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IRADIMED : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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05/06/2016 | 01:06pm CEST

The following Management's Discussion and Analysis of Financial Condition ("MD&A") supplements the MD&A in the Company's Annual Report filed on Form 10-K. The MD&A should be read in conjunction with the Risk Factors section of this Quarterly Report, our condensed financial statements and accompanying footnotes, the discussion of certain risks and uncertainties contained in Part II, Item 1A of this Quarterly Report, the Form 10-K and the cautionary information regarding forward-looking statements at the end of this section.

Some of the statements contained in this MD&A and elsewhere in this Quarterly Report are forward-looking statements that involve substantial risks and uncertainties. All statements other than historical facts contained in this report, including statements regarding our future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "believes," "expects," "anticipates," "intends," "estimates," "may," "will," "continue," "should," "plan," "predict," "potential" and other similar expressions. We have based these forward-looking statements on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. Our actual results could differ materially from those anticipated in these forward-looking statements, which are subject to a number of risks, uncertainties and assumptions including, but not limited to the risks discussed in the Risk Factor section of this Quarterly Report.



Our Business


We are the only known provider of non-magnetic intravenous ("IV") infusion pump systems that are 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 ("RF") 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. MRidium is a trademark of IRADIMED CORPORATION.

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. We generate revenue from the one-time sale of pumps and accessories, ongoing service contracts and the sale of proprietary disposable IV tubing sets used during each patient infusion. The principal customers for our MRI compatible products include hospitals, acute care facilities and outpatient imaging centers.

We sell our MRI compatible products through our direct sales force in the U.S. and independent distributors internationally. We have distribution agreements for our products with 35 independent distributors selling our products internationally. Selling cycles for medical devices vary widely but are typically three to six months in duration. 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 systems to their member hospitals. Under these agreements, we are required to pay these group purchasing organizations ("GPOs") a percentage fee based on sales of our products to their member hospitals. We currently have contracts with four major GPOs that effectively give us the ability to sell to more than 95% of all U.S. acute care facilities.




FDA Warning Letter



The FDA conducted a routine inspection of our prior facility between April 7 and April 16, 2014. This was the first FDA inspection of our facility since the voluntary product recall in August 2012 of certain infusion sets and the voluntary recall in July 2013 of our Dose Error Reduction System ("DERS") software. The FDA issued a Form 483 on April 16, 2014 that identified eight observations. The majority of the observations related to procedural and documentation issues associated with the design, development, validation testing and documentation of software used in certain of our products. Other observations were related to the design validation of pump labeling, design analysis of tube stretching, procedures for post-market design review, and control and procedures related to handling certain reported complaints. We submitted a response to the Form 483 in May 2014 and June 2014 in which we described our proposed corrective and preventative actions to address each of the FDA's observations.




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On September 2, 2014, we received a warning letter from the FDA relating to this inspection (the "Warning Letter"). The Warning Letter stated that the FDA accepted as adequate several of our responses to Form 483 observations, identified two responses whose accuracy will be determined in the next scheduled inspection of our facility and identified issues for which our response was determined to be inadequate. The issues identified as inadequate concern our procedures for validating device design primarily related to software quality assurance.

Also, the Warning Letter raised a new issue. The Warning Letter stated that modifications made to software on our previously cleared infusion pumps, the MRidium 3860 and MRidium 3850, were "significant" and required submission of new premarket notifications under Section 510(k) (a "510(k) submission") of the FDC Act. These modifications were made over time. We believe they were insignificant and did not require premarket notification submissions. However, the FDA indicated that the modifications of the software for the MRidium 3860 and the software for the MRidium 3850 were "significant" modifications because they could significantly affect the safety or effectiveness of these devices. As a result, the Warning Letter states that the products being sold by us are "adulterated" and "misbranded" under the FDC Act. The Warning Letter also indicates that the MRidium 3860+ infusion pump requires separate FDA clearance from the MRidium 3860 and MRidium 3850.

The Warning Letter requested that we immediately cease activities that result in the misbranding or adulteration of the MRidium 3860 MRI infusion pump, MRidium 3850 MRI infusion pump, and the MRidium 3860+ MRI infusion pump, including the commercial distribution of the devices. We immediately complied with the Warning Letter and ceased sale and distribution of the identified products in the United States.

On September 4, 2014, we submitted to the FDA our initial response to the Warning Letter and on September 17, 2014 we sent an additional response that included supplemental information related to the Form 483 inspection observations for which the FDA considered our initial responses inadequate.

On November 25, 2014, we announced that we filed the 510(k) submission related to our MRidium 3860+ MRI IV infusion pumps and on December 12, 2014 we were notified that our 510(k) submission had been formally accepted for review by the FDA. On December 22, 2014, under FDA enforcement discretion, we announced that we resumed domestic distribution of our MRI compatible MRidium 3860+ MRI IV infusion pump systems, without the DERS option. On January 28, 2015, under FDA enforcement discretion, we announced that we resumed domestic distribution of our DERS option. On December 9, 2015, we met with the FDA to review responses to the agency's additional information letter.

On March 24, 2016, we received a letter dated March 23, 2016 that our 510(k) submission was denied with a finding of non-substantial equivalence. This finding was due to a lack of human factors data demonstrating that our DERS was adequately validated and that we may resubmit a new 510(k) application with data showing our infusion pump to be substantially equivalent to similar devices in the market. Specifically, the agency stated that two of fifty-six test subjects in our human factors tests unintentionally bypassed the DERS feature, thus avoiding the DERS hard dose limits that healthcare institutions can program into our MRI compatible MRidium 3860+ infusion pumps. On April 7, 2016, we submitted an appeal to this determination to a higher level within the FDA. On May 2, 2016, we met with the FDA to review our appeal. At this time, we await the FDA's conclusion on our appeal.

We continue to work with the FDA to fully resolve the Warning Letter and complete the review of the 510(k) submission.

Financial Highlights and Outlook

Our revenue increased $2.0 million, or 28.2%, to $9.0 million for the first quarter ended March 31, 2016, compared to $7.0 million for the first quarter of last year. Net income was $2.3 million, or $0.19 per diluted share, in the first quarter ended March 31, 2016, compared with net income of $1.5 million, or $0.12 per diluted share, in the first quarter last year. During the first quarter of 2016, we recognized revenue on 263 pump systems, compared to 217 pump systems during the same period in 2015, a 21.2% increase.

For the remainder of 2016, we expect continued revenue growth as our growing U.S. direct sales force continues to expand market awareness of the advantages of patient safety and operating efficiencies provided by our MRI compatible IV infusion pump system. With our expanding sales force, we intend to continue targeting an increased number of hospitals and acute care facilities that have yet to adopt our technology. We also recently implemented a sales strategy to penetrate the Intensive Care Unit, Emergency Room and other locations within hospitals where there is a high probability that interventional radiology procedures will need to be performed on patients. Additionally, we expect to launch our new MRI compatible patient vital signs monitor during the second half of 2016. We expect operating expenses to increase in 2016 due to increased headcount, costs incurred in bringing the patient vital signs monitor to market and higher depreciation expense from additional capital expenditures.

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Application of Critical Accounting Policies

We prepare our financial statements in conformity with U.S. generally accepted accounting principles. 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.

We believe that the following critical accounting policies require the use of significant estimates, assumptions, and judgments.



†          Revenue recognition



†          Accounts receivable and allowance for doubtful accounts



†          Inventory carried at the lower of cost or market



†          Stock-based compensation



†          Income taxes


These critical accounting policies are described in more detail in our Annual Report filed on Form 10-K, under Management's Discussion and Analysis and Results of Operations. There have been no changes to these policies during the three months ended March 31, 2016.

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.




Results of Operations



The following table sets forth selected statements of operations data as a percentage of total revenue for the periods indicated. Our historical operating results are not necessarily indicative of the results for any future period.



                                                 Percent of Revenue
                                            Three Months Ended March 31,
                                               2016              2015
Revenue                                            100.0 %           100.0 %
Cost of revenue                                     19.0              19.0
Gross profit                                        81.0              81.0
Operating expenses:
General and administrative                          25.2              28.1
Sales and marketing                                 14.3              15.6
Research and development                             2.6               4.9
Total operating expenses                            42.1              48.6
Income from operations                              38.8              32.4
Other income, net                                    0.4               0.7
Income before provision for income taxes            39.2              33.1
Provision for income taxes                          13.7              11.8
Net income                                          25.5 %            21.3 %



Three Months Ended March 31, 2016 and 2015



Revenue


Revenue increased approximately $2.0 million, or 28.2%, to $9.0 million for the three months ended March 31, 2016, compared to $7.0 million for the same period in 2015.

Revenue from sales in the U.S. increased approximately $1.6 million, or 25.0%, to $7.9 million for the three months ended March 31, 2016, from $6.3 million for the same period in 2015. Revenue from sales internationally increased approximately $0.4 million, or 57.1%, to $1.1 million for the three months ended March 31, 2016, from $0.7 million for the same period in 2015.

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Revenue from sales of devices increased approximately $1.4 million, or 23.9%, to $7.3 million for the three months ended March 31, 2016, from $5.9 million for the same period in 2015. During the three months ended March 31, 2016, we recognized revenue on 263 MRI compatible IV infusion pumps compared to 217 pumps for the same period in 2015. The average selling price of our MRI compatible IV infusion pump systems during the three months ended March 31, 2016 and 2015 was approximately $28,000 and $27,000, respectively.

Revenue from sales of our disposable IV sets and services increased approximately $0.6 million, or 51.1%, to $1.7 million for the three months ended March 31, 2016, from $1.1 million for the same period in 2015.



Cost of Revenue


Cost of revenue increased approximately $0.4 million, or 28.4%, to $1.7 million for the three months ended March 31, 2016, from $1.3 million for the same period in 2015. Gross profit increased approximately $1.6 million, or 28.2%, to $7.3 million for the three months ended March 31, 2016 from $5.7 million for the same period in 2015. The increase in cost of revenue and gross profit is due to higher sales during the three months ended March 31, 2016, compared to the first quarter 2015. Gross profit margin was consistent at 81.0% for the three months ended March 31, 2016 and 2015. This is the result of higher sales leverage offset by higher international sales as a percent of total sales when compared to the same period last year and unfavorable inventory cost adjustments.



General and Administrative


General and administrative expense increased approximately $0.3 million, or 14.8%, to $2.3 million for the three months ended March 31, 2016, from $2.0 million for the same period last year. This increase is primarily due to higher payroll and employee benefits, consulting services, corporate franchise taxes and stock compensation expense, partially offset by lower legal and professional expenses and an impairment charge recorded during the first quarter 2015 on patents related to certain of our IV sets.



Sales and Marketing


Sales and marketing expense increased approximately $0.2 million, or 17.9%, to $1.3 million for the three months ended March 31, 2016, from $1.1 million for the same period in 2015. This is primarily the result of higher salary and travel expenses resulting from the increased size of our sales organization.



Research and Development


Research and development expense decreased approximately $0.1 million, (31.5%), to $0.2 million for the three months ended March 31, 2016, from $0.3 million for the same period in 2015. This is primarily due to the capitalization of certain internally developed software costs associated with the development of our patient vital signs monitor, which has the effect of reducing expense. This was partially offset by higher prototype expenses.



Other Income, Net


Other income, net consists of interest income, foreign currency gains and losses, and other miscellaneous income. We reported other income of approximately $32,000 for the three months ended March 31, 2016, compared to other income of approximately $47,000 for the same period in 2015. This decrease is primarily the result of losses on the sale of investments and foreign currency losses on international transactions.



Income Taxes


We recorded income tax expense of approximately $1.2 million and $0.8 million for the three months ended March 31, 2016 and 2015, respectively. The higher income tax expense for the first quarter of 2016 is due to higher income before provision for income taxes, partially offset by a lower effective tax rate when compared to the same period in 2015. Our effective tax rate for the first quarter of 2016 was 35.0% compared to 35.6% for the same period in 2015. The decrease in our effective tax rate is primarily the result of higher credits for our research and development activities.

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 March 31, 2016, we had cash and cash equivalents and investments of approximately $23.6 million, stockholders' equity of $29.2 million, and working capital of $28.1 million. As of December 31, 2015, we had cash and cash equivalents and investments of approximately $27.0 million, stockholders' equity of $31.9 million, and working capital of $31.1 million.

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We believe that our current cash and cash equivalents and any cash generated from operations will be sufficient to meet our ongoing operating requirements for at least the next 12 months. We do not anticipate requiring additional capital; however, if required or desirable, we may seek to obtain a credit facility, raise debt or issue additional equity in the private or public markets.

For the three months ended March 31, 2016, cash provided by operations increased approximately $1.3 million to $2.4 million, compared to cash provided by operations of $1.1 million for the same period in 2015. This increase was primarily the result of higher net income; higher net cash inflows related to accounts receivable, accrued payroll and benefits and accrued income taxes; and the add back of non-cash items such as stock compensation, impairment of intangible assets, depreciation and amortization, partially offset by net cash outflows related to inventory and deferred revenue. The sum of our net income and certain non-cash expense items, such as stock compensation, impairment of intangible assets, depreciation and amortization was approximately $2.7 million for the three months ended March 31, 2016 compared to $1.9 million for the same period last year.

Cash used in investing activities was approximately $917,000 for the three months ended March 31, 2016 compared to approximately $41,000 for the same period last year. During the three months ended March 31, 2016, we used approximately $728,000 of cash to purchase investments, capitalized approximately $290,000 of intangible assets and purchased approximately $199,000 of property and equipment. These cash outflows were partially offset by a $300,000 maturity of investments.

Cash used in financing activities was approximately $5.4 million for the three months ended March 31, 2016 and related to the purchase of approximately $5.5 million of treasury stock, partially offset by cash received from the exercise of stock options by employees and related tax benefits. For the three months ended March 31, 2015, cash provided by financing activities was approximately $304,000 and related to the exercise of stock options by employees and the tax benefits.

We market our products to end users in the United States and to 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.

Our manufacturing and headquarters facility has been leased from Susi, LLC, an entity controlled by our President and CEO, Roger Susi. Pursuant to the terms of our lease, the monthly base rent is $32,616, adjusted annually for changes in the consumer price index.

Off-Balance Sheet Arrangements

Under our amended and restated bylaws, we have agreed to indemnify our officers and directors for certain events or occurrences arising as a result of the officer or director serving in such capacity. We have a director and officer liability insurance policy that limits our exposure under these indemnifications and enables us to recover a portion of any future loss arising out of them. In addition, in the normal course of business, we enter into contracts that contain indemnification clauses whereby the Company indemnifies our customers against damages associated with product failures. We have obtained liability insurance providing coverage that limits our exposure for these indemnified matters. Based on our historical experience and the estimated probability of future loss, we have determined that the estimated fair value of these indemnities is not material to our financial position or results of operations and have not recorded a liability for these agreements as of March 31, 2016. We had no other off-balance sheet arrangements during the three months ended March 31, 2016 or for the year ended December 31, 2015 that had, or are reasonably likely to have, a material effect on our financial condition, results of operations, or liquidity.

Recent Accounting Pronouncements

See Note 1 to the unaudited condensed financial statements contained herein for a full description of recent accounting pronouncements including the respective expected dates of adoption and status of evaluation of expected effects on results of our operations and financial condition.

© Edgar Online, source Glimpses

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