum term of options intended to be incentive stock options granted to persons who own at least 10% of the voting power of all outstanding stock on the date of grant is 5 years. The maximum term of all other options is 10 years. Options issued under the 2008 Plan that are forfeited or expire will again be made available for issuing grants under the 2008 Plan. Options issued under the 2004 Plan that are forfeited or expire will not be made available for issuing grants under the 2008 Plan. All future equity awards will be made under the Company’s 2008 Plan.

Activity under the Plans is summarized as follows:


(in thousands, except per share data)				Outstanding Options
	Shares/Options Available For Grant			Number of Options			Weighted Average Exercise Price
Balance at December 31, 2011		469			4,753		$	11.06
Shares reserved		1,676			―			―
Net shares settled under the 2008 Plan		1			―			―
Options granted		(1,126	)		1,126			36.40
Options exercised		―			(257	)		8.33
Options forfeited under the 2004 Plan		―			(1	)		11.12
Options forfeited under the 2008 Plan		80			(80	)		14.37
Balance at March 31, 2012		1,100			5,541			16.29

The Company records stock-based compensation expense on a straight-line basis over the vesting period. As of March 31, 2012, there was total unrecognized compensation cost of $32.1 million, net of estimated forfeitures, related to non-vested stock-based payments (including stock option grants, restricted stock grants and compensation expense relating to shares issued under the 2008 Employee Stock Purchase Plan). The unrecognized compensation cost will be adjusted for future changes in estimated forfeitures, and is expected to be recognized over a remaining weighted average period of 3.0 years as of March 31, 2012.

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The estimated grant date fair values of the employee stock options were calculated using the Black-Scholes valuation model, based on the following assumptions:


	Three Months Ended March 31,
	2012		2011
Risk-free interest rate		1.35% - 1.40%		2.71% - 2.92%
Expected life		6.25 years		6.25 years
Expected dividends		―		―
Expected volatility		48.49% - 48.62%		49.87% - 50.12%

During the three months ended March 31, 2012, 2,278 shares of common stock were surrendered by the CEO to the Company to cover payroll taxes associated with the taxable income from the vesting of restricted stock previously granted to the CEO. As of March 31, 2012, 1,064,387 shares of restricted stock granted to the CEO were issued and outstanding.

Warrants

In December 2004, the Company issued warrants to purchase 462,716 shares of common stock at a purchase price of $0.03 per share. The warrants were immediately exercisable at an exercise price of $3.00 per share, with the exercise period expiring in December 2014. As of March 31, 2012, 310,872 warrants were outstanding and exercisable.

In October 2008, the Company issued warrants to purchase 1,290,323 shares of common stock at a purchase price of $0.125 per share and an exercise price of $7.44 per share. The warrants became exercisable on April 29, 2009 and have a seven-year term. As of March 31, 2012, 598,741 warrants were outstanding and exercisable.

In October 2008, the Company issued warrants to purchase 322,581 shares of common stock at a purchase price of $0.125 per share and an exercise price of $6.20 per share. These warrants became exercisable on December 31, 2009 and have a seven-year term. As of March 31, 2012, 143,157 warrants were outstanding and exercisable.

See Note 8 for a discussion of warrants issued after March 31, 2012.

7. Income Taxes

The Company accounts for income taxes under ASC 740, Income Taxes. Deferred income taxes are determined based upon differences between financial reporting and income tax bases of assets and liabilities and are measured using the enacted income tax rates and laws that will be in effect when the differences are expected to reverse. The Company recognizes any interest and penalties related to unrecognized tax benefits as a component of income tax expense.

Due to uncertainty surrounding realization of the deferred income tax assets in future periods, the Company has recorded a 100% valuation allowance against its net deferred tax assets. If it is determined in the future that it is more likely than not that the deferred income tax assets are realizable, the valuation allowance will be reduced.

8. Subsequent Event

On May 7, 2012, the Company entered into a Facility Agreement with affiliates of Deerfield Management Company, L.P. (“Deerfield”), pursuant to which Deerfield agreed to loan the Company up to $50 million, subject to the terms and conditions set forth in the Facility Agreement. Under the terms of the agreement, the Company has the flexibility, but is not required, to draw down on the Facility Agreement in $10 million increments at any time until May 15, 2013. The Company was not required to pay an upfront transaction fee to Deerfield under the Facility Agreement.

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Any amounts drawn under the Facility Agreement accrue interest at a rate of 6.75% per annum and will be secured by all of the Company’s assets excepting only the Company’s intellectual property assets. Accrued interest is payable quarterly in cash. The Company has the right to prepay any amounts owed without penalty. All principal amounts outstanding under the Facility Agreement are payable on the third anniversary of each draw. If no funds have been drawn under the Facility Agreement by May 15, 2013, the Company is required to pay Deerfield a fee of $1.0 million. As of May 7, 2012, the Company has not drawn any amounts under the Facility Agreement.

In connection with the execution of the Facility Agreement, on May 7, 2012, the Company issued to Deerfield warrants to purchase 275,000 shares of the Company’s common stock at an exercise price equal to a 20% premium to the mean closing price of the Company’s common stock over the 20 trading days beginning on May 8, 2012. As noted above, the Company has the right to draw down on the Facility Agreement one or more cash disbursements in the minimum amount of $10 million per disbursement. Each $10 million disbursement shall be accompanied by the issuance to Deerfield of warrants to purchase 140,000 shares of common stock, at an exercise price equal to a 20% premium to the mean closing price of the Company’s common stock over the 5 trading days following receipt by Deerfield of the draw notice. If the Company, in its discretion, elects to draw down the entire $50 million available under the Facility Agreement, the Company will have issued warrants to purchase a total of 975,000 shares of its common stock. The warrants expire seven years from their issuance.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

In this report, “MAKO Surgical,” “MAKO,” the “Company,” “we,” “us” and “our” refer to MAKO Surgical Corp.

The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and related notes appearing elsewhere in this report. This report contains forward-looking statements regarding, among other things, statements related to expectations, goals, plans, objectives and future events. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 21E of the Securities Exchange Act of 1934 and the Private Securities Reform Act of 1995. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Examples of such statements include, but are not limited to, statements about the nature, timing and number of planned new product introductions; market acceptance of MAKOplasty®, including the RIO® Robotic Arm Interactive Orthopedic system, or RIO system, and MAKO RESTORIS® family of implant systems; the future availability from third-party suppliers, including single source suppliers, of implants for and components of our RIO system; the anticipated adequacy of our capital resources to meet the needs of our business; our ability to sustain, and our goals for, sales and earnings growth, including projections regarding RIO system installations; and our success in achieving timely approval or clearance of products with domestic and foreign regulatory entities. These statements are based on the current estimates and assumptions of our management as of the date of this report and are subject to risks, uncertainties, changes in circumstances, assumptions and other factors that may cause actual results to differ materially from those indicated by forward-looking statements, many of which are beyond our ability to control or predict. Such factors, among others, may have a material adverse effect on our business, financial condition and results of operations and may include the following:


•	the potentially significant impact of a continued economic downturn or delayed economic recovery on the ability of our customers to secure adequate funding, including access to credit, for the purchase of our products or cause our customers to delay a purchasing decision;

•	changes in competitive conditions and prices in our markets;

•	unanticipated issues relating to intended product launches;

•	decreases in sales of our principal product lines;

•	decreases in utilization of our principal product lines or in procedure volume;

•	increases in expenditures related to increased or changing governmental regulation or taxation of our business, both nationally and internationally;

•	unanticipated issues in complying with domestic or foreign regulatory requirements related to MAKO’s current products, including Medical Device Reporting requirements and other required reporting to the United States Food and Drug Administration, or securing regulatory clearance or approvals for new products or upgrades or changes to our current products;

•	the impact of the United States healthcare reform legislation enacted in March 2010 on hospital spending, reimbursement, and the taxing of medical device companies;

•	the potential impact of the informal Securities and Exchange Commission inquiry and the findings of that inquiry;

•	loss of key management and other personnel or the inability to attract such management and other personnel; and

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•	unanticipated intellectual property expenditures required to develop, market, and defend our products.

These and other risks are described in greater detail under Item 1A, Risk Factors, contained in our Annual Report on Form 10-K for the year ended December 31, 2011. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We do not undertake any obligation to release any revisions to these forward-looking statements publicly to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

We have received or applied for trademark registration of and/or claim trademark rights, including in the following marks: “MAKOplasty^®,” “RIO^®” and “RESTORIS^®,” as well as in the MAKO Surgical Corp. “MAKO” logo, whether standing alone or in connection with the words “MAKO Surgical Corp.”

Overview

We are an emerging medical device company that markets our advanced robotic arm solution and orthopedic implants for orthopedic procedures. We offer MAKOplasty, an innovative, restorative surgical solution that enables orthopedic surgeons to consistently, reproducibly and precisely treat patient specific osteoarthritic disease. Our common stock trades on The NASDAQ Global Select Market under the ticker symbol “MAKO.”

We have incurred net losses in each year since our inception and, as of March 31, 2012, we had an accumulated deficit of $200.8 million. We expect to continue to incur significant operating losses as we increase our sales and marketing activities and otherwise continue to invest capital in the development and expansion of our products and our business generally. We expect that our general and administrative expenses will continue to increase to support the sales and marketing efforts associated with the growing commercialization of MAKOplasty, including our MAKOplasty total hip arthroplasty application, or MAKOplasty THA application, that we commercially launched in September 2011, and to support our continued growth in operations. We also expect our research and development expenses to increase as we continue to expand our research and development activities, including the support of existing products and the research of potential future products.

Recent business events and key milestones in the development of our business include the following:


	• During the three month period ended March 31, 2012, we sold six RIO systems, comprised of five domestic commercial sales and one international demonstration sale, and nine MAKOplasty THA applications to existing customers. We deferred recognition of the international sale as all revenue recognition criteria consistent with the Company’s revenue recognition policy had not been satisfied as of March 31, 2012. As of March 31, 2012, our worldwide commercial installed base was 118 systems, of which 62 systems, or 53% of our commercial installed base, have the MAKOplasty THA application.

	• A total of 2,297 MAKOplasty procedures were performed worldwide during the three month period ended March 31, 2012, representing a 76% increase over the same period in 2011.

We believe that the keys to continuing to grow our business are expanding the acceptance and application of MAKOplasty for partial knee resurfacing procedures, gaining market acceptance for our MAKOplasty THA application and associated implant systems and introducing other potential future applications. To successfully commercialize our products and continue to grow our business, we must gain broad market acceptance for MAKOplasty procedures.

Factors That May Influence Future Results of Operations

The following is a description of factors that may influence our future results of operations, including significant trends and challenges that we believe are important to an understanding of our business and results of operations.

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Revenue

Revenue is generated from: (1) RIO system sales and applications (2) sales of implants and disposable products utilized in MAKOplasty procedures; and (3) sales of warranty and maintenance services on the RIO system hardware. Future revenue from sales of our products is difficult to predict and we expect that it will only modestly reduce our continuing losses resulting from selling, general and administrative expenses, research and development expenses and other activities for at least the next two years. Our future revenue may also be adversely affected by the current general economic conditions and the resulting tightening of the credit markets, which may cause purchasing decisions to be delayed or cause our customers to experience difficulties in securing adequate funding to buy our products.

The generation of recurring revenue through sales of our implants, disposable products and warranty service contracts is an important part of the MAKOplasty business model. We anticipate that recurring revenue will constitute an increasing percentage of our total revenue as we leverage each new installation of our RIO system to generate recurring sales of implants and disposable products and as we expand our RIO applications and implant product offerings, including our MAKOplasty THA application that we commercially launched in September 2011.

Cost of Revenue

Cost of revenue primarily consists of the direct costs associated with the manufacture of RIO systems, implants and disposable products for which revenue has been recognized in accordance with our revenue recognition policy. Costs associated with providing services are expensed as incurred. Cost of revenue also includes the allocation of manufacturing overhead costs, freight, royalties related to the sale of products covered by licensing arrangements and write-offs of obsolete, impaired or excess inventory.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses consist primarily of expenses relating to compensation, including stock-based compensation and benefits, and compensation for sales, marketing, training, clinical research, operations, regulatory, quality, finance, legal, executive, and administrative personnel. Other significant expenses include costs associated with sales and marketing activities, marketing and advertising materials, training, insurance, professional fees for legal and accounting services, consulting fees, travel expenses, facility and related operating costs, depreciation on loaned implant instrumentation to customers, and recruiting and other human resources expenses. Our selling, general and administrative expenses are expected to continue to increase due to the planned increase in the number of employees necessary to support the sales and marketing efforts associated with the growing commercialization of MAKOplasty and an increased number of employees necessary to support our continued growth in operations. In addition, we expect to incur additional costs associated with securing and protecting our intellectual property rights as necessary to support our current and future product offerings.

Research and Development Expenses

Costs related to research, design and development of products are charged to research and development expense as incurred. These costs include direct salary and benefit costs for research and development employees including stock-based compensation, cost for materials used in research and development activities and costs for outside services. We expect our research and development expense to increase as we continue to expand our research and development activities, including the support of existing products and the research and development of potential future products.

Critical Accounting Policies

There have been no significant changes in our critical accounting policies during the three months ended March 31, 2012 as compared to the critical accounting policies described in our Form 10-K for the year ended December 31, 2011.

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Results of Operations for the three months ended March 31, 2012 and 2011


(in thousands)	Three Months Ended March 31,
	2012			2011			Change			% of Change
Revenue:
Procedures	$	11,562		$	6,467		$	5,095			79	%
Systems – RIO		5,871			5,364			507			9	%
Service		2,206			1,195			1,011			85	%
Total revenue		19,639			13,026			6,613			51	%
Cost of revenue:
Procedures		2,657			1,798			859			48	%
Systems – RIO		2,448			2,038			410			20	%
Service		381			259			122			47	%
Total cost of revenue		5,486			4,095			1,391			34	%
Gross profit		14,153			8,931			5,222			58	%
Operating costs and expenses:
Selling, general and administrative		19,788			14,809			4,979			34	%
Research and development		4,854			4,194			660			16	%
Depreciation and amortization		1,274			975			299			31	%
Total operating costs and expenses		25,916			19,978			5,938			30	%
Loss from operations		(11,763	)		(11,047	)		(716	)		6	%
Other income, net		58			92			(34	)		(37	%)
Loss before income taxes		(11,705	)		(10,955	)		(750	)		7	%
Income tax expense		25			40			(15	)		(38	%)
Net loss	$	(11,730	)	$	(10,995	)	$	(735	)		7	%

Revenue

Revenue was $19.6 million for the three months ended March 31, 2012, compared to $13.0 million for the three months ended March 31, 2011. The increase in revenue of $6.6 million, or 51%, was primarily due to a $5.1 million, or 79%, increase in procedure revenue, a $507,000, or 9%, increase in RIO system revenue and a $1.0 million, or 85%, increase in service revenue. The $5.1 million increase in procedure revenue was attributable to an increase in the number of MAKOplasty procedures performed during the three months ended March 31, 2012 to 2,297 as compared to 1,304 during the three months ended March 31, 2011. The increase in MAKOplasty procedures performed was primarily due to the continued adoption of MAKOplasty, driven by the growth of our commercial installed base of RIO systems and relatively consistent average selling price per procedure.

The $507,000 increase in RIO system revenue was attributable to the recognition of $5.9 million of revenue from five domestic commercial unit sales of our RIO system, four of which included MAKOplasty THA applications, and nine MAKOplasty THA application sales to existing customers during the three months ended March 31, 2012, as compared to the recognition of $5.4 million of revenue from seven domestic commercial unit sales of our RIO system during the three months ended March 31, 2011. RIO system revenue for the three months ended March 31, 2012 was reduced by $720,000 for the deferral of system revenue related to the first year warranty and maintenance services provided by MAKO, as compared to the deferral of $586,000 during the three months ended March 31, 2011. This deferred revenue will be recognized in service revenue over a twelve-month period. In addition to the five domestic commercial unit sales, we had one international demonstration unit sale of our RIO system during the three months ended March 31, 2012, for which we deferred revenue recognition due to a contingent obligation to reimburse the distributor for the costs it incurs in the regulatory process should the agreement be terminated prior to the distributor obtaining regulatory approval.

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The $1.0 million increase in service revenue was attributable to an increase in the installed base of RIO systems covered under warranty and maintenance.

We expect our revenue to continue to increase in future periods as unit sales of our RIO system increase, the number of MAKOplasty procedures performed increases, and the installed base of RIO systems covered under warranty and maintenance increases.

Cost of Revenue and Gross Profit

Cost of revenue was $5.5 million for the three months ended March 31, 2012, compared to $4.1 million for the three months ended March 31, 2011. The increase in cost of revenue of $1.4 million, or 34%, was primarily due to an increase in MAKOplasty procedures performed and the recognition of the cost of revenue from five unit sales of our RIO system and nine MAKOplasty THA application sales to existing customers during the three months ended March 31, 2012 as compared to the recognition of the cost of revenue from seven unit sales of our RIO system during the three months ended March 31, 2011. This was partially offset by lower per procedure material costs for the three months ended March 31, 2012 compared to the three months ended March 31, 2011. We expect our cost of revenue to continue to increase in future periods as unit sales of our RIO system and applications increase, the number of MAKOplasty procedures performed increases, and the installed base of RIO systems covered under warranty and maintenance increases.

Gross profit for the three months ended March 31, 2012 was $14.2 million compared to a gross profit of $8.9 million for the three months ended March 31, 2011. Total gross margin for the three months ended March 31, 2012 was 72%, including a 77% margin on procedure revenue, a 58% margin on RIO system revenue and a 83% margin on service revenue compared to a gross margin of 69% for the three months ended March 31, 2011, including a 72% margin on procedure revenue, a 62% margin on RIO system revenue and a 78% margin on service revenue. The increase in margin on procedure revenue was primarily attributable to lower material costs per procedure. The decrease in margin on RIO system revenue was primarily attributable to (i) the fact that the MAKOplasty THA application sales for the three months ended March 31, 2012 were primarily retrofit upgrades, which have a higher cost of revenue and (ii) higher indirect costs per system for the three months ended March 31, 2012 compared to the same period in 2011. The increase in margin on service revenue was primarily attributable to a reduction in the frequency of planned preventative maintenance visits as our RIO platform has matured.

Selling, General and Administrative

Selling, general and administrative expense was $19.8 million for the three months ended March 31, 2012, compared to $14.8 million for the three months ended March 31, 2011. The increase of $5.0 million, or 34%, was primarily due to an increase in sales, marketing and operations costs associated with the commercialization of our products and an increase in general and administrative costs to support our continued growth. Our total number of employees increased from 320 as of March 31, 2011 to 437 as of March 31, 2012. Of the 117 employee increase, 66 were in sales and marketing. Selling, general and administrative expense for the three months ended March 31, 2012 included $2.3 million of stock-based compensation expense compared to $2.0 million for the three months ended March 31, 2011. The increase in stock-based compensation expense was primarily due to additional option grants made in 2012 and 2011 combined with an increase in the price of our common stock. We expect our selling, general and administrative expenses to continue to increase substantially due to our planned increase in the number of employees and sales and training programs necessary to support the sales and marketing efforts associated with the growing commercialization of our products, and an increased number of employees, facilities and operating costs necessary to support our continued growth in operations. In addition, we expect to incur additional costs associated with securing and protecting our intellectual property rights as necessary to support our current and future product offerings.

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Research and Development

Research and development expense was $4.9 million for the three months ended March 31, 2012, compared to $4.2 million for the three months ended March 31, 2011. The increase of $660,000, or 16%, was primarily due to an increase in research and development activities associated with on-going development of our RIO system and applications, our RESTORIS family of implant systems, and potential future products. We expect our research and development expense to increase as we continue to expand our research and development activities, including the support of existing products and the research and development of potential future products.

Depreciation and Amortization

Depreciation and amortization expense was $1.3 million for the three months ended March 31, 2012, compared to $975,000 for the three months ended March 31, 2011. The increase of $299,000, or 31%, was primarily due to an increase in depreciation of property and equipment as a result of purchases made during 2011 and 2012 due to the growth in our business and operational activities necessary to support such growth.

Other Income, net

Other income, net was $58,000 for the three months ended March 31, 2012, compared to other income of $92,000 for the three months ended March 31, 2011. The decrease of $34,000 was primarily due to a lower average cash, cash equivalents and investments balance for the three months ended March 31, 2012 compared to the same period of 2011.

Income Taxes

No federal income taxes were recognized for the three months ended March 31, 2012 and 2011, due to net operating losses in each period. State and local income taxes for the three months ended March 31, 2012 and 2011 were $25,000 and $40,000, respectively. Income taxes recognized to date have not been significant due to net operating losses we have incurred in each period since our inception. In addition, no deferred income taxes were recorded for the three months ended March 31, 2012 and 2011, as all income tax benefits were fully offset by a valuation allowance against our net deferred income tax assets.

Liquidity and Capital Resources


(in thousands)	Three Months Ended March 31,
	2012			2011			Change			% of Change
Net cash used in operating activities	$	(11,893	)	$	(9,662	)	$	(2,231	)		23	%
Net cash provided by (used in) investing activities		4,843			(713	)		5,556			(779	%)
Net cash provided by financing activities		2,305			400			1,905			476	%
Net decrease in cash and cash equivalents	$	(4,745	)	$	(9,975	)	$	5,230			(52	%)

We have incurred net losses and negative cash flow from operating activities for each period since our inception in November 2004. As of March 31, 2012, we had an accumulated deficit of $200.8 million and have financed our operations principally through the sale of our equity securities.

As of March 31, 2012, we had $46.8 million in cash, cash equivalents and investments. Our cash and investment balances are held in a variety of interest bearing instruments, including notes and bonds from U.S. government agencies and certificates of deposit.

On May 7, 2012, we entered into a Facility Agreement with affiliates of Deerfield Management Company, L.P., or Deerfield, pursuant to which Deerfield agreed to loan us up to $50 million, subject to the terms and conditions set forth in the Facility Agreement. Under the terms of the agreement, we have the flexibility, but are not required, to draw down on the Facility Agreement in $10 million increments at any time until May 15, 2013. We were not required to pay an upfront transaction fee to Deerfield under the Facility Agreement.

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Any amounts drawn under the Facility Agreement accrue interest at a rate of 6.75% per annum and will be secured by all of our assets excepting only our intellectual property assets. Accrued interest is payable quarterly in cash. We have the right to prepay any amounts owed without penalty. All principal amounts outstanding under the Facility Agreement are payable on the third anniversary of each draw. If no funds have been drawn under the Facility Agreement by May 15, 2013, we are required to pay Deerfield a fee of $1.0 million. As of May 7, 2012, we have not drawn any amounts under the Facility Agreement.

In connection with the execution of the Facility Agreement, on May 7, 2012, we issued to Deerfield warrants to purchase 275,000 shares of our common stock at an exercise price equal to a 20% premium to the mean closing price of our common stock over the 20 trading days beginning on May 8, 2012. As noted above, we have the right to draw down on the Facility Agreement one or more cash disbursements in the minimum amount of $10 million per disbursement. Each $10 million disbursement shall be accompanied by the issuance to Deerfield of warrants to purchase 140,000 shares of common stock, at an exercise price equal to a 20% premium to the mean closing price of our common stock over the 5 trading days following receipt by Deerfield of the draw notice. If we, in our discretion, elect to draw down the entire $50 million available under the Facility Agreement, we will have issued warrants to purchase a total of 975,000 shares of our common stock. The warrants expire seven years from their issuance.

Net Cash Used in Operating Activities

Net cash used in operating activities primarily reflects the net loss for those periods, which was reduced in part by depreciation and amortization and stock-based compensation. Net cash used in operating activities was also reduced by the recognition of research and development expense associated with stock issued under the Strategic Alliance Agreement with Pipeline Biomedical Holding, LLC. Net cash used in operating activities was also affected by changes in operating assets and liabilities. Included in changes in operating assets and liabilities for the three months ended March 31, 2012 are $5.0 million of increases to inventory necessitated by the anticipated increased sales of implants and disposable products and the commercial launch of our MAKOplasty THA application, $2.3 million of increases to prepaid and other current assets, $4.7 million of decreases to accrued compensation and employee benefits due primarily to the payment of 2011 bonuses and 2011 commissions and $3.1 million of decreases to other accrued liabilities. This was partially offset by $8.2 million of decreases to accounts receivable due primarily to collections of sales recognized in the prior year. Included in changes in operating assets and liabilities for the three months ended March 31, 2011 are $2.3 million of increases to inventory necessitated by the anticipated increased sales of implants and disposable products and preparation for the launch of our MAKOplasty THA application in September 2011, and $3.4 million of decreases to accrued compensation and employee benefits due primarily to the payment of year-end bonuses and commissions, which was partially offset by $3.4 million of decreases to accounts receivable.

Net Cash Provided by (Used in) Investing Activities

Net cash provided by investing activities for the three months ended March 31, 2012 was primarily attributable to proceeds of $10.2 million from sales and maturities of investments, which was partially offset by the purchase of investments of $3.2 million and purchases of property and equipment of $2.2 million due to the growth in our business. Net cash used in investing activities for the three months ended March 31, 2011 was primarily attributable to the purchase of investments of $15.1 million and purchases of property and equipment of $1.3 million, which was partially offset by proceeds of $15.6 million from sales and maturities of investments.

Net Cash Provided by Financing Activities

Net cash provided by our financing activities for the three months ended March 31, 2012 and 2011 was primarily attributable to proceeds received under our employee stock purchase plan of $360,000 and $241,000, respectively, and to proceeds received on the exercise of stock options and warrants of $2.0 million and $516,000, respectively.

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Operating Capital and Capital Expenditure Requirements

To date, we have not achieved profitability. We anticipate that we will continue to incur substantial net losses for at least the next two years as we expand our sales and marketing capabilities in the orthopedic products market, continue to commercialize our RIO system and MAKOplasty applications, including our MAKOplasty THA application that we commercially launched in September 2011, and our implant systems, continue research and development of existing and future products, and continue development of the corporate infrastructure required to sell and market our products and support operations. We also expect to experience increased cash requirements for inventory and property and equipment in conjunction with the continued commercialization of our RIO system and implant systems, and introducing other potential future applications.

In executing our current business plan, we believe our cash, cash equivalents and investment balances as of March 31, 2012, and interest income we earn on these balances will be sufficient to meet our anticipated cash requirements for at least the next twelve months. To the extent our available cash, cash equivalents and investment balances are insufficient to satisfy our operating requirements, we will need to seek additional sources of funds, including selling additional equity, debt or other securities or drawing on our available credit facility, or modify our current business plan. The sale of additional equity or convertible debt securities may result in dilution to our current stockholders. If we raise additional funds through the issuance of debt securities, these securities may have rights senior to those of our common stock and could contain covenants that could restrict our operations and ability to issue dividends. We may also require additional capital beyond our currently forecasted amounts. Any required additional capital, whether forecasted or not, may not be available on reasonable terms, or at all. If we are unable to obtain additional financing, we may be required to reduce the scope of, delay or eliminate some or all of our planned research, development and commercialization activities, which could materially harm our business and results of operations.

Because of the numerous risks and uncertainties associated with the development of medical devices and the current economic situation, we are unable to estimate the exact amounts of capital outlays and operating expenditures necessary to complete the development of our products and successfully deliver commercial products to the market. Our future capital requirements will depend on many factors, including but not limited to the following:


	•	the revenue generated by sales of our current and future products;

	•	the expenses we incur in selling and marketing our products and supporting our growth;

	•	the costs and timing of domestic and foreign regulatory clearance or approvals for new products or upgrades or changes to our products;

	•	the expenses we incur in complying with domestic or foreign regulatory requirements imposed on medical device companies;

	•	the rate of progress, cost and success or failure of on-going development activities;

	•	the emergence of competing or complementary technological developments;

	•	the costs of filing, prosecuting, defending and enforcing any patent or license claims and other intellectual property rights, or participating in litigation related activities;

	•	the terms and timing of any collaborative, licensing, or other arrangements that we may establish;

	•	the impact of the United States healthcare reform legislation enacted in March 2010 on hospital spending, reimbursement, and the taxing of medical device companies;

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	•	the acquisition of businesses, products and technologies; and

	•	general economic conditions and interest rates.

Contractual Obligations

At March 31, 2012, we were committed to make future purchases for inventory and other items that occur in the ordinary course of business under various purchase arrangements with fixed purchase provisions aggregating $16.5 million.

Other than as described above and scheduled payments through March 31, 2012, there have been no significant changes in our contractual obligations during the three months ended March 31, 2012 as compared to the contractual obligations described in our Form 10-K for the year ended December 31, 2011.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Our exposure to market risk is confined to our cash, cash equivalents, investments and exchange rate risk on international sales. The goals of our cash investment policy are the security of the principal invested and fulfillment of liquidity needs, with the need to maximize value being an important consideration. To achieve our goals, we maintain a portfolio of cash equivalents and investments in a variety of securities including notes and bonds from U.S. government agencies and certificates of deposit. The securities in our investment portfolio are not leveraged and are classified as available-for-sale. We currently do not hedge interest rate exposure or exchange rate risk. We do not believe that a variation in market rates of interest would significantly impact the value of our investment portfolio. We do not believe that a variation in the value of the U.S. dollar relative to foreign currencies would significantly impact our results of operations.

ITEM 4. CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures.

In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934, or the Exchange Act, our management evaluated, with the participation of our chief executive officer and chief financial officer, or the Certifying Officers, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of March 31, 2012. Based upon their evaluation of these disclosure controls and procedures, our Certifying Officers concluded that the disclosure controls and procedures were effective as of March 31, 2012 to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the rules and forms of the Securities and Exchange Commission, and to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.

We believe that a controls system, no matter how well designed and operated, is based in part upon certain assumptions about the likelihood of future events, and therefore can only provide reasonable, not absolute, assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Changes in Internal Control over Financial Reporting.

There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 1A. RISK FACTORS.

There have been no material changes in our risk factors from those disclosed in our Form 10-K for the year ended December 31, 2011.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.


(c)	Issuer Purchases of Equity Securities

The following table summarizes the surrenders of the Company’s common stock during the three month period ended March 31, 2012:


	Total Number of Shares Purchased(1)		Average Price Paid per Share(1)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs
Period
January 1 to 31, 2012		—	$	—		—	$	—
February 1 to 29, 2012		2,278		35.62		—		—
March 1 to 31, 2012		—		—		—		—
		2,278	$	35.62		—	$	—


(1)	Represents the surrender of shares of common stock of the Company to satisfy the tax withholding obligations associated with the vesting of restricted stock under the Company’s equity incentive plans.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION.

We take matters relating to regulatory compliance very seriously. In 2012, as part of our ongoing internal quality management initiatives and systems enhancements, we undertook a retrospective review of all product complaints to determine if we may have inadvertently failed to file certain Medical Device Reporting (“MDR”) reports with the U.S. Food and Drug Administration (the “FDA”) during the period 2010 to present. Based upon criteria set by the FDA as well as our own internal MDR reporting criteria, our internal review preliminarily identified potential MDR reportability for 105 of such complaints. Significantly, no new or unknown product safety issues were discovered in this retrospective review.

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On May 4, 2012, we met with and solicited the advice of the FDA as to the reasonableness of our enhanced MDR reporting systems and retrospective review, which resulted in the submission of 120 MDR filings on May 7, 2012. The filing of these MDR reports could result in scrutiny of the MDR reports, or an inspection of our records and reporting procedures, by the FDA, which could result in issuance of a warning letter with respect to such procedures. We do not believe, however, based upon the nature of the MDR reports, our interactions with the FDA and all other information currently available to us, that the filing of these MDR reports and the potential regulatory and other consequences related to such filing, if any, will have a material adverse impact on our results of operations.

We have implemented corrective and preventive actions, including revised internal reporting procedures, revised standard operating procedures and additional employee training, to address and prevent regulatory issues from occurring in the future. We believe that we have made significant progress in transitioning our organization to increase focus on regulatory compliance and in implementing solutions to enhance our quality systems. Notwithstanding our continuing efforts in these areas, scrutiny or inspection by the FDA could result in regulatory consequences to us as described in greater detail under Item 1A, “Risk Factors,” in our periodic filings with the Securities and exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2011.

ITEM 6. EXHIBITS.


Exhibit No.		Description

4.1		Form of Warrant to purchase shares of common stock of MAKO Surgical Corp. (incorporated by reference to the Company’s Form 8-K as filed on May 7, 2012)

10.1		Facility Agerement dated May7, 2012 by and among MAKO Surgical Corp., Deerfield Private Design Fund II, L.P. and Deerfield Private Design International II, L.P. (incorporated by reference to the Company’s Form 8-K as filed on May 7, 2012)

10.2		Registration Rights Agreement dated May7, 2012 by and among MAKO Surgical Corp., Deerfield Private Design Fund II, L.P. and Deerfield Private Design International II, L.P. (incorporated by reference to the Company’s Form 8-K as filed on May 7, 2012)

10.3		Form of Security Agreement (incorporated by reference to the Company’s Form 8-K as filed on May 7, 2012)

10.4		Employment Agreement between Registrant and Lawrence T. Gibbons, effective as of February 3, 2012 (incorporated by reference to the Company’s Form 8-K as filed on January 31, 2012)

10.5		2012 Leadership Cash Bonus Plan (incorporated by reference to the Company’s Form 8-K as filed on February 27, 2012)

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. §1350

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. §1350

101		The following materials from MAKO Surgical Corp.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Balance Sheets, (ii) Condensed Statements of Operations, (iii) Condensed Statements of Cash Flows, and (iv) Notes to Condensed Financial Statements, tagged as blocks of text.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	MAKO Surgical Corp.

Date: May 7, 2012	By:	/s/ Fritz L. LaPorte
		Fritz L. LaPorte
		Senior Vice President of Finance and
		Administration, Chief Financial Officer and Treasurer
		(Principal Financial Officer and Authorized Signatory)

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EXHIBIT INDEX


Exhibit No.		Description

4.1		Form of Warrant to purchase shares of common stock of MAKO Surgical Corp. (incorporated by reference to the Company’s Form 8-K as filed on May 7, 2012)

10.1		Facility Agerement dated May7, 2012 by and among MAKO Surgical Corp., Deerfield Private Design Fund II, L.P. and Deerfield Private Design International II, L.P. (incorporated by reference to the Company’s Form 8-K as filed on May 7, 2012)

10.2		Registration Rights Agreement dated May 7, 2012 by and among MAKO Surgical Corp., Deerfield Private Design Fund II, L.P. and Deerfield Private Design International II, L.P. (incorporated by reference to the Company’s Form 8-K as filed on May 7, 2012)

10.3		Form of Security Agreement (incorporated by reference to the Company’s Form 8-K as filed on May 7, 2012)

10.4		Employment Agreement between Registrant and Lawrence T. Gibbons, effective as of February 3, 2012 (incorporated by reference to the Company’s Form 8-K as filed on January 31, 2012)

10.5		2012 Leadership Cash Bonus Plan (incorporated by reference to the Company’s Form 8-K as filed on February 27, 2012)

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. §1350

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. §1350

101		The following materials from MAKO Surgical Corp.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Balance Sheets, (ii) Condensed Statements of Operations, (iii) Condensed Statements of Cash Flows, and (iv) Notes to Condensed Financial Statements, tagged as blocks of text.

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