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, disposables and services relating to them.
We are a leader in the development of innovative 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, 2022, our direct U.S. sales force consisted of 25 field sales representatives, 3 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 lingering pandemic issues. We also enter into agreements with integrated delivery health systems and healthcare supply contracting companies in the U.S. Our agreements with healthcare supply contracting companies enable us to sell and distribute our products and services 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.
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Financial Highlights and Outlook
Our revenue was $53.3 million in 2022 and $41.8 million in 2021. Our diluted earnings per share was $1.02 in 2022, and $0.74 in 2021. Our cash provided by operations was $10.0 million in 2022, and $11.3 million in 2021.
Our estimated installed base of medical devices is as follows:
December 31,
Patient Vital Signs Monitoring Systems 1,596 1,138
COVID 19 Considerations
The worldwide COVID-19 pandemic has negatively impacted, and may continue to negatively impact, the macroeconomic environment in the United States and globally. The magnitude of the impact will depend on numerous evolving factors that we may not be able to accurately predict, including the impact of federal, state, local and foreign governmental actions, consumer, supplier and hospital behavior in response to the pandemic and such governmental actions, and the economic and operating conditions.
Critical Accounting Policies and Estimates
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 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.
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 many domestic sales, we enter into agreements with integrated delivery health systems and healthcare supply contracting companies, commonly referred to as Group Purchasing Organizations (“GPOs”).
GPO agreements 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.
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Customer sale prices for our medical devices and related disposables and services are contractually fixed over the 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.
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:
General and administrative 20.1 23.4
Research and development 4.3 4.6
Total operating expenses 48.2 53.2
Income from operations 29.3 23.5
Other income, net 1.0 0.0
Income before provision for income taxes 30.3 23.5
Provision for income tax expense 6.3 1.2
Comparison of the Years Ended December 31, 2022 and 2021
Revenue by Geographic Region
Years Ended December 31,
(In millions, except percent change) 2022 2021 Change
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Revenue by Type
Years Ended December 31,
(In millions, except percent change) 2022 2021 Change
Devices:
MRI compatible IV infusion pump system $ 14.5 $ 13.3 9.0 %
MRI compatible patient vital signs monitoring system 21.7 13.8 57.2
Ferro Magnetic Detection Systems 0.3 — N/A
Disposables, service and other 14.6 12.8 14.1
Amortization of extended warranty agreements 2.2 1.9 15.8
Revenue increased $11.5 million, or 27.5 percent, to $53.3 million from $41.8 million for the same period in 2021.
Revenue from sales in the U.S. increased $10.4 million, or 31.0 percent, to $43.9 million from $33.5 million for the same period in 2021. Revenue from sales internationally increased $1.1 million, or 13.3 percent, to $9.4 million from $8.3 million for the same period in 2021. Domestic sales accounted for 82.4 percent of total revenue for the year ended December 31, 2022, compared to 80.0 percent for the same period in 2021.
Revenue from sales of devices increased $9.4 million, or 34.7 percent, to $36.5 million from $27.1 million for the same period in 2021. This increase was the result of higher overall unit sales especially related to our patient vital signs monitoring systems.
Revenue from sales of our disposables, service and other increased $1.8 million, or 14.1 percent, to $14.6 million from $12.8 million for the same period in 2021. Revenue from the amortization of our extended warranty agreements increased $0.3 million, or 15.8%, to $2.2 million from $1.9 million for the same period in 2021. The increase in ancillary product sales aligns with the increased sales of our devices.
Cost of Revenue and Gross Profit
Years Ended December 31,
(In millions, except gross profit percentage) 2022 2021
Cost of revenue 12.0 9.8
Gross profit $ 41.3 $ 32.0
Gross profit percentage 77.5 % 76.6 %
Cost of revenue increased approximately $2.2 million, or 22.4 percent, to $12.0 million for the year ended December 31, 2022, from $9.8 million for the same period in 2021. Gross profit increased approximately $9.3 million, or 29.1 percent, to $41.3 million for the year ended December 31, 2022 from $32.0 million for the same period in 2021. The increase in cost of revenue and gross profit is primarily due to higher revenue during the year ended December 31, 2022, compared to the same period in 2021.
Gross profit margin was 77.5 percent and 76.6 percent for the years ended December 31, 2022 and 2021, respectively. The increase in gross profit margin is the result of favorable overhead variance adjustments and higher average selling prices in 2022 compared to 2021, offset by increased raw material costs due to inflation. The increase in year over year sales also positively impacts the ability to favorably absorb overhead costs increasing gross profit margin.
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Operating Expenses
Years Ended December 31,
(In millions, except percentage of revenue) 2022 2021
General and administrative $ 10.7 $ 9.8
Percentage of revenue 20.1 % 23.4 %
Sales and marketing $ 12.7 $ 10.6
Percentage of revenue 23.8 % 25.2 %
Research and development $ 2.3 $ 1.9
Percentage of revenue 4.3 % 4.6 %
General and Administrative
General and administrative expense increased approximately $0.9 million, or 9.2 percent, to $10.7 million for the year ended December 31, 2022, from $9.8 million for the same period last year. This increase is primarily due to higher expenses for legal and professional costs, regulatory approval and certification costs, and payroll and employee benefits costs. These increases are a direct result of the continuous growth of the company and need for additional resources.
Sales and Marketing
Sales and marketing expense increased approximately $2.1 million, or 19.8 percent, to $12.7 million for the year ended December 31, 2022, from $10.6 million for the same period in 2021. This increase is primarily the result of higher expenses for sales commissions, sales activities and software costs, partially offset by lower expenses for payroll and benefits. These increases are a direct result of the continuous growth of the Company. Commissions and sales activity expenses increases in line with revenue growth.
Research and Development
Research and development expense increased approximately $0.4 million, or 21.1 percent, to $2.3 million for the year ended December 31, 2022, from $1.9 million for the same period in 2021. This is primarily due to higher expenses for prototype and consulting costs, offset by lower allocated payroll and benefits costs.
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 $550 thousand and $19 thousand for the years ended December 31, 2022 and 2021, respectively. This increase is primarily the result of higher interest income during the year ended December 31, 2022 compared to the same period in 2021.
Income Taxes
We recorded a provision for income tax expense of approximately $3.4 million for the year ended December 31, 2022, compared to a tax expense of approximately $0.5 million for the year ended December 31, 2021. Our effective tax rate for the year ended December 31, 2022 was 20.7 percent compared to 5.2 percent for the same period in 2021. The increase in our effective tax rate is primarily the result of higher book income before the provision for income taxes and tax benefits associated with the exercise and sale of employee options and vesting of restricted stock units that materially reduced the effective tax rate in 2021 but did not recur to the same extent in 2022.
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.
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As of December 31, 2022, we had cash and investments of $57.9 million, stockholders’ equity of $73.7 million, and working capital of $68.9 million, compared to cash and cash equivalents and investments of $62.5 million, stockholders’ equity of $72.2 million, and working capital of $69.4 million as of December 31, 2021.
For the Years Ended December 31,
Net cash provided by operating activities $ 10.1 $ 11.3
Net cash (used in) provided by investing activities $ (1.4) $ 0.6
Net cash (used in) provided by financing activities $ (12.7) $ 0.0
Comparison of the Years Ended December 31, 2022 and 2021
Operating Activities
For the year ended December 31, 2022, cash provided by operations decreased $1.2 million to $10.1 million, from $11.3 million in 2021. During 2022, cash provided by operations was positively impacted by higher net income, prepaid expenses, accounts payable, and prepaid income taxes. Cash provided by operations was negatively impacted by net accounts receivable and accrued payroll and benefits.
Investing Activities
For the year ended December 31, 2022, cash related to investing activities decreased $2.0 million to a use of $1.4 million, from $0.6 million provided in 2021. During 2022, cash related to investing activities was impacted by maturities of investments, purchases of property and equipment, and capitalized intangible assets. During 2021, cash provided by investing activities was impacted by maturities of investments, partially offset by impacts from purchases of property and equipment, and capitalized intangible assets.
Financing Activities
For the year ended December 31, 2022, cash related to financing activities decreased $(12.7) million to a use of $(12.7) million, from $24 thousand provided in 2021. During 2022, cash provided by financing activities was related to a cash payment for a dividend, proceeds from the exercise of stock options, 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;
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● Extent to which we make acquisitions;
● Cost and timing of selling and marketing activities; and
● Availability of borrowings or other means of financing.
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 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, 2022.
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, 2022, we expect a corresponding change of approximately $526,000 in interest income earned on our excess cash held in interest bearing accounts.
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.
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
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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.
We conducted an assessment of the effectiveness of our system of internal control over financial reporting as of December 31, 2022, 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, 2022 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.
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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.
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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
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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.
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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 2, 2023.
IRADIMED CORPORATION
(Registrant)
Dated: March 2, 2023 /s/ Roger Susi
By: Roger Susi
Chief Executive Officer and President
(Principal Executive Officer)
Each person whose signature appears below constitutes and appoints Roger Susi and John Glenn 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
John Glenn
/s/ Monty Allen Director March 2, 2023
Monty Allen
/s/ Anthony Vuoto Director March 2, 2023
Anthony Vuoto
/s/ James Hawkins Director March 2, 2023
James Hawkins
/s/ Hilda Scharen-Guivel Director March 2, 2023
Hilda Scharen-Guivel
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IRADIMED CORPORATION FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (PCAOB ID: 49) 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
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Report of Independent Registered Public Accounting Firm
To the Stockholders’ 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, 2022 and 2021, the related statements of operations, comprehensive income, stockholders’ equity and cash flows for the years ended December 31, 2022 and 2021, 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, 2022 and 2021, and the results of its operations and its cash flows for the years ended December 31, 2022 and 2021, 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 Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Deferred Revenue Recorded on the Sale of Extended Warranties
As discussed in Notes 1 and 2 to the financial statements, the Company recorded deferred revenue related to the sale of extended warranty agreements of $3,837,006 at December 31, 2022. The Company records contract liabilities, or deferred revenue, when it has an obligation to provide a product or service to the customer and payment is received in advance. Payments received on the sale of 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 product is transferred to the customer.
We identified deferred revenue recorded on the sale of extended warranties as a critical audit matter because of the complexities of the manual calculations performed by management in estimating the deferred revenue to recognize on the sale of extended warranties at year end. Auditing management’s estimates of deferred revenue to record on the sale of extended warranties required auditor judgment and an increase in audit effort due to the complexities of management’s manual calculations.
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Our audit procedures related to deferred revenue recorded on the sale of extended warranties included the following, among others:
/s/ RSM US LLP
We have served as the Company’s auditor since 2013.
Orlando, Florida
March 2, 2023
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IRADIMED CORPORATION
BALANCE SHEETS
December 31, December 31,
ASSETS
Current assets:
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of operating lease liability 293,466 276,568
Other current liability — 146,435
Operating lease liability, less current portion 1,911,820 2,205,516
Stockholders’ equity:
Accumulated other comprehensive income — 17,012
See accompanying notes to financial statements.
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iRadimed Corporation
STATEMENTS OF OPERATIONS
For the year ended December 31,
Operating expenses:
Net income per share
Weighted average shares outstanding
See accompanying notes to financial statements.
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iRadimed Corporation
STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31,
Other comprehensive (loss):
See accompanying notes to financial statements.
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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 loss — — — — (20,075) (20,075)
Other comprehensive loss — — — — (17,012) (17,012)
Stock-based compensation — — 1,394,106 — — 1,394,106
See accompanying notes to financial statements.
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iRadimed Corporation
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
Operating activities:
Change in allowance for doubtful accounts 102,767 13,876
Change in provision for excess and obsolete inventory 55,737 118,217
Disposal of property and equipment (1,741) 5,544
Gain on maturity of investments (8,025) (18,593)
Changes in operating assets and liabilities:
Other current liabilities (146,435) —
Investing activities:
Net cash (used in) provided by investing activities $ (1,374,997) 648,241
Financing activities:
Net cash (used in) provided by financing activities $ (12,706,400) 24,425
Supplemental disclosure of cash flow information:
See accompanying notes to financial statements.
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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, disposables 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 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.
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.
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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 many domestic sales, we enter into agreements with integrated delivery health systems and healthcare supply contracting companies, commonly referred to as Group Purchasing Organizations (“GPOs”).
GPO agreements 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 the 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 medical devices and related disposables and services are contractually fixed over the 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.
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.
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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
Our sales are typically 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, 2022 and 2021, our allowance for doubtful accounts was $160,498 and $60,361, respectively.
Investments
Our investments consisted 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 classified 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. We currently do not own any corporate bonds but should direct debt securities be utilized in the future, we would treat them as described above.
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:
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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.
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
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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
The Company provides 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
Historically, we have granted three types of employee equity awards, stock options, restricted stock units and performance-based restricted stock units.
We recognize stock-based compensation expense associated with employee equity awards on a straight-line basis over the requisite service period for stock options and restricted stock units, which is generally four years for employees and two years for the board of directors. Expense related to our performance-based restricted stock units is recognized straight-line over the requisite performance period, which is three years.
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.
In December 2022 and 2021, the Company granted Performance-Based Restricted Stock Units (“PSUs”) to certain employees under the Company’s Long-Term Incentive Pan (“LTIP”), which was adopted under the Company’s Amended and Restated 2014 Equity Incentive Plan. Payouts of the PSUs will be based on the Company’s total shareholder return compared to a peer group or index total shareholder return. For purposes of the LTIP, total shareholder return is calculated as the share price at the end of the performance period, which is three years, including the reinvestment of any dividends during the performance period, as compared to the share price at the beginning of the performance period. The payout range for participants will be between 0 percent and 200 percent, depending on the Company’s performance.
The grant date fair value of our PSUs is based on a Monte Carlo simulation, the closing price of our common stock, and other pertinent factors on the grant date. Compensation expense for the PSUs is recognized on a straight-line basis over the requisite performance period, which is three years from the grant date.
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 and PSUs.
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
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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 included unrealized gains and losses on our investments classified as available for sale while those investments were held.
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 stock options, restricted stock units, and performance-based restricted stock units granted by us represent the only dilutive effect reflected in diluted weighted average shares outstanding.
The following table presents the computation of basic and diluted net income per share:
For the Years Ended December 31,
Effect of dilutive securities:
Performance-based restricted stock units 9,972 11,892
Basic net income per share $ 1.02 $ 0.76
Diluted net income per share $ 1.02 $ 0.74
Stock options 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 22,744 4,597
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.
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We have deposited our cash and cash equivalents with various financial institutions. Our cash and cash equivalents balances exceed federally insured limits periodically throughout the year. We have not incurred any losses related to these balances.
Our medical devices 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.
Pandemic Considerations
We continue to monitor developments associated with the recent evolving pandemic and its effects on our employees, customers, supply chain and distribution channels. The ongoing impact of the recent and potential future pandemics depends on several 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 disruptions in our supply chain and manufacturing operations, delays in payments on outstanding accounts receivable, uncertain demand for our products, and effects of any actions we may take to address financial and operational challenges our customers may face. Our future results may potentially be heavily determined by global vaccination rates, duration of the pandemic, its geographic spread, further business disruptions and the overall impact on the global economy.
We are actively managing our response to the recent pandemic and continue to 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 a pandemic, may materially impact our financial condition, liquidity, or results of operations in future periods remains uncertain.
Recent Accounting Pronouncements
Accounting Pronouncements Implemented in 2022
Beginning in 2022, the Tax Cuts and Jobs Act of 2017 (“TCJA”) eliminated the option to deduct research and experimental expenditures in the current year and requires taxpayers to amortize them over five years pursuant to IRC Section 174. This change is applied from 2022 onward prospectively and impacts the timing of the related cash tax payments as the deductions are disallowed for tax in the year incurred but allowed for tax purposes to be amortized and deducted over 5 years. The mandatory capitalization requirement increases our deferred tax assets and cash tax liabilities by approximately $0.5million. In the future, Congress may consider legislation that would defer the amortization requirement to later years, possibly with a retroactive effect. In the meantime, we expect to continue to make additional Federal tax payments based on current Section 174 tax law. The impact on Section 174 on our cash from operations depends on the amount of research and experimental expenditures incurred by the company and whether the IRS issues guidance on the provision which differs from current interpretation, among other things.
Recently Issued Accounting Pronouncements to be Implemented
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the Company to measure and recognize expected credit losses for financial assets held and not accounted for at fair value through net income. In November 2018, April 2019 and May 2019, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses and ASU 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief, which provided additional implementation guidance on ASU 2016-03. The previously mentioned ASUs are effective for fiscal years beginning after December 15, 2022, with early adoption permitted. We do not expect the adoption of these ASUs to have a material impact on our financial condition, results of operations or cash flows.
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2 - Revenue
Disaggregation of Revenue
We disaggregate revenue from contracts with customers by geographic region and revenue type as we believe it best depicts the nature, amount, timing and uncertainty of our revenue and cash flow.
Revenue information by geographic region is as follows:
For the Years Ended December 31,
Revenue information by type is as follows:
For the Years Ended December 31,
Devices:
Ferro Magnetic Detection Systems 257,112 —
Contract Liabilities
Our contract liabilities consist of:
As of December 31,
Changes in the contract liabilities during the period are as follows:
Deferred
Revenue
Increases due to cash received from customers 4,421,712
Decreases due to recognition of revenue (4,443,945)
Increases due to cash received from customers 5,094,184
Decreases due to recognition of revenue (4,578,304)
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Capitalized Contract Costs
Our capitalized contract costs totaled $340,044 and $357,810 as of December 31, 2022 and 2021, respectively.
3 — Inventory, net
Inventory consists of:
As of December 31,
Inventory before allowance for excess and obsolete 5,608,521 4,483,350
Allowance for excess and obsolete (239,288) (183,551)
4 — Property and Equipment, net
Property and equipment consist of:
As of December 31,
Depreciation and amortization expense of property and equipment was $569,551 and $532,275 for the years ended December 31, 2022 and 2021, respectively.
Property and equipment, net by geographic region is as follows:
As of December 31,
Long-lived assets held outside of the United States consist principally of tooling, which is a component of machinery and equipment, net.
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5 — Intangible Assets, net
The following table summarizes the components of intangible asset balances:
As of December 31,
Internally developed software — in process 1,489,322 468,441
Amortization expense of intangible assets was $101,122 and $101,735 for the two years ended December 31, 2022, and 2021, respectively.
Expected annual amortization expense for the next five years related to intangible assets is as follows (excludes in-process intangible assets):
6 — Investments
Our investments consist of bonds that we have classified as available-for-sale and are summarized in the following tables:
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. corporations $ — $ — $ — $ —
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
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7 — Fair Value Measurements
The fair value of our assets and liabilities subject to recurring fair value measurements are as follows:
Fair Value at December 31, 2022
Quoted Prices Significant
in Active Other Significant
Market for Observable Unobservable
Fair Identical Assets Inputs Inputs
Value (Level 1) (Level 2) (Level 3)
U.S. corporations $ — $ — $ — $ —
Fair Value at December 31, 2021
Quoted Prices Significant
in Active Other Significant
Market for Observable Unobservable