ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read this discussion and analysis together with our audited financial statements, the notes to such statements and the other financial information included in this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under the section entitled “Risk Factors” and elsewhere in this Form 10-K, our actual results may differ materially from those anticipated in these forward-looking statements. See “CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS” for a discussion of the uncertainties, risks and assumptions associated with these statements.
Our Business
We develop, manufacture, market and distribute Magnetic Resonance Imaging (“MRI”) compatible medical devices and accessories and services relating to them.
We are a leader in the development of innovative magnetic resonance imaging (“MRI”) compatible medical devices. We are the only known provider of a non-magnetic intravenous (“IV”) infusion pump system that is specifically designed to be safe for use during MRI procedures. We were the first to develop an infusion delivery system that largely eliminates many of the dangers and problems present during MRI procedures. Standard infusion pumps contain magnetic and electronic components which can create radio frequency interference and are dangerous to operate in the presence of the powerful magnet that drives an MRI system. Our patented MRidium® MRI compatible IV infusion pump system has been designed with a non-magnetic ultrasonic motor, uniquely designed non-ferrous parts and other special features to safely and predictably deliver anesthesia and other IV fluids during various MRI procedures. Our pump solution provides a seamless approach that enables accurate, safe and dependable fluid delivery before, during and after an MRI scan, which is important to critically-ill patients who cannot be removed from their vital medications, and children and infants who must generally be sedated to remain immobile during an MRI scan.
Each IV infusion pump system consists of an MRidium® MRI compatible IV infusion pump, non-magnetic mobile stand, proprietary disposable IV tubing sets and many of these systems contain additional optional upgrade accessories.
Our 3880 MRI compatible patient vital signs monitoring system has been designed with non-magnetic components and other special features to safely and accurately monitor a patient’s vital signs during various MRI procedures. The IRADIMED 3880 system operates dependably in magnetic fields up to 30,000 gauss, which means it can operate virtually anywhere in the MRI scanner room. The IRADIMED 3880 has a compact, lightweight design allowing it to travel with the patient from their critical care unit, to the MRI and back, resulting in increased patient safety through uninterrupted vital signs monitoring and decreasing the amount of time critically ill patients are away from critical care units. The features of the IRADIMED 3880 include: wireless ECG with dynamic gradient filtering; wireless SpO2 using Masimo® algorithms; non-magnetic respiratory CO2; invasive and non-invasive blood pressure; patient temperature, and; optional advanced multi-gas anesthetic agent unit featuring continuous Minimum Alveolar Concentration measurements. The IRADIMED 3880 MRI compatible patient vital signs monitoring system has an easy-to-use design and allows for the effective communication of patient vital signs information to clinicians.
We generate revenue from the sale of MRI compatible medical devices and accessories, extended warranty agreements, services related to maintaining our products and the sale of disposable products used with our devices. The principal customers for our MRI compatible products include hospitals and acute care facilities, both in the United States and internationally. As of December 31, 2020, our direct U.S. sales force consisted of 22 field sales representatives, 4 regional sales directors and supplemented by 5 clinical application specialists. Internationally, we have distribution agreements with independent distributors selling our products.
Selling cycles for our devices have varied widely and have historically ranged between three and six months in duration with more recent trends lengthening beyond this historical range due to the COVID-19 pandemic. We also enter into agreements with healthcare supply contracting companies in the U.S., which enable us to sell and distribute our MRidium MRI compatible IV infusion pump system to their member hospitals. Under these agreements, we are required to pay these group purchasing organizations (“GPOs”) a fee of three percent of the sales of our products to their member hospitals.
46
Table of Contents
Financial Highlights and Outlook
Our revenue was $31.7 million in 2020, $38.5 million in 2019 and $30.4 million in 2018. Our diluted earnings per share was $0.11 in 2020, $0.78 in 2019 and $0.52 in 2018. Our cash provided by operations was $5.8 million in 2020, $10.2 million in 2019 and $7.4 million in 2018.
Our estimated installed base of medical devices is as follows:
Years Ended December 31,
Patient Vital Signs Monitoring Systems 794 539 261
Effects of the COVID-19 Pandemic
The COVID-19 global pandemic caused disruption in global supply and distribution channels and dramatically changed the way companies do business. From the beginning of this global health crisis, our first priority has been the safety and well-being of our employees.
We continue to monitor the developments associated with the COVID-19 pandemic and its effects on our employees, customers, supply chain and distribution channels. The ongoing impact of the pandemic depends on a number of factors including the severity and duration of the pandemic and the extent and severity of the impact on our customers, which is uncertain and unpredictable. Our future results of operations and cash flows may suffer adverse effects from delays in payments on outstanding accounts receivable, potential manufacturing, distribution and supply chain disruptions and uncertain demand, and effects of any actions we may take to address financial and operational challenges our customers may face. Other risks and uncertainties that we face include, but are not limited to:
● the health of our employees and ability to meet staffing needs;
● volatility in economic conditions and the financial markets, and
● other unanticipated effects that remain unknown.
We are actively managing our response to the COVID-19 pandemic and work with our customers, distributors, vendors, and suppliers and assessing the potential effects to our financial position, results of operations and cash flows. As of the date of the issuance of these financial statements, the extent to which COVID-19 may materially impact our financial condition, liquidity, or results of operations in future periods remains uncertain. For further information regarding the potential impact of the COVID-19 pandemic on our company, see “Risk Factors” in Item 1A of this report.
The CARES Act
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020. The CARES Act allows for the carryback of net operating losses, which were expected to be used in future years, to prior years resulting in a $0.8 million benefit that was recognized in the year ended December 31, 2020. Consequently, we recorded an income tax receivable of approximately $1.4 million as of December 31, 2020.
Application of Critical Accounting Policies
We prepare our financial statements in conformity with U.S. GAAP. The preparation of these financial statements requires us to make estimates and use assumptions that affect the reported amounts of assets, liabilities and
47
Table of Contents
related disclosures at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Our significant accounting policies are more fully described in Note 1 to the Financial Statements. However, we believe that the following critical accounting policies require the use of significant estimates, assumptions and judgments. The use of different estimates, assumptions and judgments could have a material effect on the reported amounts of assets, liabilities and related disclosures as of the date of the financial statements and revenue and expenses during the reporting period.
The extent to which COVID-19 impacts our business and financial results will depend on numerous evolving factors including, but not limited to: the magnitude and duration of COVID-19, the extent to which it will impact worldwide macroeconomic conditions, the speed of the anticipated recovery, access to capital markets, and governmental and business reactions to the pandemic. We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the unknown future impacts of COVID-19 as of December 31, 2020 and through the date of the filing of this Annual Report on Form 10-K. The accounting matters assessed included, but were not limited to estimates related to revenue, the accounting for potential liabilities and accrued expenses, the assumptions utilized in valuing stock-based compensation, the realization of deferred tax assets, and assessments of impairment related to long-lived assets and intangibles. Our future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in additional material impacts to our financial statements in future reporting periods.
Despite our efforts, the ultimate impact of COVID-19 depends on factors beyond our knowledge or control, including the duration and severity of the outbreak, as well as third-party actions taken to contain its spread and mitigate its public health effects. As a result, we are unable to estimate the full extent to which COVID-19 will negatively impact our financial results or liquidity.
Revenue Recognition
We generate revenue from the sale of MRI compatible medical devices and accessories, extended warranty agreements, services related to maintaining our products and the sale of disposable products used with our devices. The principal customers for our MRI compatible products include hospitals and acute care facilities, both in the U.S. and internationally. In the U.S. we sell our products through our direct sales force and outside of the U.S. we sell our products through third-party distributors who resell our products to end users.
For most domestic sales, we enter into agreements with healthcare supply contracting companies, commonly referred to as Group Purchasing Organizations (“GPOs”), which enable us to sell and distribute our products to their member hospitals. Our agreements with GPOs typically include negotiated pricing for all group members established at time of GPO contract execution.
We do not sell to GPOs. Hospitals, group practices and other acute care facilities that are members of a GPO, purchase products directly from us under the terms of our GPO agreements.
We recognize revenue when all of the following criteria are met: we have a contract with a customer that creates enforceable rights and obligations; promised products or services are identified; the transaction price, or the amount we expect to receive, is determinable and we have transferred control of the promised products or services to the customer. We consider transfer of control evidenced upon the passage of title and risks and rewards of ownership to the customer, which is typically at a point in time, except for our extended warranty agreements. We allocate the transaction price using the relative standalone selling price method. Customer sale prices for our MRI compatible IV infusion pump systems and related disposables and services are contractually fixed over the GPO contract term. We recognize a receivable at the point in time we have an unconditional right to payment. Payment terms are typically within 45 days after transferring control to U.S. customers. Most international distributors are required to pay a portion of the transaction price in advance and the remaining amount within 30 days of receiving the related products. Accordingly, we have elected to use the practical expedient that allows us to ignore the possible existence of a significant financing component within the contract.
We have elected to account for shipping and handling charges billed to customers as revenue and shipping and handling related expenses as cost of revenue.
48
Table of Contents
In certain U.S. states we are required to collect sales taxes from our customers. We have elected to exclude the amounts collected for these taxes from revenue and record them as a liability until remitted to the taxing authority.
Contract Liabilities
We record contract liabilities, or deferred revenue, when we have an obligation to provide a product or service to the customer and payment is received in advance of our performance. When we sell a product or service with a future performance obligation, we defer revenue allocated to the unfulfilled performance obligation and recognize this revenue when, or as, the performance obligation is satisfied.
Our deferred revenue consists of advance payments received from customers prior to the transfer of products or services, shipments that are in-transit at the end of a period and sales of extended warranty agreements. Advance payments received from customers and shipments in-transit are recognized in revenue at the time control of the related products has been transferred to the customer or services have been delivered. Amounts related to extended warranty agreements are deferred and recognized in revenue ratably over the agreement period, which is typically one to four years after control of the related products is transferred to the customer, as we believe this recognition pattern best depicts the transfer of services being provided.
Deferred revenue is classified as current or long-term deferred revenue in our Balance Sheets, depending on the expected timing of satisfying the related performance obligations.
Capitalized Contract Costs
We capitalize commissions paid to our sales managers related to contracts with customers when the associated revenue is expected to be earned over a period of time. Deferred commissions are primarily related to the sale of extended warranty agreements. Capitalized commissions are included in Prepaid Expenses and Other Current Assets in our Balance Sheets when the associated expense is expected to be recognized in one year or less, or in Other Assets when the associated expense is expected to be recognized in greater than one year. The associated expense is included in Sales and Marketing expenses in our Statements of Operations.
Variable Consideration
Most of our sales are subject to 30 to 60-day customer-specified acceptance provisions primarily for purposes of ensuring products were not damaged during the shipping process. Historically, we have experienced immaterial product returns and, when experienced, we typically exchange the affected products with new products. Accordingly, variable consideration from contracts with customers is immaterial to our financial statements.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable is recorded at the transaction price of the related products and services. We regularly assess the sufficiency of the allowance for estimated uncollectible accounts receivable. Estimates are based on historical collection experience and other customer-specific information, such as bankruptcy filings or known liquidity problems of our customers. When it is determined that an account receivable is uncollectible, it is written off and relieved from the allowance. Any future determination that the allowance for estimated uncollectible accounts receivable is not properly stated could result in changes in operating expense and results of operations.
Inventory
Inventory is stated at the lower of standard cost, which approximates actual cost on a first-in, first-out basis, or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. We may be exposed to a number of factors that could result in portions of our inventory becoming either obsolete or in excess of anticipated usage. These factors include, but are not limited to, technological changes, competitive pressures in products and prices, and the introduction of new product lines. We regularly evaluate our ability to realize the value of inventory based on a combination of factors, including historical usage rates, forecasted sales, product life cycles, and market acceptance of new products.
49
Table of Contents
When inventory that is obsolete or in excess of anticipated usage is identified, it is written down to net realizable value or an inventory valuation allowance is established.
The estimates we use in projecting future product demand may prove to be incorrect. Any future determination that our inventory is overvalued could result in increases to our cost of sales and decreases to our operating margins and results of operations.
Warranty
We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in product quality programs and processes, including actively monitoring and evaluating the quality of our suppliers, the estimated warranty obligation is affected by ongoing product failure rates, material usage costs and direct labor incurred in correcting a product failure. Actual product failure rates, material usage costs and the amount of labor required to repair products that differ from estimates result in revisions to the estimated liability. We warrant for a limited period of time that our products will be free from defects in materials and workmanship. We estimate warranty allowances based on historical warranty experience. The estimates we use in projecting future product warranty costs may prove to be incorrect. Any future determination that our provision for product warranty is understated could result in increases to our cost of revenue and a reduction in our operating profits and results of operations. Historically, warranty expenses have not been material to our financial statements.
Stock-based Compensation
We apply the fair value recognition provisions of Financial Accounting Standards Board Accounting Standards Codification Topic 718, Compensation — Stock Compensation (“ASC 718”). Determining the amount of stock-based compensation to be recorded for stock options that we grant requires us to develop estimates of the fair value as of the grant date. Calculating the fair value of stock option awards requires that we make highly subjective assumptions. We use the Black-Scholes option pricing model to value our stock option awards. Use of this valuation methodology requires that we make assumptions as to the volatility of our common stock, the expected term of our stock options, the risk-free interest rate for a period that approximates the expected term of our stock options and our expected dividend yield. Estimated volatility is based on the historical volatility of our share price. We use the simplified method as prescribed by ASC 718 to calculate the expected term of stock options granted to employees as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term of our stock option awards. The risk-free interest rate used for each grant is based on the U.S. Treasury yield curve in effect at the time of the grant for instruments with a similar expected life. We utilize a dividend yield of zero as we have no current intention to pay cash dividends. We elect to recognize forfeitures as they occur.
As stock-based compensation is an important part of our employee compensation reward strategy, we expect the future impact of stock-based compensation expense on our financial results to grow due to additional stock grants and increased headcount.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. A valuation allowance is recorded to offset net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
We recognize the tax benefit of uncertain tax positions in the financial statements based on the technical merits of the position. When the tax position is deemed more likely than not of being sustained, we recognize the largest amount of tax benefit that is greater than 50 percent likely of being ultimately realized upon settlement.
50
Table of Contents
Results of Operations
The following table sets forth for the periods indicated selected statements of operations data as a percentage of total revenue. Our historical operating results are not necessarily indicative of the results for any future period.
Percent of Revenue
Years Ended December 31,
Operating expenses:
Research and development 6.0 3.7 5.0
(Loss) income from operations (2.4) 22.5 19.7
Other income, net 0.4 1.0 0.6
(Loss) income before provision for income taxes (1.9) 23.5 20.4
Provision for income tax benefit (6.3) (1.5) (0.3)
Comparison of the Years Ended December 31, 2020 and 2019
Revenue by Geographic Region
Years Ended December 31,
(In millions, except percent change) 2020 2019 Change
International 7.2 7.6 (5.3) %
Revenue by Type
Years Ended December 31,
(In millions, except percent change) 2020 2019 Change
Devices:
MRI compatible IV infusion pump system $ 9.3 $ 18.1 (48.1) %
MRI compatible patient vital signs monitoring system 9.8 9.7 0.6 %
Disposables, service and other 10.7 8.9 20.3 %
Amortization of extended warranty agreements 1.9 1.8 1.6 %
Revenue decreased $(6.8) million, or (17.7) percent, to $31.7 million from $38.5 million for the same period in 2019. This decrease is primarily due to a decrease in the number of our MRI compatible medical devices that we recognized in revenue, partially offset by higher revenue from our disposables, service and other.
Revenue from sales in the U.S. decreased $(6.4) million, or (20.7) percent, to $24.5 million from $30.9 million for the same period in 2019. Revenue from sales internationally decreased $(0.4) million, or (5.3) percent, to $7.2 million from $7.6 million for the same period in 2019. Domestic sales accounted for 77.4 percent of total revenue for the year ended December 31, 2020, compared to 80.3 percent for the same period in 2019.
Revenue from sales of devices decreased $(8.7) million, or (31.1) percent, to $19.1 million from $27.8 million for the same period in 2019. This decrease was the result of lower revenue from sales of our MRI compatible IV infusion pump systems.
During the year ended December 31, 2020, we recognized revenue on 279 MRI compatible IV infusion pumps compared to 519 pumps in 2019. The average selling price for our MRI compatible IV infusion pump systems recognized in
51
Table of Contents
revenue during the year ended December 31, 2020 was approximately $33,600, compared to $34,800 for the same period in 2019. The decrease in average selling price is the result of higher international unit sales and an unfavorable product sales mix during 2020 when compared to 2019.
We recognized revenue on 255 MRI compatible patient vital signs monitoring systems during the year ended December 31, 2020, compared to 278 systems for the same period in 2019. The average selling price for our MRI compatible patient vital signs monitoring systems recognized in revenue was approximately $36,300 during the year ended December 31, 2020, compared to $34,700 for the same period in 2019. The increase in average selling price is due to higher domestic unit sales, partially offset by an unfavorable product sales mix in 2020 when compared to 2019.
Revenue from sales of our disposables, service and other increased $1.8 million, or 20.3 percent, to $10.7 million from $8.9 million for the same period in 2020. Revenue from the amortization of our extended warranty agreements increased $0.1 million, or 1.6 percent, to $1.9 million from $1.8 million for the same period in 2019.
Cost of Revenue and Gross Profit
Years Ended December 31,
(In millions, except gross profit percentage) 2020 2019
Cost of revenue 8.1 8.8
Gross profit $ 23.6 $ 29.7
Gross profit percentage 74.3 % 77.1 %
Cost of revenue decreased approximately $(0.7) million, or (7.6) percent, to $8.1 million for the year ended December 31, 2020, from $8.8 million for the same period in 2019. Gross profit decreased approximately $(6.1) million, or (20.6) percent, to $23.6 million for the year ended December 31, 2020 from $29.7 million for the same period in 2019. The decrease in cost of revenue and gross profit is primarily due to lower revenue during the year ended December 31, 2020, compared to the same period in 2019.
Gross profit margin was 74.3 percent and 77.1 percent for the years ended December 31, 2020 and 2019, respectively. The decrease in gross profit margin is the result of unfavorable overhead variance adjustments, partially offset by favorable pricing adjustments in 2020 compared to 2019.
Operating Expenses
Years Ended December 31,
(In millions, except percentage of revenue) 2020 2019
General and administrative $ 12.3 $ 10.5
Percentage of revenue 38.7 % 27.1 %
Sales and marketing $ 10.2 $ 9.2
Percentage of revenue 32.0 % 23.8 %
Research and development $ 1.9 $ 1.4
Percentage of revenue 6.0 % 3.7 %
General and Administrative
General and administrative expense increased approximately $1.8 million, or 17.4 percent, to $12.3 million for the year ended December 31, 2020, from $10.5 million for the same period last year. This increase is primarily due to higher expenses for stock compensation, and payroll and benefits, partially offset by lower employee recruiting costs, GPO administrative fees and regulatory approval and certification costs. During the year ended December 31, 2020, the
52
Table of Contents
Company recognized total general and administrative expense of $3.2 million related to our former Chief Executive Officer, of which $2.7 million relates to the separation.
Sales and Marketing
Sales and marketing expense increased approximately $1.0 million, or 10.8 percent, to $10.2 million for the year ended December 31, 2020, from $9.2 million for the same period in 2019. This increase is primarily the result of higher expenses for payroll and benefits, and sales commissions, partially offset by lower sales activities expenses and tradeshow costs during 2020 when compared to 2019.
Research and Development
Research and development expense increased approximately $0.5 million, or 32.8 percent, to $1.9 million for the year ended December 31, 2020, from $1.4 million for the same period in 2019. This increase is primarily due to higher payroll and benefits expenses and employee recruiting fees, partially offset by lower consulting expenses during 2020 when compared to 2019.
Other Income, Net
Other income, net consists of interest income, foreign currency transactional gains and losses, and other miscellaneous income. We reported other income of approximately $0.1 million and $0.4 for the years ended December 31, 2020 and 2019, respectively. This decrease is primarily the result of lower interest income during the year ended December 31, 2020 compared to the same period in 2019.
Income Taxes
We recorded a provision for income tax benefit of approximately $(2.0) million and $(0.6) million for the years ended December 31, 2020 and 2019, respectively. Our effective tax rate for the year ended December 31, 2020 was 321.9 percent compared to (6.5) percent for the same period in 2019. The increase in our effective tax rate is primarily the result of a loss before the provision for income taxes, discrete items related to tax benefits associated with the exercise and sale of employee options and vesting of restricted stock units, and the carryback of net operating losses to years prior to the enactment of the Tax Cuts and Jobs Act, as allowable under the Coronavirus Aid, Relief, and Economic Security Act. These were partially offset by a statutory limitation on the deductibility of certain executive compensation associated with the separation of our former Chief Executive Officer.
Comparison of the Years Ended December 31, 2019 and 2018
Revenue by Geographic Region
Years Ended December 31,
(In millions, except percent change) 2019 2018 Change
Revenue by Type
Years Ended December 31,
(In millions, except percent change) 2019 2018 Change
Devices:
MRI compatible IV infusion pump system $ 18.1 $ 14.5 24.2 %
MRI compatible patient vital signs monitoring system 9.7 6.7 45.9 %
Disposables, service and other 8.9 7.7 15.3 %
Amortization of extended warranty agreements 1.8 1.5 21.3 %
Revenue increased $8.1 million, or 26.5 percent, to $38.5 million from $30.4 million for the same period in 2018. This increase is primarily due to an increase in the number of our MRI compatible medical devices that we
53
Table of Contents
recognized in revenue, higher revenue from our disposables, services and other, and a higher average selling price for our infusion pump system.
Revenue from sales in the U.S. increased $6.4 million, or 26.2 percent, to $30.9 million from $24.5 million for the same period in 2018. Revenue from sales internationally increased $1.7 million, or 27.9 percent, to $7.6 million from $5.9 million for the same period in 2018. Domestic sales accounted for 80.3 percent of total revenue for the year ended December 31, 2019, compared to 80.5 percent for the same period in 2018.
Revenue from sales of devices increased $6.6 million, or 31.0 percent, to $27.8 million from $21.2 million for the same period in 2018.
During the year ended December 31, 2019, we recognized revenue on 519 MRI compatible IV infusion pumps compared to 451 pumps in 2018. The average selling price for our MRI compatible IV infusion pump systems recognized in revenue during the year ended December 31, 2019 was approximately $34,800, compared to $32,200 for the same period in 2018. The increase in average selling price is the result of higher domestic unit sales and a favorable product sales mix during 2019 when compared to 2018.
We recognized revenue on 278 MRI compatible patient vital signs monitoring systems during the year ended December 31, 2019, compared to 186 systems for the same period in 2018. The average selling price for our MRI compatible patient vital signs monitoring systems recognized in revenue was approximately $34,700 during the year ended December 31, 2019, compared to $35,100 for the same period in 2018. The decrease in average selling price is due to higher international unit sales in 2019 when compared to 2018.
Revenue from sales of our disposables, services and other increased $1.2 million, or 15.3 percent, to $8.9 million from $7.7 million for the same period in 2018. Revenue from the amortization of our extended warranty agreements increased $0.3 million, or 21.3 percent, to $1.8 million from $1.5 million for the same period in 2018.
Cost of Revenue and Gross Profit
Years Ended December 31,
(In millions, except gross profit percentage) 2019 2018
Cost of revenue 8.8 7.2
Gross profit $ 29.7 $ 23.2
Gross profit percentage 77.1 % 76.3 %
Cost of revenue increased approximately $1.6 million, or 22.2 percent, to $8.8 million for the year ended December 31, 2019, from $7.2 million for the same period in 2018. Gross profit increased approximately $6.5 million, or 27.9 percent, to $29.7 million for the year ended December 31, 2019 from $23.2 million for the same period in 2018. The increase in cost of revenue and gross profit is due to higher sales during the year ended December 31, 2019, compared to the same period in 2018. Gross profit margin was 77.1 percent and 76.3 percent for the years ended December 31, 2019 and 2018, respectively. The increase in gross profit margin is the result of favorable overhead variance adjustments, partially offset by unfavorable pricing adjustments in 2019 compared to 2018.
Operating Expenses
Years Ended December 31,
(In millions, except percentage of revenue) 2019 2018
General and administrative $ 10.5 $ 8.7
Percentage of revenue 27.1 % 28.6 %
Sales and marketing $ 9.2 $ 7.0
Percentage of revenue 23.8 % 23.0 %
Research and development $ 1.4 $ 1.5
Percentage of revenue 3.7 % 5.0 %
54
Table of Contents
General and Administrative
General and administrative expense increased approximately $1.8 million, or 20.0 percent, to $10.5 million for the year ended December 31, 2019, from $8.7 million for the same period last year. This increase is primarily due to higher expenses for payroll and benefits, legal and professional costs, employee relocation and recruiting costs, regulatory approval and certification costs, GPO administrative fees due to higher sales and stock compensation expense.
Sales and Marketing
Sales and marketing expense increased approximately $2.2 million, or 31.1 percent, to $9.2 million for the year ended December 31, 2019, from $7.0 million for the same period in 2018. This is primarily the result of higher salary and commissions expenses resulting from the increased size of our sales team and higher sales during 2019 when compared to 2018.
Research and Development
Research and development expense decreased approximately $(0.1) million, or (5.6) percent, to $1.4 million for the year ended December 31, 2019, from $1.5 million for the same period in 2018. This is primarily due to lower expenses for payroll and stock compensation expense.
Other Income, Net
Other income, net consists of interest income, foreign currency transactional gains and losses, and other miscellaneous income. We reported other income of approximately $0.4 million and $0.2 for the years ended December 31, 2019 and 2018, respectively. This increase is primarily the result of higher interest income and gains on maturities of investments during the year ended December 31, 2019 compared to the same period in 2018.
Income Taxes
We recorded a provision for income tax benefit of approximately $(0.6) million and $(0.1) million for the years ended December 31, 2019 and 2018, respectively. Our effective tax rate for the year ended December 31, 2019 was (6.5) percent compared to (1.7) percent for the same period in 2018. The decrease in our provision for income taxes and effective tax rate is primarily the result of discrete items related to tax benefits associated with the exercise and sale of employee options and vesting of restricted stock units.
Liquidity and Capital Resources
Our principal sources of liquidity have historically been our cash and cash equivalents balances, our investments, cash flow from operations and access to the financial markets. Our principal uses of cash are operating expenses, working capital requirements and capital expenditures.
As of December 31, 2020, we had cash and investments of $52.0 million, stockholders’ equity of $61.4 million, and working capital of $58.8 million, compared to cash and cash equivalents and investments of $46.3 million, stockholders’ equity of $55.5 million, and working capital of $53.1 million as of December 31, 2019.
For the Years Ended December 31,
Net cash provided by operating activities $ 5.8 $ 10.2 $ 7.4
Net cash provided by investing activities $ 0.2 $ 3.2 $ 1.5
Net cash provided by financing activities $ 0.5 $ 2.0 $ 0.9
Comparison of the Years Ended December 31, 2020, 2019 and 2018
Operating Activities
For the year ended December 31, 2020, cash provided by operations decreased $(4.4) million to $5.8 million, from $10.2 million in 2019. During 2020, cash provided by operations was negatively impacted by lower net income, prepaid expenses and other current assets, income taxes, other accrued taxes, accrued payroll and benefits, and accounts
55
Table of Contents
payable. Cash provided by operations was positively impacted by stock-based compensation, accounts receivable, depreciation and amortization and deferred income taxes.
For the year ended December 31, 2019, cash provided by operations increased $2.8 million to $10.2 million, from $7.4 million in 2018. During 2019, cash provided by operations was positively impacted by higher net income, deferred revenue, other accrued taxes and accounts payable, partially offset by negative impacts from accounts receivable and other assets.
Investing Activities
For the year ended December 31, 2020, cash provided by investing activities decreased $(3.0) million to $0.2 million, from $3.2 million in 2019. During 2020, cash provided by investing activities was positively impacted by maturities of investments, partially offset by negative impacts from purchases of property and equipment, and capitalized intangible assets.
For the year ended December 31, 2019, cash provided by investing activities increased $1.7 million to $3.2 million, from $1.5 million in 2018. During 2019, cash provided by investing activities was positively impacted by maturities of investments, partially offset by negative impacts from purchases of property and equipment, and capitalized intangible assets.
Financing Activities
For the year ended December 31, 2020, cash provided by financing activities decreased $(1.5) million to $0.5, from $2.0 million in 2019. During 2020, cash provided by financing activities was positively impacted by proceeds from the exercise of stock options, partially offset by taxes paid for the net share settlement of restricted stock units.
For the year ended December 31, 2019, cash provided by financing activities increased $1.1 million to $2.0, from $0.9 million in 2018. During 2019, cash provided by financing activities was positively impacted by proceeds from the exercise of stock options and warrants, partially offset by taxes paid for the net share settlement of restricted stock units.
Sales to end users in the United States are generally made on open credit terms. Management maintains an allowance for potential credit losses.
Our manufacturing operations and headquarters facility is approximately 23,100 square feet located in Winter Springs, Florida. This facility has been leased from Susi, LLC, an entity controlled by our President, Chief Executive Officer, and Chairman, Roger Susi. Pursuant to the terms of our lease, the monthly base rent is $34,133, adjusted annually for changes in the consumer price index.
We believe our sources of liquidity, including cash flow from operations, existing cash, investments, and available financing sources will be sufficient to meet our projected cash requirements for at least the next 12 months from the date the financial statements are issued. Any equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants that increase our costs. We monitor our capital requirements to ensure our needs are in line with available capital resources. From time to time, we may explore additional financing sources to meet our working capital requirements, make continued investment in research and development, expand our business and acquire products or businesses that complement our current business. These actions would likely affect our future capital requirements and the adequacy of our available funds. Our future liquidity and capital requirements will depend on numerous factors, including the:
● Amount and timing of revenue and expenses;
· Extent to which our existing and new products gain market acceptance;
· Extent to which we make acquisitions;
· Cost and timing of selling and marketing activities; and
· Availability of borrowings or other means of financing.
56
Table of Contents
Contractual Obligations
In the normal course of business, we enter into obligations and commitments that require future contractual payments. The commitments result primarily from purchase orders with vendors that supply components used in our medical devices and related disposables and commitments for our building and office equipment leases. The following table summarizes our contractual obligations and commercial commitments as of December 31, 2020:
Payments due by Period
Less than More than
Total 1 Year 1-3 Years 3-5 Years 5 Years
Purchase obligations are defined as agreements to purchase goods or services that are enforceable and legally binding. Included in the purchase obligations category above are obligations related to purchase orders for inventory purchases under our standard terms and conditions and under negotiated agreements with vendors. We expect to receive consideration (products or services) for these purchase obligations. The purchase obligation amounts do not represent all anticipated purchases in the future, but represent only those items for which we are contractually obligated. The table above does not include obligations under employment agreements for services rendered in the ordinary course of business.
Off-Balance Sheet Arrangements
During the periods presented, we did not have and we do not currently have any off-balance sheet arrangements, as defined under SEC rules.
57
Table of Contents
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We develop our products in the U.S. and sell those products into more than 77 countries throughout the world. We also purchase certain components for our products from foreign vendors. Most of our sale and purchase transactions are denominated in the U.S. Dollar. As a result, our financial results could be affected by factors such as foreign currency exchange rates relative to the U.S. Dollar or weak economic conditions in foreign markets. In addition, changes in exchange rates may also affect the end-user prices of our products compared to those of our competitors, who may be selling their products in local currencies, making our products less competitive in some countries.
Foreign Currency Exchange Risk
We have foreign currency risks related to our revenue and cost of revenue denominated in currencies other than the U.S. Dollar, principally the Japanese yen (“Yen”). The volatility of the Yen depends on many factors that we cannot forecast with reliable accuracy. We have experienced and will continue to experience fluctuations in our net income as a result of transaction gains and losses related to revaluing Yen denominated accounts payable balances. In the event our Yen denominated accounts payable or expenses increase, our operating results may be affected by fluctuations in the Yen exchange rate. If the U.S. Dollar uniformly increased or decreased in strength by 10 percent relative to the Yen, our net income would have correspondingly increased or decreased by an immaterial amount for the year ended December 31, 2020.
Interest Rate Risk
When able, we invest excess cash in bank money-market funds, corporate debt securities or discrete short-term investments. Our interest income is sensitive to changes in the general level of interest rates in the U.S. If market interest rates were to change by 100 basis points from levels at December 31, 2020, we expect a corresponding change of approximately $380,000 in interest income earned on our excess cash held in interest bearing accounts.
The fair value of our corporate bonds held as short-term investments is sensitive to changes in the general level of interest rates in the U.S., and the fair value of these investments will decline if market interest rates increase. As of December 31, 2020, our corporate bonds consisted of the following:
Expected Maturity Dates
Our corporate bonds have fixed interest rates and semi-annual interest payment dates. If market interest rates were to change by 100 basis points from levels at December 31, 2020, we expect the corresponding change in fair value of our investments would be approximately $13,000. This is based on sensitivity analyses performed on our financial position as of December 31, 2020. Actual results may differ as our analysis of the effects of changes in interest rates does not account for, among other things, sales of securities prior to maturity and repurchase of replacement securities, the change in mix or quality of the investments in the portfolio, and changes in the relationship between short-term and long-term interest rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data required by this Item 8 are incorporated by reference to information beginning on Page F-1 of this Form 10-K.
Selected Quarterly Financial Data (Unaudited)
The following tables present our operating results for each of the eight quarters in the period ending December 31, 2020. The information for each of these quarters is unaudited and has been prepared on the same basis as our audited financial statements appearing elsewhere in this report.
58
Table of Contents
In the opinion of our management, all necessary adjustments, including normal recurring adjustments, have been included to present fairly the unaudited quarterly results when read in conjunction with our audited Financial Statements and the related notes appearing elsewhere in this report. These operating results are not necessarily indicative of the results of any future period.
Quarters Ended
December September June March
Operating expenses:
Net income (loss) per share:
Weighted-average shares outstanding:
59
Table of Contents
Quarters Ended
December September June March
Operating expenses:
Net income per share:
Weighted-average shares outstanding:
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain a set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. In accordance with Rule 13a-15(b) of the Exchange Act, as of the end of the period covered by this Annual Report on Form 10-K, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of the end of the period covered by this Annual Report on Form 10-K, were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining a system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). All internal control systems, no matter how well designed, have inherent limitations.
60
Table of Contents
We conducted an assessment of the effectiveness of our system of internal control over financial reporting as of December 31, 2020, the last day of our fiscal year. This assessment was based on criteria established in the framework Internal Control-Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission and included an evaluation of elements such as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. Based on our assessment, management has concluded that our internal control over financial reporting was effective as of the end of the fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. GAAP. We reviewed the results of management’s assessment with the Audit Committee of our Board of Directors.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended December 31, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Controls
Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
ITEM 9B. OTHER INFORMATION
Not applicable.
61
Table of Contents
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information required by this Item 10 will be included in the Proxy Statement to be filed within 120 days after the fiscal year covered by this annual report on Form 10-K and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 will be included in the Proxy Statement, and such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item 12, including Equity Compensation Plan Information, will be included in the Proxy Statement, and such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item 13 will be included in the Proxy Statement, and such information is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item 14 will be included in the Proxy Statement, and such information is incorporated herein by reference.
62
Table of Contents
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
2. Financial Statement Schedule: Not applicable.
ITEM 16. FORM 10-K SUMMARY
None.
EXHIBIT INDEX
Incorporated by Reference
Exhibit Filing Filed
Number Description of Exhibit Form File No. Date Herewith
63
Table of Contents
23.1 Consent of RSM US LLP, Independent Registered Public Accounting Firm X
24.1 Power of Attorney (included on signature page) X
101.INS XBRL Instance Document X
101.SCH XBRL Taxonomy Extensions Schema Document X
101.CAL XBRL Taxonomy Extension Label Calculation Linkbase Document X
101.DEF XBRL Taxonomy Extension Definition Document X
101.LAB XBRL Taxonomy Extension Label Linkbase Document X
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document X
+Indicates a management contract or compensatory plan or arrangement.
†Confidential treatment has been granted for portions of this exhibit. These portions have been omitted from the exhibit filed with the Securities and Exchange Commission and submitted separately to the Securities and Exchange Commission.
*The certification attached as Exhibit 32.1 that accompanies this Form 10-K is not deemed filed with the SEC and is not to be incorporated by reference into any filing of Iradimed Corporation under the Securities Act or the Exchange Act, whether made before or after the date of this Form 10-K, irrespective of any general incorporation language contained in such filing.
64
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Winter Springs, State of Florida, on March 5, 2021.
IRADIMED CORPORATION
(Registrant)
Dated: March 5, 2021 /s/ Roger Susi
By: Roger Susi
Chief Executive Officer and President
(Principal Executive Officer)
Each person whose signature appears below constitutes and appoints Leslie McDonnell and Chris Scott as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company in the capacities and on the dates indicated.
Signature Title Date
Roger Susi
Chris Scott
/s/ Monty Allen Director March 5, 2021
Monty Allen
/s/ Anthony Vuoto Director March 5, 2021
Anthony Vuoto
/s/ James Hawkins Director March 5, 2021
James Hawkins
65
Table of Contents
IRADIMED CORPORATION FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm F-2
Balance Sheets F-3
Statements of Operations F-4
Statements of Comprehensive Income F-5
Statements of Stockholders’ Equity F-6
Statements of Cash Flows F-7
Notes to Financial Statements F-8
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of IRADIMED CORPORATION
Opinion on the Financial Statements
We have audited the accompanying balance sheets of IRADIMED CORPORATION (the Company) as of December 31, 2020 and 2019, the related statements of operations, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes to the financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
We have served as the Company's auditor since 2013.
/s/ RSM US LLP
Orlando, Florida
March 5, 2021
F-2
Table of Contents
IRADIMED CORPORATION
BALANCE SHEETS
As of December 31,
ASSETS
Current assets:
Prepaid expenses and other current assets 771,666 407,802
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of operating lease liability 255,698 240,843
Operating lease liability, less current portion 2,459,332 2,715,030
Stockholders’ equity:
Accumulated other comprehensive income 37,087 30,374
See accompanying notes to financial statements.
F-3
Table of Contents
iRadimed Corporation
STATEMENTS OF OPERATIONS
For the Years Ended December 31,
Operating expenses:
Net income per share:
Weighted-average shares outstanding:
See accompanying notes to financial statements.
F-4
Table of Contents
iRadimed Corporation
STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31,
Other comprehensive income (loss):
See accompanying notes to financial statements.
F-5
Table of Contents
iRadimed Corporation
STATEMENTS OF STOCKHOLDERS’ EQUITY
Accumulated
Additional Other
Common Stock Paid-in Retained Comprehensive Stockholders’
Shares Amount Capital Earnings (Loss) Income Equity
Other comprehensive income — — — — 17,213 17,213
Other comprehensive income — — — — 72,566 72,566
Other comprehensive income — — — — 6,713 6,713
Stock-based compensation — — 3,962,021 — — 3,962,021
See accompanying notes to financial statements.
F-6
Table of Contents
iRadimed Corporation
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
Operating activities:
Disposal of property and equipment 6,496 — —
Changes in operating assets and liabilities:
Other current liabilities 38,014 — (150)
Investing activities:
Purchases of investments — — (1,124,512)
Financing activities:
Supplemental disclosure of cash flow information:
See accompanying notes to financial statements.
F-7
Table of Contents
iRadimed Corporation
NOTES TO FINANCIAL STATEMENTS
1 — Organization and Significant Accounting Policies
Organization
IRADIMED CORPORATION (“IRADIMED”, the “Company”, “we”, “our”) was incorporated in Oklahoma in July 1992 and reincorporated in Delaware in April 2014. We develop, manufacture, market and distribute a Magnetic Resonance Imaging (“MRI”) compatible intravenous (“IV”) infusion pump system and MRI compatible patient vital signs monitoring systems and related accessories and services.
We are a leader in the development of innovative MRI compatible medical devices . We are the only known provider of a non-magnetic IV infusion pump system that is specifically designed to be safe for use during MRI procedures. We were the first to develop an infusion delivery system that largely eliminates many of the dangers and problems present during MRI procedures. Standard infusion pumps contain magnetic and electronic components which can create radio frequency interference and are dangerous to operate in the presence of the powerful magnet that drives an MRI system. Our patented MRidium® MRI compatible IV infusion pump system has been designed with a non-magnetic ultrasonic motor, uniquely designed non-ferrous parts and other special features in order to safely and predictably deliver anesthesia and other IV fluids during various MRI procedures. Our pump solution provides a seamless approach that enables accurate, safe and dependable fluid delivery before, during and after an MRI scan, which is important to critically-ill patients who cannot be removed from their vital medications, and children and infants who must generally be sedated in order to remain immobile during an MRI scan.
Each IV infusion pump system consists of an MRidium® MRI compatible IV infusion pump, non-magnetic mobile stand, proprietary disposable IV tubing sets and many of these systems contain additional optional upgrade accessories.
Our 3880 MRI compatible patient vital signs monitoring system (“IRADIMED 3880”) has been designed with non-magnetic components and other special features in order to safely and accurately monitor a patient’s vital signs during various MRI procedures. The IRADIMED 3880 operates dependably in magnetic fields up to 30,000 gauss, which means it can operate virtually anywhere in the MRI scanner room, including in very close proximity to the MRI scanner bore. The IRADIMED 3880 has a compact, lightweight design allowing it to travel with the patient from their critical care unit, to the MRI and back, resulting in increased patient safety through uninterrupted vital signs monitoring and decreasing the amount of time critically ill patients are away from critical care units. Other MRI compatible patient vital signs monitors are large and heavy, creating workflow issues for users. The features of the IRADIMED 3880 include: wireless ECG with dynamic gradient filtering; wireless SpO2 using Masimo® algorithms; non-magnetic respiratory CO2; invasive and non-invasive blood pressure; invasive blood pressure; patient temperature, and; optional advanced multi-gas anesthetic agent unit featuring continuous Minimum Alveolar Concentration measurements. The IRADIMED 3880 MRI compatible patient vital signs monitoring system has an easy-to-use design and allows for the effective communication of patient vital signs information to clinicians.
Our headquarters is located in Winter Springs, Florida.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities in the financial statements and the reported amount of revenue and expenses during the reporting period. Such estimates include allowances for potentially uncollectible accounts receivable, valuation of inventory, intangible assets, stock-based compensation, deferred income taxes, reserves for warranty obligations, and the provision for income taxes. Actual results could differ from those estimates.
F-8
Table of Contents
Revenue Recognition
We generate revenue from the sale of MRI compatible medical devices and accessories, extended warranty agreements, services related to maintaining our products and the sale of disposable products used with our devices. The principal customers for our MRI compatible products include hospitals and acute care facilities, both in the U.S. and internationally. In the U.S. we sell our products through our direct sales force and outside of the U.S. we sell our products through third-party distributors who resell our products to end users.
For most domestic sales, we enter into agreements with healthcare supply contracting companies, commonly referred to as Group Purchasing Organizations ("GPOs"), which enable us to sell and distribute our products to their member hospitals. Our agreements with GPOs typically include negotiated pricing for all group members established at time of GPO contract execution. Under these agreements, we are required to pay the GPOs a fee of three percent of the sales of our products to members of the GPO.
We do not sell to GPOs. Hospitals, group practices and other acute care facilities that are members of a GPO, purchase products directly from us under the terms of our GPO agreements.
We recognize revenue when all of the following criteria are met: we have a contract with a customer that creates enforceable rights and obligations; promised products or services are identified; the transaction price, or the amount we expect to receive, is determinable and we have transferred control of the promised products or services to the customer. We consider transfer of control evidenced upon the passage of title and risks and rewards of ownership to the customer, which is typically at a point in time, except for our extended warranty agreements. We allocate the transaction price using the relative standalone selling price method. Customer sale prices for our MRI compatible IV infusion pump systems and related disposables and services are contractually fixed over the GPO contract term. We recognize a receivable at the point in time we have an unconditional right to payment. Payment terms are typically within 45 days after transferring control to U.S. customers. Most international distributors are required to pay a portion of the transaction price in advance and the remaining amount within 30 days of receiving the related products. Accordingly, we have elected to use the practical expedient that allows us to ignore the possible existence of a significant financing component within the contract.
We have elected to account for shipping and handling charges billed to customers as revenue and shipping and handling related expenses as cost of revenue.
In certain U.S. states we are required to collect sales taxes from our customers. We have elected to exclude the amounts collected for these taxes from revenue and record them as a liability until remitted to the taxing authority.
Contract Liabilities
We record contract liabilities, or deferred revenue, when we have an obligation to provide a product or service to the customer and payment is received in advance of our performance. When we sell a product or service with a future performance obligation, we defer revenue allocated to the unfulfilled performance obligation and recognize this revenue when, or as, the performance obligation is satisfied.
F-9
Table of Contents
Our deferred revenue consists of advance payments received from customers prior to the transfer of products or services, shipments that are in-transit at the end of a period and sales of extended warranty agreements. Advance payments received from customers and shipments in-transit are recognized in revenue at the time control of the related products has been transferred to the customer or services have been delivered. Amounts related to extended warranty agreements are deferred and recognized in revenue ratably over the agreement period, which is typically one to four years after control of the related products is transferred to the customer, as we believe this recognition pattern best depicts the transfer of services being provided.
Deferred revenue is classified as current or long-term deferred revenue in our Balance Sheets, depending on the expected timing of satisfying the related performance obligations.
Capitalized Contract Costs
We capitalize commissions paid to our sales managers related to contracts with customers when the associated revenue is expected to be earned over a period of time. Deferred commissions are primarily related to the sale of extended warranty agreements. Capitalized commissions are included in Prepaid Expenses and Other Current Assets in our Balance Sheets when the associated expense is expected to be recognized in one year or less, or in Other Assets when the associated expense is expected to be recognized in greater than one year. The associated expense is included in Sales and Marketing expenses in our Statements of Operations.
Variable Consideration
Most of our sales are subject to 30 to 60-day customer-specified acceptance provisions primarily for purposes of ensuring products were not damaged during the shipping process. Historically, we have experienced immaterial product returns and, when experienced, we typically exchange the affected products with new products. Accordingly, variable consideration from contracts with customers is immaterial to our financial statements.
Cash Equivalents
All highly liquid instruments purchased with an original maturity of three months or less are classified as cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable is recorded at the transaction price of the related products and services. We regularly assess the sufficiency of the allowance for estimated uncollectible accounts receivable. Estimates are based on historical collection experience and other customer-specific information, such as bankruptcy filings or known liquidity problems of our customers. When it is determined that an account receivable is uncollectible, it is written off and relieved from the allowance. Any future determination that the allowance for estimated uncollectible accounts receivable is not properly stated could result in changes in operating expense and results of operations. As of December 31, 2020 and 2019, our allowance for doubtful accounts was $46,484 and $69,093, respectively.
Investments
Our investments consist of corporate debt securities and are considered available-for-sale. The specific identification method is used to determine the cost basis of investments sold. Our investments are recorded in our Balance Sheets at fair value. We classify our investments as current based on the nature of the investments and their availability for use in current operations. Unrealized gains and losses on our investments are included in accumulated other comprehensive income (loss), net of tax. Realized gains or losses and impairment losses that are determined to be other-than-temporary are recorded in other income, net in our Statements of Operations.
F-10
Table of Contents
Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. A three-level valuation hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels of inputs are:
Financial instruments include cash and cash equivalents, investments, accounts receivable, accounts payable and accrued expenses. Cash and cash equivalents and investments are reported at their respective fair values on the balance sheet dates. The recorded carrying amount of accounts receivable, accounts payable and accrued expenses approximates their fair values due to their short-term nature.
Inventory
Inventory is stated at the lower of standard cost, which approximates actual cost on a first-in, first-out basis, or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. We may be exposed to a number of factors that could result in portions of our inventory becoming either obsolete or in excess of anticipated usage. These factors include, but are not limited to, technological changes, competitive pressures in products and prices, and the introduction of new product lines. We regularly evaluate our ability to realize the value of inventory based on a combination of factors, including historical usage rates, forecasted sales, product life cycles, and market acceptance of new products. When inventory that is obsolete or in excess of anticipated usage is identified, it is written down to net realizable value or an inventory valuation allowance is established.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation expense is computed using the straight-line method over estimated useful lives of the respective assets, which are generally three to five years for computer software and hardware and five to seven years for furniture, fixtures, machinery and equipment. Leasehold improvements are depreciated over the shorter of the lease term or the estimated useful life of the improvements.
Repair and maintenance costs that do not extend the useful life of our property and equipment are expensed as incurred.
Intangible Assets
Intangible assets include application and legal costs incurred to obtain patents. We capitalize these costs when we determine that probable future economic benefits exist. In making this determination, we consider the projected future operating results associated with the patents, industry and economic trends, and the entry of new products in the market. Costs incurred prior to this determination are expensed in the period they are incurred. We amortize capitalized patent costs using the straight-line method over their useful lives, which is typically 20 years. Periodic costs incurred to maintain existing patents are expensed as incurred.
F-11
Table of Contents
Research & Development and Capitalized Software Development Costs
Research and development costs are expensed as incurred. Some of our products include embedded software which is essential to the products’ functionality. Costs incurred in the research and development of new software components and enhancements to existing software components are expensed as incurred until technological feasibility has been established. We capitalize software development costs when the project reaches technological feasibility and cease capitalization when the project is ready for release. Capitalized software development costs are included in intangible assets and are amortized on a straight-line basis over the estimated useful life of the product and included in cost of revenue. Amortization begins when the product is available for general release to the customer.
Long-lived Assets
Long-lived assets, including right-of-use assets, are tested for impairment whenever changes in circumstances indicate the carrying value of these assets may be impaired. Impairment indicators include, but are not limited to, technological obsolescence, unfavorable court rulings, significant negative industry and economic trends, and significant underperformance relative to historical and projected future operating results. Impairment is considered to have occurred when the estimated undiscounted future cash flows related to the asset groups are less than its carrying value. Estimates of future cash flows involve consideration of many factors including the marketability of new products, product acceptance and lifecycle, competition, appropriate discount rates and operating margins. An impairment is recognized as the amount by which the carrying value is greater than the fair value of the asset or asset group.
Warranty
We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in product quality programs and processes, including actively monitoring and evaluating the quality of our suppliers, the estimated warranty obligation is affected by ongoing product failure rates, material usage costs and direct labor incurred in correcting a product failure. Actual product failure rates, material usage costs and the amount of labor required to repair products that differ from estimates result in revisions to the estimated liability. We warrant for a limited period of time that our products will be free from defects in materials and workmanship. We estimate warranty allowances based on historical warranty experience. The estimates we use in projecting future product warranty costs may prove to be incorrect. Any future determination that our provision for product warranty is understated could result in increases to our cost of revenue and a reduction in our operating profits and results of operations. Historically, warranty expenses have not been material to our financial statements.
Advertising and Marketing
For the years ended December 31, 2020, 2019 and 2018, these costs were $6,959, $155,983 and $123,451, respectively. Advertising and marketing costs are expensed as incurred and included in sales and marketing expense.
Stock-Based Compensation
We recognize stock-based compensation expense associated with employee equity awards on a straight-line basis over the requisite service period for the entire award, which is generally four years for employees and two years for the board of directors.
Historically, we have granted two types of employee equity awards, stock options and restricted stock units.
The maximum contractual life of our stock options is ten years from the grant date. We utilize the Black-Scholes option pricing model to estimate the grant date fair value of those awards. The Black-Scholes option pricing model requires the input of certain assumptions including stock price, dividend yield, expected volatility, risk-free interest rate, and expected option life. Changes in these assumptions can materially affect the estimated fair value of our employee stock options.
F-12
Table of Contents
The grant date stock price was based on our closing stock price on the date of grant; dividend yield was based on our expectation of dividend payments over the expected life of the option; expected volatility was based on a study of our volatility and comparable, publicly traded companies with similar products and product life cycles; risk-free interest rate was the rate available on zero coupon U.S. government obligations with a term approximating the expected option life; the expected option life was calculated using the simplified method.
The grant date fair value of our restricted stock units is based on the closing price of our common stock on the date of grant.
We elect to recognize forfeitures as they occur.
We issue new shares of common stock upon exercise of stock options or vesting of restricted stock units.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. A valuation allowance is recorded to offset net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
We recognize the tax benefit of uncertain tax positions in the financial statements based on the technical merits of the position. When the tax position is deemed more likely than not of being sustained, we recognize the largest amount of tax benefit that is greater than 50 percent likely of being ultimately realized upon settlement.
Foreign Currency
Gains and losses from transactions denominated in currencies other than our functional currency are included in other income, net. Foreign currency gains and losses result primarily from fluctuations in the exchange rate between the U.S. Dollar and the Japanese Yen.
Comprehensive Income
Comprehensive income includes net income and other comprehensive income items that are excluded from net income under U.S. GAAP. Comprehensive income includes unrealized gains and losses on our investments classified as available for sale.
F-13
Table of Contents
Basic and Diluted Net Income per Share
Basic net income per share is based on the weighted-average number of common shares outstanding during the period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The Underwriters’ warrants, stock options and restricted stock units granted by us represent the only dilutive effect reflected in diluted weighted-average shares outstanding. See the Warrants portion of Note 9.
The following table presents the computation of basic and diluted net income per share:
For the Years Ended December, 31
Effect of dilutive securities:
Basic net income per share $ 0.11 $ 0.85 $ 0.59
Diluted net income per share $ 0.11 $ 0.78 $ 0.52
Stock options and warrants to purchase shares of our common stock and restricted stock units excluded from the calculation of diluted net income per share because the effect would have been anti-dilutive are as follows:
As of December, 31
Anti-dilutive stock options and restricted stock units 42,690 25,439 21,488
Certain Significant Risks and Uncertainties
We market our products to end users in the United States and to third-party distributors internationally. Sales to end users in the United States are generally made on open credit terms. Management maintains an allowance for potential credit losses.
We have deposited our cash and cash equivalents with various financial institutions. Our cash and cash equivalents balances exceed federally insured limits throughout the year. We have not incurred any losses related to these balances.
Our products require clearance from the Food and Drug Administration and international regulatory agencies prior to commercialized sales. Our future products may not receive required approvals. If we were denied such approvals, or if such approvals were revoked or delayed or if we were unable to timely renew certain approvals for existing products, it would have a materially adverse impact on our business, results of operations and financial condition.
Certain key components of our products essential to their functionality are sole-sourced. Any disruption in the availability of these components would have a materially adverse impact on our business, results of operations and financial condition.
F-14
Table of Contents
COVID-19 Considerations
The COVID-19 global pandemic caused disruption in global supply and distribution channels and dramatically changed the way companies do business. From the beginning of this global health crisis, our first priority has been the safety and well-being of our employees.
We continue to monitor the developments associated with the COVID-19 pandemic and its effects on our employees, customers, supply chain and distribution channels. The ongoing impact of the pandemic depends on a number of factors including the severity and duration of the pandemic and the extent and severity of the impact on our customers, which is uncertain and unpredictable. Our future results of operations and cash flows may suffer adverse effects from delays in payments on outstanding accounts receivable, potential manufacturing, distribution and supply chain disruptions and uncertain demand, and effects of any actions we may take to address financial and operational challenges our customers may face. Other risks and uncertainties that we face include, but are not limited to: