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 the MAKOplasty® solution; the future availability from third-party suppliers, including single source suppliers of implants and components of our RIO® Robotic Arm Interactive Orthopedic system, or 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 systems 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 potentially significant impact of a further or continued economic downturn on the ability of our customers to secure adequate funding to buy our products or cause our customers to delay a purchasing decision, changes in competitive conditions and prices in our markets, unanticipated issues relating to product releases, decreases in sales of our principal product lines, increases in expenditures related to increased or changing governmental regulation or taxation of our business, unanticipated issues in securing regulatory clearance or approvals for new products or upgrades or changes to our current products, unanticipated issues associated with any healthcare reform that may be enacted, loss of key management and other personnel or inability to attract such management and other personnel and unanticipated intellectual property expenditures required to develop and market our products. These and other risks are described in greater detail under Item 1A, Risk Factors, contained in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 and our other periodic reports filed from time to time with the Securities and Exchange Commission. 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 for the following marks: "MAKOplasty," "RIO," "RESTORIS®," "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."

Business Overview

We are an emerging 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. In February 2008, our common stock began trading on The NASDAQ Global Market under the ticker symbol "MAKO" and we closed our initial public offering, or IPO.

Through December 31, 2008, our recognized revenue was primarily generated from the sale of our implants and disposable products utilized in knee MAKOplasty procedures. In accordance with our revenue recognition policy, upon the sale of our Tactile Guidance System, or TGS, we deferred recognition of the related revenue and direct cost of revenue until delivery of the RIO system, which is version 2.0 of the TGS. We commercially released the RIO system in the first quarter of 2009. Revenue for all previously deferred TGS sales was recognized in our statement of operations during the six months ended June 30, 2009 upon delivery of the RIO system. We have incurred net losses in each year since our inception and, as of September 30, 2009, we had an accumulated deficit of $104.9 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 the rapid expansion of our operations and operating as a public company.

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

• We commercially released our RIO system in the first quarter of 2009. Revenue for all previously deferred TGS sales was recognized in our statement of operations during the six months ended June 30, 2009 upon delivery of the RIO system. In addition, we recognized the revenue and the direct cost of revenue from twelve new unit sales of our RIO system during the nine month period ended September 30, 2009, bringing the total number of commercial MAKOplasty sites to 29 as of September 30, 2009.

• In the second quarter of 2009 we commercially released our RESTORIS MCK multicompartmental knee implant system, or RESTORIS MCK, which enables surgeons to perform bicompartmental knee MAKOplasty procedures. As of September 30, 2009, 89 RESTORIS MCK bicompartmental knee MAKOplasty procedures were performed since the release of RESTORIS MCK.

• During the nine month period ended September 30, 2009, a total of 1,041 knee MAKOplasty procedures were performed, including unicompartmental and bicompartmental procedures, representing a 160% increase over the same period in 2008.

• In September 2009, we received 510(k) clearance from the FDA for an application that assists a surgeon in acetabular reaming during total hip arthroplasty using the RIO system platform. We believe this represents achievement of a necessary milestone towards what we anticipate will be our future development and clearance of a RIO-enabled hip MAKOplasty application.

We believe that the key to growing our near term business is expanding the acceptance and application of MAKOplasty to unicompartmental and multicompartmental knee resurfacing procedures by offering implants that address early to mid-stage, unicompartmental and multicompartmental knee degeneration. To successfully commercialize our products and grow our business, we must gain market acceptance for knee MAKOplasty.

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 RIO systems, including installation services, training and upgrades and enhancements, from sales of implants and disposable products and sales of extended warranty service contracts. Through December 31, 2008, our recognized revenue was primarily generated from the sale of implants and disposable products utilized in knee MAKOplasty procedures. For the three and nine months ended September 30, 2009, we also recognized revenue from sales of our RIO systems in our statement of operations as discussed below.

Since December 31, 2008, we no longer manufacture TGS units, to which associated TGS sales arrangements required us to provide upgrades and enhancements, through and including the delivery of the RIO system. We commercially released the RIO system in the first quarter of 2009. Sales arrangements for RIO systems do not require us to provide upgrades and enhancements. As a result, we anticipate that revenues related to RIO system sales will not be deferred and will be recognized upon installation of the system, delivery of associated instrumentation and training of at least one surgeon.

For sales of TGS units through December 31, 2008, the sales arrangements required us to provide upgrades and enhancements to the TGS unit through and including delivery of the RIO system. Prior to delivery of the RIO system, sales of TGS units were recorded as deferred revenue and the direct cost of revenue associated with the sale of TGS units was recorded as deferred cost of revenue. Upon satisfaction of the final deliverable of the RIO system, the revenue and direct cost of revenue associated with the sale of TGS units are recognized in our statement of operations. Revenue for all previously deferred TGS sales was recognized in our statement of operations during the six months ended June 30, 2009 upon delivery of the RIO system. Our deferred revenue balance as of September 30, 2009 consists primarily of deferred service revenue for extended warranty 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 and increasing losses resulting from selling, general and administrative expenses, research and development and other activities for at least the next two or three years. Our future revenue may also be adversely affected by the current general economic downturn 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 knee implants, disposable products and extended 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 implant product offering.

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 or deferred in accordance with our revenue recognition policy. Costs associated with providing services are expensed as incurred. Cost of revenue also includes the cost associated with establishing at the time of installation an accrual for the RIO system standard one-year warranty liability, royalties related to the sale of products covered by licensing arrangements and write-offs of obsolete or impaired inventory.

The direct cost of revenue associated with the sale of TGS units was deferred until the recognition of the related revenue. The revenue and the direct cost of revenue for all previously deferred TGS sales was recognized in our statement of operations during the six months ended June 30, 2009 upon delivery of the RIO system.

Beginning with the fourth quarter of 2008, manufacturing overhead costs are capitalized in inventory and included in cost of revenue as products are sold and revenue is recognized in the statements of operations. Previously, such overhead costs were fully expensed as selling, general and administrative expense as capitalizable amounts were not significant.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses consist primarily of compensation, including stock-based compensation and benefits, for sales, marketing, operations, regulatory, quality, executive, finance, legal and administrative personnel. Other significant expenses include costs associated with sales and marketing activities, marketing and advertising materials, insurance, 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 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, an increased number of employees 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 are currently taking preliminary steps to investigate the feasibility of establishing clinical sites outside the United States, which may also increase our selling, general and administrative expenses, and we expect to incur additional costs associated with securing and 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 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 of potential future products.

Critical Accounting Policies

A summary of our critical accounting policies is included in our Form 10-K, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." There have been no changes to those policies for the nine months ended September 30, 2009.

Results of Operations

Comparison of the Three Months Ended September 30, 2009 to the Three Months Ended September 30, 2008

Revenue. Revenue was $6.7 million for the three months ended September 30, 2009, compared to $777,000 for the three months ended September 30, 2008. The increase in revenue of $5.9 million was primarily due to $4.6 million of revenue from six unit sales of our RIO system. Prior to 2009, recognized revenue was primarily generated from the sale of implants and disposable products utilized in knee MAKOplasty procedures. In accordance with our revenue recognition policy, recognition of revenue on unit sales of our TGS was deferred until they were upgraded to RIO systems, which we commercially released in the first quarter of 2009. Revenue for all previously deferred TGS sales was recognized in our statement of operations during the six months ended June 30, 2009. Total revenue was also positively impacted by a $1.4 million increase in procedure revenue attributable to an increase in knee MAKOplasty procedures performed during the three months ended September 30, 2009 as compared with the three months ended September 30, 2008. There were 418 knee MAKOplasty procedures performed during the three months ended September 30, 2009 compared to 159 knee MAKOplasty procedures performed during three months ended September 30, 2008. We expect our revenue to increase as unit sales of our RIO system increases in future periods and the number of knee MAKOplasty procedures performed increases in future periods.

Cost of Revenue. Cost of revenue was $4.0 million for the three months ended September 30, 2009, compared to $1.4 million for the three months ended September 30, 2008. The increase in cost of revenue of $2.6 million was primarily due to the recognition of the cost of revenue from six unit sales of our RIO system and to an increase in knee MAKOplasty procedures performed. We expect our cost of revenue to increase as unit sales of our RIO system increases in future periods and the number of knee MAKOplasty procedures performed increases in future periods.

Selling, General and Administrative. Selling, general and administrative expense was $7.9 million for the three months ended September 30, 2009, compared to $6.3 million for the three months ended September 30, 2008. The increase of $1.6 million, or 26%, was primarily due to an increase in sales, marketing and operations costs associated with the production and commercialization of our products and an increase in general and administrative costs to support growth and costs associated with operating as a public company. Selling, general and administrative expense for the three months ended September 30, 2009 also included $883,000 of stock-based compensation expense compared with $501,000 for the three months ended September 30, 2008. The increase in stock-based compensation expense was primarily due to additional option and restricted stock grants made in 2009. We expect our selling, general and administrative expenses to continue to increase substantially due to our planned increase in the number of employees necessary to support the sales and marketing efforts associated with the growing commercialization of MAKOplasty, continued growth in operations and the costs associated with operating as a public company.

Research and Development.Research and development expense was $3.8 million for the three months ended September 30, 2009, compared to $3.1 million for the three months ended September 30, 2008. The increase of $647,000, or 21%, was primarily due to an increase in research and development activities associated with on-going development of our RIO system, our MAKO 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 of potential future products.

Depreciation and Amortization.Depreciation and amortization expense was $595,000 for the three months ended September 30, 2009, compared to $483,000 for the three months ended September 30, 2008. The increase of $112,000, or 23%, was primarily due to an increase in depreciation of property and equipment as a result of purchases made during 2009 and 2008.

Interest and Other Income.Interest and other income was $59,000 for the three months ended September 30, 2009, compared to $241,000 for the three months ended September 30, 2008. The decrease of $182,000, or 76%, was primarily due to lower yields realized on our cash, cash equivalents and investments for the three months ended September 30, 2009 compared with the same period of 2008.

Income Taxes. No income taxes were recognized for the three months ended September 30, 2009 and 2008, due to net operating losses in each period. In addition, no current or deferred income taxes were recorded for the three months ended September 30, 2009 and 2008, as all income tax benefits were fully offset by a valuation allowance against our net deferred income tax assets.

Comparison of the Nine Months Ended September 30, 2009 to the Nine Months Ended September 30, 2008

Revenue. Revenue was $25.4 million for the nine months ended September 30, 2009, compared to $2.0 million for the nine months ended September 30, 2008. The increase in revenue of $23.4 million was primarily due to the recognition of approximately $11.3 million of revenue from seventeen previously deferred unit sales of our TGS and $8.9 million of revenue from twelve unit sales of our RIO system. In accordance with our revenue recognition policy, recognition of revenue on unit sales of our TGS was deferred until delivery of the RIO system, which we commercially released in the first quarter of 2009. Prior to 2009, recognized revenue was primarily generated from the sale of implants and disposable products utilized in knee MAKOplasty procedures. Total revenue was also positively impacted by a $3.2 million increase in procedure revenue attributable to an increase in knee MAKOplasty procedures performed during the nine months ended September 30, 2009 as compared with the nine months ended September 30, 2008. There were 1,041 knee MAKOplasty procedures performed during the nine months ended September 30, 2009 compared to 401 knee MAKOplasty procedures performed during nine months ended September 30, 2008.

Cost of Revenue. Cost of revenue was $17.3 million for the nine months ended September 30, 2009, compared to $2.2 million for the nine months ended September 30, 2008. The increase in cost of revenue of $15.1 million was primarily due to the recognition of the direct cost of revenue from seventeen previously deferred unit sales of our TGS, including the cost of providing the RIO system upgrades, as described in the "Factors Which May Influence Future Results of Operations" section above, the cost of revenue from twelve unit sales of our RIO system and an increase in knee MAKOplasty procedures performed.

Selling, General and Administrative. Selling, general and administrative expense was $22.1 million for the nine months ended September 30, 2009, compared to $16.0 million for the nine months ended September 30, 2008. The increase of $6.1 million, or 38%, was primarily due to an increase in sales, marketing and operations costs associated with the production and commercialization of our products and an increase in general and administrative costs to support growth and costs associated with operating as a public company. Selling, general and administrative expense for the nine months ended September 30, 2009 also included $2.4 million of stock-based compensation expense compared with $1.4 million for the nine months ended September 30, 2008. The increase in stock-based compensation expense was primarily due to additional option and restricted stock grants made in 2009.

Research and Development. Research and development expense was $9.4 million for the nine months ended September 30, 2009, compared to $9.2 million for the nine months ended September 30, 2008. The increase of $155,000, or 2%, was primarily due to an increase in research and development activities associated with on-going development of our RIO system, our MAKO implant systems and potential future products. This was partially offset by a nonrecurring charge of $949,000 incurred in the first quarter of 2008 associated with the vesting in full, upon completion of our IPO in February 2008, of restricted common stock issued pursuant to business consultation agreements entered into in December 2004.

Depreciation and Amortization.Depreciation and amortization expense was $1.7 million for the nine months ended September 30, 2009, compared to $1.3 million for the nine months ended September 30, 2008. The increase of $332,000, or 25%, was primarily due to an increase in depreciation of property and equipment as a result of purchases made during 2009 and 2008.

Interest and Other Income.Interest and other income was $348,000 for the nine months ended September 30, 2009, compared to $642,000 for the nine months ended September 30, 2008. The decrease of $294,000, or 46%, was primarily due to lower yields realized on our cash, cash equivalents and investments for the nine months ended September 30, 2009 compared with the same period of 2008.

Interest and Other Expense.Interest and other expense was $0 for the nine months ended September 30, 2009, compared to $110,000 for the nine months ended September 30, 2008. Through February 2008, interest and other expense consisted primarily of the amortization of a $590,000 discount associated with a deferred payment to IBM of $4.0 million which had been fully amortized and paid upon the completion of our IPO in February 2008.

Income Taxes. No income taxes were recognized for the nine months ended September 30, 2009 and 2008, 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, 2009 and 2008, as all income tax benefits were fully offset by a valuation allowance against our net deferred income tax assets.

Liquidity and Capital Resources


(in thousands)                                Nine Months Ended September 30,
                                                  2009                2008
Cash used in operating activities           $        (36,473 )  $        (22,308 )
Cash used in investing activities                    (15,353 )            (2,981 )
Net cash provided by financing activities             54,308              46,489
Net increase in cash and cash equivalents   $          2,482    $         21,200

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, 2009, we had an accumulated deficit of $104.9 million and have financed our operations principally through the sale of Series A, B and C redeemable convertible preferred stock, the sale of common stock in our IPO in February 2008, our equity financing in October 2008 and our equity financing in August 2009. We received net proceeds of $52.2 million from the issuance of Series A, B and C redeemable convertible preferred stock. In February 2008, we completed our IPO of common stock, issuing a total of 5.1 million shares at an offering price to the public of $10.00 per share, resulting in net proceeds to us, after underwriting discounts and commission and expenses, of approximately $43.8 million. In conjunction with the closing of the IPO in February 2008, all of our outstanding Series A, Series B and Series C redeemable convertible preferred stock was converted into 10,945,080 shares of common stock, as adjusted for a one-for-3.03 reverse stock split, which has been retroactively reflected in the accompanying financial statements.

In October 2008, we entered into a Securities Purchase Agreement for an equity financing of up to approximately $60 million, with initial gross proceeds of approximately $40.2 million, which we closed on October 31, 2008, and conditional access at our discretion to an additional $20 million, which we refer to as the Second Closing. In connection with the financing, we issued and sold to the participating investors 6,451,613 shares of our common stock at a purchase price of $6.20 per share and issued warrants to the participating investors to purchase 1,290,323 shares of common stock at a purchase price of $0.125 per warrant and an exercise price of $7.44 per share. In addition, we . . .