Company Quick10K Filing
Quick10K
Iradimed
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$23.45 11 $262
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
8-K 2019-07-30 Earnings, Exhibits
8-K 2019-07-29 Officers, Exhibits
8-K 2019-06-14 Shareholder Vote
8-K 2019-05-17 Other Events
8-K 2019-04-30 Earnings, Exhibits
8-K 2019-02-06 Earnings, Exhibits
8-K 2019-01-22 Other Events, Exhibits
8-K 2018-10-30 Earnings, Exhibits
8-K 2018-09-14 Officers, Exhibits
8-K 2018-09-13 Amend Bylaw, Exhibits
8-K 2018-07-31 Earnings, Exhibits
8-K 2018-06-08 Shareholder Vote
8-K 2018-04-30 Earnings, Exhibits
8-K 2018-02-06 Earnings, Exhibits
8-K 2018-01-22 Earnings, Regulation FD, Exhibits
BKH Black Hills Power 4,480
UVSP Univest of Pennsylvania 740
ZIOP Ziopharm Oncology 690
USX US Xpress Enterprises 287
CDR Cedar Realty Trust 276
TRNC Tronc 0
SCACU Saban Capital Acquisition 0
ROYE Royal Energy Resources 0
FTMR Fortem Resources 0
SAF Safeco 0
IRMD 2019-06-30
Part I. Financial Information
Item 1. Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
Item 3. Default Upon Senior Securities
Item 4. Mine Safety Disclosures.
Item 5. Other Information
Item 6. Exhibits
EX-31.1 a19-10359_1ex31d1.htm
EX-31.2 a19-10359_1ex31d2.htm
EX-32.1 a19-10359_1ex32d1.htm

Iradimed Earnings 2019-06-30

IRMD 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a19-10359_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

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

 

For the Quarterly Period Ended June 30, 2019

 

OR

 

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

 

For the transition period from               to               

 

Commission File No.:  001-36534

 


 

IRADIMED CORPORATION

(Exact name of Registrant as specified in its charter)

 

Delaware

 

73-1408526

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number

 

1025 Willa Springs Drive

 

 

Winter Springs, Florida

 

32708

(Address of principal executive offices)

 

(Zip Code)

 

(407) 677-8022

(Registrant’s telephone number, including area code)

 

N/A

(Former Name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class:

 

Trading Symbol

 

Name of each exchange on which registered:

Common stock, par value $0.0001

 

IRMD

 

NASDAQ Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

 

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

 

Large accelerated filer  o

 

Accelerated filer  o

 

 

 

Non-accelerated filer  o

 

Smaller reporting company  x

 

 

Emerging growth company  x

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  Yes x No o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

The registrant had 11,369,507 shares of common stock, par value $0.0001 per share, outstanding as of July 31, 2019.

 

 

 


Table of Contents

 

IRADIMED CORPORATION

 

Table of Contents

 

 

 

Page

Part I

Financial Information

 

 

 

 

 

Item 1

Condensed Financial Statements

2

 

 

 

 

 

 

(a)

 Condensed Balance Sheets as of June 30, 2019 (Unaudited) and December 31, 2018

2

 

 

 

 

 

 

 

(b)

Condensed Statements of Operations for the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited)

3

 

 

 

 

 

 

 

(c)

Condensed Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited)

4

 

 

 

 

 

 

 

(d)

Condensed Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited)

5

 

 

 

 

 

 

 

(e)

Condensed Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018 (Unaudited)

6

 

 

 

 

 

 

 

(f)

Notes to Unaudited Condensed Financial Statements

7

 

 

 

 

 

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 

 

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

24

 

 

 

 

 

Item 4

Controls and Procedures

24

 

 

 

 

Part II

Other Information

 

 

 

 

 

 

Item 1

Legal Proceedings

26

 

 

 

 

 

Item 1A

Risk Factors

26

 

 

 

 

 

Item 2

Unregistered Sale of Equity Securities and Use of Proceeds

43

 

 

 

 

 

Item 3

Default Upon Senior Securities

43

 

 

 

 

 

Item 4

Mine Safety Disclosures

43

 

 

 

 

 

Item 5

Other Information

43

 

 

 

 

 

Item 6.

Exhibits

44

 

 

 

 

Signatures

45

 

1


Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1.  Condensed Financial Statements

 

IRADIMED CORPORATION

CONDENSED BALANCE SHEETS

 

 

 

June 30,
2019

 

December 31,
2018

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

32,421,994

 

$

28,027,688

 

Accounts receivable, net of allowance for doubtful accounts of $57,567 as of June 30, 2019 and $42,443 as of December 31, 2018

 

5,877,393

 

4,209,992

 

Investments

 

5,382,861

 

6,349,915

 

Inventory, net

 

4,368,651

 

4,059,443

 

Prepaid expenses and other current assets

 

637,106

 

526,787

 

Prepaid income taxes

 

1,289,526

 

1,367,892

 

Total current assets

 

49,977,531

 

44,541,717

 

Property and equipment, net

 

1,830,194

 

1,869,561

 

Intangible assets, net

 

821,937

 

832,519

 

Operating lease right-of-use asset

 

3,070,996

 

 

Deferred income taxes, net

 

1,031,863

 

1,088,702

 

Other assets

 

112,455

 

109,759

 

Total assets

 

$

56,844,976

 

$

48,442,258

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

974,747

 

$

772,470

 

Accrued payroll and benefits

 

1,559,277

 

1,802,321

 

Other accrued taxes

 

52,549

 

133,000

 

Warranty reserve

 

75,057

 

74,524

 

Deferred revenue

 

1,853,403

 

1,798,784

 

Current portion of operating lease liability

 

233,743

 

 

Other current liability

 

108,421

 

108,421

 

Total current liabilities

 

4,857,197

 

4,689,520

 

Deferred revenue

 

2,002,104

 

1,807,005

 

Operating lease liability, less current portion

 

2,837,253

 

 

Total liabilities

 

9,696,554

 

6,496,525

 

Stockholders’ equity:

 

 

 

 

 

Common stock; $0.0001 par value; 31,500,000 shares authorized; 11,196,402 shares issued and outstanding as of June 30, 2019 and 10,989,111 shares issued and outstanding as of December 31, 2018

 

1,120

 

1,099

 

Additional paid-in capital

 

16,520,138

 

15,317,335

 

Retained earnings

 

30,603,897

 

26,669,491

 

Accumulated other comprehensive income (loss)

 

23,267

 

(42,192

)

Total stockholders’ equity

 

47,148,422

 

41,945,733

 

Total liabilities and stockholders’ equity

 

$

56,844,976

 

$

48,442,258

 

 

See accompanying notes to unaudited condensed financial statements.

 

2


Table of Contents

 

IRADIMED CORPORATION

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

For the Three Months Ended
June 30,

 

For the Six Months Ended
June 30,

 

 

 

2019

 

2018

 

2019

 

2018

 

Revenue

 

$

9,225,596

 

$

7,376,785

 

$

17,663,189

 

$

14,484,936

 

Cost of revenue

 

1,858,288

 

1,710,890

 

3,906,115

 

3,402,425

 

Gross profit

 

7,367,308

 

5,665,895

 

13,757,074

 

11,082,511

 

Operating expenses:

 

 

 

 

 

 

 

 

 

General and administrative

 

2,460,372

 

2,078,356

 

4,873,068

 

4,381,888

 

Sales and marketing

 

2,199,823

 

1,516,044

 

4,310,475

 

3,161,980

 

Research and development

 

331,310

 

395,988

 

683,883

 

775,814

 

Total operating expenses

 

4,991,505

 

3,990,388

 

9,867,426

 

8,319,682

 

Income from operations

 

2,375,803

 

1,675,507

 

3,889,648

 

2,762,829

 

Other income, net

 

78,025

 

27,838

 

170,599

 

67,910

 

Income before provision for income taxes

 

2,453,828

 

1,703,345

 

4,060,247

 

2,830,739

 

Provision for income tax expense

 

364,987

 

348,377

 

125,841

 

634,575

 

Net income

 

$

2,088,841

 

$

1,354,968

 

$

3,934,406

 

$

2,196,164

 

Net income per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.19

 

$

0.13

 

$

0.35

 

$

0.21

 

Diluted

 

$

0.17

 

$

0.11

 

$

0.32

 

$

0.18

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

11,163,506

 

10,651,619

 

11,096,942

 

10,630,123

 

Diluted

 

12,226,660

 

12,011,475

 

12,227,949

 

11,953,486

 

 

See accompanying notes to unaudited condensed financial statements.

 

3


Table of Contents

 

IRADIMED CORPORATION

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

For the Three Months Ended
June 30,

 

For the Six Months Ended
June 30,

 

 

 

2019

 

2018

 

2019

 

2018

 

Net income

 

$

2,088,841

 

$

1,354,968

 

$

3,934,406

 

$

2,196,164

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Change in fair value of available-for-sale securities, net of tax expense (benefit) of $8,671 and $1,115 for the three months ended June 30, 2019 and 2018, respectively, and $20,327 and $(13,013) for the six months ended June 30, 2019 and 2018, respectively

 

27,301

 

3,905

 

62,618

 

(38,746

)

Realized (gain) loss on available-for-sale securities reclassified to net income, net of tax expense (benefit) of $12 and $(588) for the three months ended June 30, 2019 and 2018, respectively, and $(937) and $(502) for the six months ended June 30, 2019 and 2018, respectively

 

(36

)

1,256

 

2,841

 

827

 

Other comprehensive income (loss)

 

27,265

 

5,161

 

65,459

 

(37,919

)

Comprehensive income

 

$

2,116,106

 

$

1,360,129

 

$

3,999,865

 

$

2,158,245

 

 

See accompanying notes to unaudited condensed financial statements.

 

4


Table of Contents

 

IRADIMED CORPORATION

CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

 

 

For the Three Months Ended
June 30,

 

For the Six Months Ended
June 30,

 

 

 

2019

 

2018

 

2019

 

2018

 

Common stock:

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

1,114

 

$

1,062

 

$

1,099

 

$

1,060

 

Net share settlement of restricted stock units

 

3

 

2

 

3

 

2

 

Exercise of stock options and warrants

 

3

 

3

 

18

 

5

 

Balance at end of period

 

1,120

 

1,067

 

1,120

 

1,067

 

 

 

 

 

 

 

 

 

 

 

Additional paid-in capital:

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

16,133,905

 

13,131,054

 

15,317,335

 

12,623,181

 

Stock compensation expense

 

468,436

 

442,081

 

850,789

 

858,408

 

Net share settlement of restricted stock units

 

(125,708

)

(11,222

)

(148,215

)

(15,598

)

Exercise of stock options and warrants

 

43,505

 

139,153

 

500,229

 

235,075

 

Balance at end of period

 

16,520,138

 

13,701,066

 

16,520,138

 

13,701,066

 

 

 

 

 

 

 

 

 

 

 

Retained earnings:

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

28,515,056

 

21,207,237

 

26,669,491

 

20,355,545

 

Net income

 

2,088,841

 

1,354,968

 

3,934,406

 

2,196,164

 

Cumulative effect from adoption of accounting standard update

 

 

 

 

10,496

 

Balance at end of period

 

30,603,897

 

22,562,205

 

30,603,897

 

22,562,205

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

(3,998

)

(102,485

)

(42,192

)

(48,909

)

Other comprehensive income (loss)

 

27,265

 

5,161

 

65,459

 

(37,919

)

Cumulative effect of adoption of accounting standard update

 

 

 

 

(10,496

)

Balance at end of period

 

23,267

 

(97,324

)

23,267

 

(97,324

)

 

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

$

47,148,422

 

$

36,167,014

 

$

47,148,422

 

$

36,167,014

 

 

See accompanying notes to unaudited condensed financial statements.

 

5


Table of Contents

 

IRADIMED CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Six Months Ended
June 30,

 

 

 

2019

 

2018

 

Operating activities:

 

 

 

 

 

Net income

 

$

3,934,406

 

$

2,196,164

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Change in allowance for doubtful accounts

 

15,124

 

12,137

 

Change in provision for excess and obsolete inventory

 

115,600

 

73,581

 

Depreciation and amortization

 

672,676

 

830,163

 

Stock-based compensation

 

850,789

 

858,408

 

Deferred income taxes, net

 

35,574

 

(167,401

)

Loss on maturities of investments

 

3,778

 

1,100

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(1,682,525

)

(214,896

)

Inventory

 

(494,108

)

(300,990

)

Prepaid expenses and other current assets

 

(600,485

)

(849,413

)

Other assets

 

(10,830

)

(20,316

)

Accounts payable

 

178,912

 

(56,199

)

Accrued payroll and benefits

 

(243,044

)

(175,946

)

Other accrued taxes

 

(80,451

)

(46,810

)

Warranty reserve

 

533

 

(262

)

Deferred revenue

 

371,317

 

527,305

 

Prepaid income taxes, net of accrued income taxes

 

78,366

 

439,084

 

Net cash provided by operating activities

 

3,145,632

 

3,105,709

 

Investing activities:

 

 

 

 

 

Purchases of investments

 

 

(918,417

)

Proceeds from maturity of investments

 

1,050,000

 

830,000

 

Purchases of property and equipment

 

(118,962

)

(105,328

)

Capitalized intangible assets

 

(34,399

)

(6,545

)

Net cash provided by (used in) investing activities

 

896,639

 

(200,290

)

Financing activities:

 

 

 

 

 

Proceeds from exercises of stock options

 

500,247

 

235,080

 

Taxes paid related to the net share settlement of equity awards

 

(148,212

)

(15,596

)

Net cash provided by financing activities

 

352,035

 

219,484

 

Net increase in cash and cash equivalents

 

4,394,306

 

3,124,903

 

Cash and cash equivalents, beginning of period

 

28,027,688

 

18,205,976

 

Cash and cash equivalents, end of period

 

$

32,421,994

 

$

21,330,879

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid for income taxes

 

$

12,000

 

$

363,050

 

Right-of-use asset recognized in exchange for new lease obligation

 

$

3,182,724

 

$

 

Operating and short-term lease payments recorded within cash flow from operating activities

 

$

213,336

 

$

205,448

 

 

See accompanying notes to unaudited condensed financial statements.

 

6


Table of Contents

 

IRADIMED CORPORATION

Notes to Unaudited Condensed Financial Statements

 

1 — Basis of Presentation

 

The accompanying interim condensed financial statements of IRADIMED CORPORATION (“IRADIMED”, the “Company”, “we”, “our”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally presented in annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The interim financial information is unaudited, but reflects all normal adjustments that are, in the opinion of management, necessary for the fair presentation of our financial position, results of operations and cash flows for the interim periods presented. Operating results for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

 

These accompanying interim condensed financial statements should be read with the financial statements and related footnotes to financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018. The accounting policies followed in the preparation of these interim condensed financial statements, except as described in Note 1, are consistent in all material respects with those described in Note 1 of our Form 10-K.

 

We operate in one reportable segment which is the development, manufacture and sale of MRI compatible medical devices, related accessories, disposables and services for use by hospitals and acute care facilities during MRI procedures.

 

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 DERS software. The FDA issued a Form 483 on April 16, 2014 that identified eight observations. Most 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 responses 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.

 

On September 2, 2014, we received a warning letter from the FDA relating to this inspection (the “Warning Letter”). The Warning Letter states 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 states 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 had been made over time. We believed 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.

 

7


Table of Contents

 

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.

 

Between July 11 and July 18, 2016, the FDA conducted a routine inspection of our facility. This was the first FDA inspection of our facility since the receipt of the Warning Letter.  During this inspection, the updated documents and actions implemented in response to the Warning Letter findings were reviewed, and the FDA determined that no further actions were necessary.

 

On December 15, 2016, we received FDA 510(k) clearance for our MRidium 3860+ MRI IV infusion pump system, including the DERS software feature. As of June 30, 2019, the Warning Letter remains open.

 

CE Mark for Products

 

On January 16, 2019, we were notified by the U.K. Notified Body, UL International Ltd. (“UL”) that their recent technical file review of our 3880 MRI compatible patient vital signs monitoring system could not be completed as aspects of clinical evaluation reporting, as required by newly issued guidance from the European Union, was not acceptable, resulting in a technical non-conformity. Accordingly, UL issued temporary EC Certificates that include our MRI compatible IV infusion pump system and related IV tubing sets and excludes our 3880 patient vital signs monitoring system. These temporary EC Certificates extended through July 27, 2019. We immediately suspended shipments of our 3880 patient vital signs monitor to all markets requiring a CE Mark.

 

On July 3, 2019, during the process of addressing the technical non-conformity associated with the review of our 3880 MRI compatible patient vital signs monitoring system, UL notified its customers of their decision to cease operations as a notified body and would continue the process of transferring all customers to the Polish Center for Testing and Certification (Polskie Centrum Badań i Certyfikacji S.A.) (“PCBC”) based in Warsaw, Poland. UL notified us that they have transferred our EC Certificates to PCBC and we are currently awaiting PCBC to process the transfer and re-issue new EC Certificates for our MRI compatible IV infusion pump system and related IV tubing sets with an additional 4-year term. We expect to receive these renewed EC Certificates from PCBC before the end of August 2019.

 

UL’s decision to cease operations as a medical device notified body caused us to seek a new notified body for certification of our 3880 MRI compatible patient vital signs monitoring system. Concurrent to UL’s announcement, we engaged Ente Certificazione Macchine (“ECM”) as our notified body for the 3880 MRI compatible patient vital signs monitoring system. We are actively working through the recertification process with ECM and expect to complete this process and resume shipments into all markets requiring a CE Mark near the beginning of our fiscal fourth quarter 2019, however, there can be no assurance that these efforts will be successful.

 

Certain Significant Risks and Uncertainties

 

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.

 

Recent Accounting Pronouncements

 

Accounting Pronouncements Implemented in 2019

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). This update requires lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by all leases not considered short-term leases. For short-term leases, lessees may elect an accounting policy by class of underlying assets under which right-of-use assets and lease liabilities are not recognized and lease payments are generally recognized as expense over the lease term on a straight-line basis.

 

We adopted this update on January 1, 2019 and, as part of that process, made the following elections:

 

·                  We elected to use the hindsight practical expedient.

 

·                  We elected the package of practical expedients in transition for leases that commenced prior to January 1, 2019 whereby contracts were not reassessed or reclassified from their previous assessment as of December 31, 2018.

 

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·                  In March 2018, the FASB approved an optional transition method that allows companies to use the effective date as the date of initial application on transition. We elected this transition method, and as a result, did not adjust comparative period financial information or make the newly required lease disclosures for periods before the effective date.

 

·                  We elected to make the accounting policy election for short-term leases resulting in lease payments being recorded as an expense on a straight-line basis over the lease term.

 

·                  We elected to not separate lease and nonlease components, for all leases.

 

·                  We did not elect the land easement practical expedient.

 

The impact of Topic 842 on our Balance Sheet beginning January 1, 2019 was through the recognition of an operating lease right-of-use asset and operating lease liability. Amounts recognized at January 1, 2109 for operating leases were as follows:

 

 

 

January 1,
2019

 

Operating lease right-of-use asset

 

$

3,182,724

 

Current portion of operating lease liability

 

$

226,852

 

Operating lease liability, less current portion

 

$

2,955,872

 

 

There was no impact to our Condensed Statements of Operations, Condensed Statements of Cash Flows or beginning retained earnings related to the adoption of Topic 842.

 

Recently Issued Accounting Pronouncements to be Implemented

 

In August 2018, the FASB issued ASU 2018-03, Fair Value Measurement (Topic 820). This update modifies disclosure requirements related to fair value measurements. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Implementation on a prospective or retrospective basis varies by specific disclosure requirement. Early adoption is permitted. The ASU also allows for early adoption of any removed or modified disclosures upon issuance of this ASU, while delaying adoption of the additional disclosures until their effective date. We do not expect the adoption of this guidance will have a material impact upon our footnote disclosures.

 

In June 2016, the FASB issued 2016-03, Financial Instruments — Credit Losses (Topic 326). This update requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. In addition, for available-for-sale debt securities, this ASU replaces the other-than-temporary impairment model and requires the recognition of an allowance for reductions in a security’s fair value attributable to declines in credit quality, instead of a direct write-down of the security, when a valuation decline is determined to be other-than-temporary. The ASU requires a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019 and for interim periods therein. Companies may choose to adopt this ASU as of its fiscal year beginning after December 15, 2018. We did not early adopt this standard. We do not believe this ASU will have a material impact on our financial condition or statements of operations.

 

2 — Revenue Recognition

 

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:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2019

 

2018

 

2019

 

2018

 

 

 

(unaudited)

 

(unaudited)

 

United States

 

$

7,561,054

 

$

5,732,044

 

$

14,634,788

 

$

11,709,151

 

International

 

1,664,542

 

1,644,741

 

3,028,401

 

2,775,785

 

Total revenue

 

$

9,225,596

 

$

7,376,785

 

$

17,663,189

 

$

14,484,936

 

 

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Revenue information by type is as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2019

 

2018

 

2019

 

2018

 

 

 

(unaudited)

 

(unaudited)

 

Devices:

 

 

 

 

 

 

 

 

 

MRI Compatible IV Infusion Pump Systems

 

$

4,550,542

 

$

3,590,538

 

$

8,743,296

 

$

7,216,160

 

MRI Compatible Patient Vital Signs Monitoring Systems

 

1,891,031

 

1,505,518

 

3,657,639

 

2,709,374

 

Total Devices Revenue

 

6,441,573

 

5,096,056

 

12,400,935

 

9,925,534

 

Disposables and Services

 

2,313,755

 

1,909,043

 

4,350,428

 

3,848,134

 

Amortization of extended warranty agreements

 

470,268

 

371,686

 

911,826

 

711,268

 

Total revenue

 

$

9,225,596

 

$

7,376,785

 

$

17,663,189

 

$

14,484,936

 

 

Contract Liabilities

 

Our contract liabilities consist of:

 

 

 

June 30,
2019

 

December 31,
2018

 

 

 

(unaudited)

 

 

 

Advance payments from customers

 

$

75,830

 

$

180,425

 

Shipments in-transit

 

121,599

 

9,582

 

Extended warranty agreements

 

3,658,078

 

3,415,782

 

Total

 

$

3,855,507

 

$

3,605,789

 

 

Changes in the contract liabilities during the periods presented are as follows:

 

 

 

Deferred
Revenue

 

Contract liabilities, December 31, 2018

 

$

3,605,789

 

Increases due to cash received from customers

 

1,646,638

 

Decreases due to recognition of revenue

 

(1,396,920

)

Contract liabilities, June 30, 2019

 

$

3,855,507

 

 

 

 

Deferred
Revenue

 

Contract liabilities, December 31, 2017

 

$

3,621,256

 

Increases due to cash received from customers

 

1,314,024

 

Decreases due to recognition of revenue

 

(1,008,979

)

Contract liabilities, June 30, 2018

 

$

3,926,301

 

 

Capitalized Contract Costs

 

Our capitalized contract costs consist of:

 

 

 

June 30,
2019

 

December 31,
2018

 

 

 

(unaudited)

 

 

 

Capitalized contract costs

 

$

192,078

 

$

181,248

 

 

Expense for the three and six months ended June 30, 2019 and 2018 related to the amortization of capitalized contract costs were immaterial to our financial statements.

 

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3 — Basic and Diluted Net Income per Share

 

Basic net income per share is based upon the weighted-average number of common shares outstanding during the period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The underwriters’ warrants, stock options and restricted stock units granted by us represent the only dilutive effect reflected in diluted weighted-average shares outstanding.

 

The following table presents the computation of basic and diluted net income per share:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2019

 

2018

 

2019

 

2018

 

 

 

(unaudited)

 

(unaudited)

 

Net income

 

$

2,088,841

 

$

1,354,968

 

$

3,934,406

 

$

2,196,164

 

Weighted-average shares outstanding — Basic

 

11,163,506

 

10,651,619

 

11,096,942

 

10,630,123

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Underwriters’ warrants

 

92,898

 

78,351

 

96,482

 

67,533

 

Stock Options

 

880,908

 

1,186,412

 

938,135

 

1,174,362

 

Restricted Stock Units

 

89,348

 

95,093

 

96,390

 

81,468

 

Weighted-average shares outstanding — Diluted

 

12,226,660

 

12,011,475

 

12,227,949

 

11,953,486

 

Basic net income per share

 

$

0.19

 

$

0.13

 

$

0.35

 

$

0.21

 

Diluted net income per share

 

$

0.17

 

$

0.11

 

$

0.32

 

$

0.18

 

 

Stock options and warrants to purchase shares of our common stock and restricted stock units excluded from the calculation of diluted net income per share because the effect would have been anti-dilutive are as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2019

 

2018

 

2019

 

2018

 

 

 

(unaudited)

 

(unaudited)

 

Anti-dilutive stock options and restricted stock units

 

6,639

 

44,123

 

6,895

 

46,039

 

 

4 — Inventory

 

Inventory consists of:

 

 

 

June 30,
2019

 

December 31,
2018

 

 

 

(unaudited)

 

 

 

Raw materials

 

$

3,361,192

 

$

3,408,158

 

Work in process

 

364,884

 

305,562

 

Finished goods

 

878,658

 

557,566

 

Inventory before allowance for excess and obsolete

 

4,604,734

 

4,271,286

 

Allowance for excess and obsolete

 

(236,083

)

(211,843

)

Total

 

$

4,368,651

 

$

4,059,443

 

 

5 — Property and Equipment

 

Property and equipment consist of:

 

 

 

June 30,
2019

 

December 31,
2018

 

 

 

(unaudited)

 

 

 

Computer software and hardware

 

$

534,616

 

$

555,292

 

Furniture and fixtures

 

988,229

 

901,415

 

Leasehold improvements

 

209,226

 

202,026

 

Machinery and equipment

 

2,212,349

 

2,184,015

 

Tooling in-process

 

91,146

 

58,263

 

 

 

4,035,566

 

3,901,011

 

Accumulated depreciation

 

(2,205,372

)

(2,031,450

)

Total

 

$

1,830,194

 

$

1,869,561

 

 

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Depreciation expense of property and equipment was $126,653 and $115,088 for the three months ended June 30, 2019 and 2018, respectively, and $250,994 and $224,459 for the six months ended June 30, 2019 and 2018, respectively.

 

Property and equipment, net, information by geographic region is as follows:

 

 

 

June 30,
2019

 

December 31,
2018

 

 

 

(unaudited)

 

 

 

United States

 

$

1,422,908

 

$

1,439,545

 

International

 

407,286

 

430,016

 

Total property and equipment, net

 

$

1,830,194

 

$

1,869,561

 

 

Long-lived assets held outside of the United States consist principally of tooling and machinery and equipment, which are components of property and equipment, net.

 

6 — Intangible Assets

 

The following table summarizes the components of intangible asset balances:

 

 

 

June 30,
2019

 

December 31,
2018

 

 

 

(unaudited)

 

 

 

Patents — in use

 

$

304,270

 

$

304,270

 

Patents — in process

 

87,053

 

73,164

 

Internally developed software — in use

 

867,569

 

867,569

 

Internally developed software — in process

 

34,233

 

13,723

 

Trademarks

 

23,017

 

23,017

 

 

 

1,316,142

 

1,281,743

 

Accumulated amortization

 

(494,205

)

(449,224

)

Total

 

$

821,937

 

$

832,519

 

 

Amortization expense of intangible assets was $22,490 and $22,491 for the three months ended June 30, 2019 and 2018, respectively, and $44,981 and $44,351 for the six months ended June 30, 2019 and 2018, respectively.

 

Expected annual amortization expense for the remaining portion of 2019 and the next five years related to intangible assets is as follows (excludes in process intangible assets):

 

Six months ending December 31, 2019

 

$

44,982

 

2020

 

89,963

 

2021

 

89,963

 

2022

 

89,392

 

2023

 

88,740

 

2024

 

88,439

 

 

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7 — Investments

 

Our investments consist of corporate bonds that we have classified as available-for-sale and are summarized in the following tables:

 

 

 

June 30, 2019

 

 

 

Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Corporate bonds:

 

 

 

 

 

 

 

 

 

U.S. corporations

 

$

4,433,867

 

$

20,611

 

$

1,348

 

$

4,453,130

 

International corporations

 

918,417

 

11,314

 

 

929,731

 

Total

 

$

5,352,284

 

$

31,925

 

$

1,348

 

$

5,382,861

 

 

 

 

December 31, 2018

 

 

 

Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Corporate bonds:

 

 

 

 

 

 

 

 

 

U.S. corporations

 

$

5,487,645

 

$

 

$

58,309

 

$

5,429,336

 

International corporations

 

918,417

 

2,162

 

 

920,579

 

Total

 

$

6,406,062

 

$

2,162

 

$

58,309

 

$

6,349,915

 

 

Unrealized losses from the above investments for all periods presented are attributable to changes in interest rates. We do not believe any of these unrealized losses represent other-than-temporary impairments based on our evaluation of available evidence as of June 30, 2019.

 

8 — Fair Value Measurements

 

The fair value of our assets and liabilities subject to recurring fair value measurements are as follows:

 

 

 

Fair Value at June 30, 2019

 

 

 

Fair
Value

 

Quoted Prices
in Active
Market for
Identical Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Corporate bonds:

 

 

 

 

 

 

 

 

 

U.S. corporations

 

$

4,453,130

 

$

 

$

4,453,130

 

$

 

International corporations

 

929,731

 

 

929,731

 

 

Total

 

$

5,382,861

 

$

 

$

5,382,861

 

$

 

 

 

 

Fair Value at December 31, 2018

 

 

 

Fair
Value

 

Quoted Prices
in Active
Market for
Identical Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Corporate bonds:

 

 

 

 

 

 

 

 

 

U.S. corporations

 

$

5,429,336

 

$

 

$

5,429,336

 

$

 

International corporations

 

920,579

 

 

920,579

 

 

Total

 

$

6,349,915

 

$

 

$

6,349,915

 

$

 

 

Our corporate bonds are valued by a third-party custodian at closing prices from secondary exchanges or pricing vendors on the valuation date.

 

There were no transfers into or out of any Levels during the six months ended June 30, 2019 or the year ended December 31, 2018.

 

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9 — Accumulated Other Comprehensive Loss

 

The components of accumulated other comprehensive loss, net of tax, for the three months ended June 30, 2019 and 2018 are as follows:

 

 

 

Unrealized (Losses)
Gains on
Available-For-Sale
Securities

 

Balance at March 31, 2019

 

$

(3,998

)

Gains on available-for-sale securities, net

 

27,301

 

Reclassification realized in net earnings

 

(36

)

Balance at June 30, 2019

 

$

23,267

 

 

 

 

 

Balance at March 31, 2018

 

$

(102,485

)

Gains on available-for-sale securities, net

 

3,905

 

Reclassification realized in net earnings

 

1,256

 

Balance at June 30, 2018

 

$

(97,324

)

 

The components of accumulated other comprehensive loss, net of tax, for the six months ended June 30, 2019 and 2018 are as follows:

 

 

 

Unrealized (Losses)
Gains on
Available-For-Sale
Securities

 

Balance at December 31, 2018

 

$

(42,192

)

Gains on available-for-sale securities, net

 

62,618

 

Reclassification realized in net earnings

 

2,841

 

Balance at June 30, 2019

 

$

23,267

 

 

 

 

 

Balance at December 31, 2017

 

$

(48,909

)

Losses on available-for-sale securities, net

 

(38,746

)

Reclassification realized in net earnings

 

827

 

Cumulative effect from adoption of accounting standard update

 

(10,496

)

Balance at June 30, 2018

 

$

(97,324

)

 

10 — Stock-Based Compensation

 

Stock-based compensation was recognized as follows in the Condensed Statements of Operations:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2019

 

2018

 

2019

 

2018

 

 

 

(unaudited)

 

(unaudited)

 

Cost of revenue

 

$

58,319

 

$

69,239

 

$

120,843

 

$

137,498

 

General and administrative

 

303,375

 

256,466

 

523,080

 

483,237

 

Sales and marketing

 

87,168

 

78,277

 

169,299

 

161,893

 

Research and development

 

19,574

 

38,099

 

37,567

 

75,780

 

Total

 

$

468,436

 

$

442,081

 

$

850,789

 

$

858,408

 

 

As of June 30, 2019, we had $19,208 of unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted-average period of 0.4 years. As of June 30, 2019, we had $2,494,518 of unrecognized compensation cost related to unvested restricted stock units, which is expected to be recognized over a weighted-average period of 2.5 years.

 

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The following table presents a summary of our stock-based compensation activity for the six months ended June 30, 2019 (shares):

 

 

 

Stock
Options

 

Restricted
Stock Units

 

Outstanding beginning of period

 

1,129,463

 

226,501

 

Awards granted

 

 

8,780

 

Awards exercised/vested

 

(179,638

)

(32,964

)

Awards canceled

 

(750

)

(13,246

)

Outstanding end of period

 

949,075

 

189,071

 

 

11 — Income Taxes

 

For the three and six months ended June 30, 2019, we recorded a provision for income tax expense of $364,987 and $125,841, respectively. Our effective tax rate was 14.9 percent and 3.1 percent and differed from the U.S. Federal statutory rate primarily due to discrete items related to tax benefits associated with stock-based compensation and the foreign derived intangible income deduction, partially offset by U.S. state tax expense.

 

For the three and six months ended June 30, 2018, we recorded a provision for income tax expense of $348,377 and $634,575, respectively. Our effective tax rate was 20.5 percent and 22.4 percent and differed from the U.S. Federal statutory rate primarily due to the foreign derived intangible income deduction and research and development credits, partially offset by U.S. state tax expense.

 

As of June 30, 2019 and December 31, 2018, we had not identified or accrued for any uncertain tax positions. We are currently unaware of any uncertain tax positions that could result in significant payments, accruals or other material deviations in this estimate over the next 12 months. We believe that our tax positions comply in all material respects with applicable tax law. However, tax law is subject to interpretation, and interpretations by taxing authorities could be different from ours, which could result in the imposition of additional taxes and penalties.

 

We file tax returns in the United States Federal jurisdiction and many U.S. state jurisdictions. The Company is subject to income tax examinations for our United States Federal and certain U.S. state income taxes for 2015 and subsequent years and various other U.S. state income taxes for 2014 and subsequent years.

 

12 — Leases

 

Lease assets and lease liabilities are recognized at the commencement of an arrangement where it is determined at inception that a lease exists. Lease assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using our incremental borrowing rate, unless the rate implicit in the lease is readily determinable. Lease assets also include any upfront lease payments made and exclude lease incentives. Lease terms include options to extend or terminate leases when it is reasonably certain that those options will be exercised.

 

Variable lease payments are expensed as incurred and include annual rent adjustments based on the consumer price index. Leases with an initial term of 12 months or less are not recorded on the balance sheet, and the expense for these short-term leases and for operating leases is recognized on a straight-line basis over the lease term.

 

Lease agreements with lease and nonlease components are combined as a single lease component. The depreciable life of lease assets and leasehold improvements is limited by the expected lease term.

 

We have only one material lease contract outstanding. In January 2014, we entered into a non-cancelable operating lease, commencing July 1, 2014, for our manufacturing and headquarters facility in Winter Springs, Florida owned by Susi, LLC, an entity controlled by our President and CEO, Roger Susi. Pursuant to the terms of our lease for this property, the monthly base rent is $34,133, adjusted annually for changes in the consumer price index. Under the terms of the lease, we are responsible for property taxes, insurance and maintenance expenses. Prior to May 31, 2019, the expiration date of the initial lease term, and pursuant to the terms of the lease contract, we renewed the lease for an additional five years, resulting in a new lease expiration date of May 31, 2024. Unless advance written notice of termination is timely provided, the lease will automatically renew for one additional successive term of five years each beginning in 2024, and thereafter, will be renewed for successive terms of one year each. For purposes of Topic 842, we concluded that we will exercise both of the five-year options, resulting in a remaining lease term of 9.9 years as of June 30, 2019. This lease agreement does not contain any residual value guarantee or material restrictive covenants.

 

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Table of Contents

 

Operating lease cost recognized in the Condensed Statements of Operations is as follows:

 

 

 

Three Months
Ended
June 30, 2019

 

Six Months
Ended
June 30, 2019

 

Cost of revenue

 

$

46,534

 

$

93,069

 

General and administrative

 

46,045

 

92,089

 

Sales and marketing

 

2,604

 

5,209

 

Research and development

 

7,216

 

14,431

 

Total

 

$

102,399

 

$

204,798

 

 

Lease costs for short-term leases were immaterial for the three and six months ended June 30, 2019.

 

Maturity of Operating Lease Liability as of June 30, 2019 is as follows:

 

Six months ending December 31, 2019

 

$

204,798

 

2020

 

409,596

 

2021

 

409,596

 

2022

 

409,596

 

2023

 

409,596

 

Thereafter

 

2,218,646

 

Total lease payments

 

4,061,828

 

Imputed interest

 

(990,832

)

Present value of lease liability

 

$

3,070,996

 

 

We used a discount rate of 6.0% to determine the present value of the operating lease liability on January 1, 2019.

 

Undiscounted future minimum lease payments under noncancelable operating leases as of December 31, 2018 as determined prior to the adoption of ASC 842 are as follows:

 

2019

 

$

170,664

 

2020

 

 

2021

 

 

2022

 

 

2023

 

 

Thereafter

 

 

Total minimum lease payments

 

$

170,664

 

 

13 — Commitments and Contingencies

 

Purchase commitments. We had various purchase orders for goods or services totaling $3,510,390 and $2,674,691 as of June 30, 2019 and December 31, 2018, respectively. No amounts related to these purchase orders have been recognized in our balance sheet.

 

Legal matters. We may from time to time become party to various legal proceedings or claims that arise in the ordinary course of business.

 

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

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 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 magnetic resonance imaging (“MRI”) compatible medical devices. We are the only known provider of a non-magnetic intravenous (“IV”) infusion pump system that is specifically designed to be safe for use during MRI procedures. We were the first to develop an infusion delivery system that largely eliminates many of the dangers and problems present during MRI procedures. Standard infusion pumps contain magnetic and electronic components which can create radio frequency interference and are dangerous to operate in the presence of the powerful magnet that drives an MRI system. Our patented MRidium® MRI compatible IV infusion pump system has been designed with a non-magnetic ultrasonic motor, uniquely designed non-ferrous parts and other special features to safely and predictably deliver anesthesia and other IV fluids during various MRI procedures. Our pump solution provides a seamless approach that enables accurate, safe and dependable fluid delivery before, during and after an MRI scan, which is important to critically-ill patients who cannot be removed from their vital medications, and children and infants who must generally be sedated to remain immobile during an MRI scan.

 

Each IV infusion pump system consists of an MRidium® MRI compatible IV infusion pump, non-magnetic mobile stand, proprietary disposable IV tubing sets and many of these systems include 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; non-invasive blood pressure; invasive blood pressure; patient temperature, and; optional advanced multi-gas anesthetic agent unit featuring continuous Minimum Alveolar Concentration measurements. The IRADIMED 3880 MRI compatible patient vital signs monitoring system has an easy-to-use design and allows for the effective communication of patient vital signs information to clinicians.

 

We generate revenue from the one-time sale of MRI compatible medical devices and accessories, ongoing service contracts 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.

 

We sell our MRI compatible products through our direct sales force in the U.S. and independent distributors internationally. 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 fee of three percent of the sales of our products to their member hospitals. Our current GPO contracts effectively give us the ability to sell to more than approximately 95 percent of all U.S. hospitals and acute care facilities. Historical selling cycles for our devices vary and are typically three to six months in duration.

 

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Table of Contents

 

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 DERS software. The FDA issued a Form 483 on April 16, 2014 that identified eight observations. Most 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 responses 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.

 

On September 2, 2014, we received a warning letter from the FDA relating to this inspection (the “Warning Letter”). The Warning Letter states 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 states 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 had been made over time. We believed 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.

 

Between July 11 and July 18, 2016, the FDA conducted a routine inspection of our facility. This was the first FDA inspection of our facility since the receipt of the Warning Letter.  During this inspection, the updated documents and actions implemented in response to the Warning Letter findings were reviewed, and the FDA determined that no further actions were necessary.

 

On December 15, 2016, we received FDA 510(k) clearance for our MRidium 3860+ MRI IV infusion pump system, including the DERS software feature. As of June 30, 2019, the Warning Letter remains open.

 

CE Mark for Products

 

On January 16, 2019, we were notified by the U.K. Notified Body, UL International Ltd. (“UL”) that their recent technical file review of our 3880 MRI compatible patient vital signs monitoring system could not be completed as aspects of clinical evaluation reporting, as required by newly issued guidance from the European Union, was not acceptable, resulting in a technical non-conformity. Accordingly, UL issued temporary EC Certificates that include our MRI compatible IV infusion pump system and related IV tubing sets and excludes our 3880 patient vital signs monitoring system. These temporary EC Certificates extended through July 27, 2019. We immediately suspended shipments of our 3880 patient vital signs monitor to all markets requiring a CE Mark.

 

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On July 3, 2019, during the process of addressing the technical non-conformity associated with the review of our 3880 MRI compatible patient vital signs monitoring system, UL notified its customers of their decision to cease operations as a notified body and would continue the process of transferring all customers to the Polish Center for Testing and Certification (Polskie Centrum Badań i Certyfikacji S.A.) (“PCBC”) based in Warsaw, Poland. UL notified us that they have transferred our EC Certificates to PCBC and we are currently awaiting PCBC to process the transfer and re-issue new EC Certificates for our MRI compatible IV infusion pump system and related IV tubing sets with an additional 4-year term. We expect to receive these renewed EC Certificates from PCBC before the end of August 2019.

 

UL’s decision to cease operations as a medical device notified body caused us to seek a new notified body for certification of our 3880 MRI compatible patient vital signs monitoring system. Concurrent to UL’s announcement, we engaged Ente Certificazione Macchine (“ECM”) as our notified body for the 3880 MRI compatible patient vital signs monitoring system. We are actively working through the recertification process with ECM and expect to complete this process and resume shipments into all markets requiring a CE Mark near the beginning of our fiscal fourth quarter 2019, however, there can be no assurance that these efforts will be successful.

 

Financial Highlights and Outlook

 

Our revenue increased $1.8 million, or 25.1 percent, to $9.2 million for the second quarter ended June 30, 2019, compared to $7.4 million for the second quarter last year. Net income was $2.1 million, or $0.17 per diluted share in the second quarter ended June 30, 2019, compared to net income of $1.4 million, or $0.11 per diluted share in the second quarter last year.

 

For the remainder of 2019, we expect our revenues to increase when compared to same period in 2018 due to higher sales of our medical devices and related accessories, disposables and services through the continued execution of our critical care strategy and headcount growth of our sales team. We intend to continue targeting hospitals and acute care facilities that have yet to adopt our MRI compatible IV pump and patient monitoring solutions and penetrating the Intensive Care Unit, Emergency Room and other critical care locations within hospitals where there is a high probability that interventional radiology procedures will need to be performed on patients.

 

We expect higher full-year 2019 operating expenses compared to 2018 due primarily to higher sales and marketing expenses.

 

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 net realizable value

 

·                  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. Except as disclosed in Note 1 to the unaudited condensed financial statements contained herein related to the adoption of recent accounting pronouncements, there have been no changes to these policies during the three and six months ended June 30, 2019.

 

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.

 

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Table of Contents

 

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 June 30,

 

Percent of Revenue
Six Months
Ended June 30,

 

 

 

2019

 

2018

 

2019

 

2018

 

Revenue

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of revenue

 

20.1

 

23.2

 

22.1

 

23.5

 

Gross profit

 

79.9

 

76.8

 

77.9

 

76.5

 

Operating expenses:

 

 

 

 

 

 

 

 

 

General and administrative

 

26.7

 

28.2

 

27.6

 

30.3

 

Sales and marketing

 

23.8

 

20.6

 

24.4

 

21.8

 

Research and development

 

3.6

 

5.4

 

3.9

 

5.4

 

Total operating expenses

 

54.1

 

54.1

 

55.9

 

57.4

 

Income from operations

 

25.8

 

22.7

 

22.0

 

19.1

 

Other income, net

 

0.8

 

0.4

 

1.0

 

0.5

 

Income before provision for income taxes

 

26.6

 

23.1

 

23.0

 

19.5

 

Provision for income tax expense

 

4.0

 

4.7

 

0.7

 

4.4

 

Net income

 

22.6

%

18.4

%

22.3

%

15.2

%

 

Three and Six Months Ended June 30, 2019 and 2018

 

Revenue by Geographic Region

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2019

 

2018

 

Change

 

2019

 

2018

 

Change

 

United States

 

$

7,561,054

 

$

5,732,044

 

31.9

%

$

14,634,788

 

$

11,709,151

 

25.0

%

International

 

1,664,542

 

1,644,741

 

1.2

%

3,028,401

 

2,775,785

 

9.1

%

Total Revenue

 

$

9,225,596

 

$

7,376,785

 

25.1

%

$

17,663,189

 

$

14,484,936

 

21.9

%

 

Revenue by Type

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2019

 

2018

 

Change

 

2019

 

2018

 

Change

 

Devices:

 

 

 

 

 

 

 

 

 

 

 

 

 

MRI Compatible IV Infusion Pump Systems

 

$

4,550,542

 

$

3,590,538

 

26.7

%

$

8,743,296

 

$

7,216,160

 

21.2

%

MRI Compatible Patient Vital Signs Monitoring Systems

 

1,891,031

 

1,505,518

 

25.6

%

3,657,639

 

2,709,374

 

35.0

%

Total Devices Revenue

 

6,441,573

 

5,096,056

 

26.4

%

12,400,935

 

9,925,534

 

24.9

%

Disposables and Services

 

2,313,755

 

1,909,043

 

21.2

%

4,350,428

 

3,848,134

 

13.1

%

Amortization of extended warranty agreements

 

470,268

 

371,686

 

26.5

%

911,826

 

711,268

 

28.2

%

Total revenue

 

$

9,225,596

 

$

7,376,785

 

25.1

%

$

17,663,189

 

$

14,484,936

 

21.9

%

 

For the three months ended June 30, 2019, revenue increased $1.8 million, or 25.1 percent, to $9.2 million from $7.4 million for the same period in 2018.

 

The average selling price of our MRI compatible IV infusion pump system during the three months ended June 30, 2019 was approximately $35,300, compared to $29,400 for the same period in 2018. The increase in ASP relates to a favorable geographic and product sales mix when compared to the same period in 2018.

 

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Table of Contents

 

The average selling price of our MRI compatible patient vital signs monitoring system during the three months ended June 30, 2019 was approximately $32,200, compared to $34,100 for the same period in 2018. The decrease in ASP primarily relates to an unfavorable geographic sales mix when compared to the same period in 2018.

 

Revenue from sales in the U.S. increased $1.9 million, or 31.9 percent, to $7.6 million from $5.7 million for the same period in 2018. Revenue from sales internationally were consistent at $1.6 million for the three months ended June 30, 2019 and 2018. Domestic sales accounted for 82.0 percent of revenue in the second quarter 2019, compared to 77.7 percent in the second quarter 2018.

 

Revenue from sales of devices increased $1.3 million, or 26.4 percent, to $6.4 million from $5.1 million for the same period in 2018. Revenue from sales of our disposables and services increased $0.4 million, or 21.2 percent, to $2.3 million from $1.9 million for the same period in 2018. Revenue from the amortization of extended maintenance contracts increased $0.1 million, or 26.5%, to $0.5 million from $0.4 million for the same period in 2018.

 

For the six months ended June 30, 2019, revenue increased $3.2 million, or 21.9 percent, to $17.7 million from $14.5 million for the same period in 2018.

 

The average selling price of our MRI compatible IV infusion pump system during the six months ended June 30, 2019 was approximately $35,500, compared to $31,100 for the same period in 2018. The increase in ASP relates to a favorable geographic and product sales mix when compared to the same period in 2018.

 

The average selling price of our MRI compatible patient vital signs monitoring system during the six months ended June 30, 2019 was approximately $34,600, compared to $35,000 for the same period in 2018. The decrease in ASP primarily relates to an unfavorable geographic sales mix when compared to the same period in 2018.

 

Revenue from sales in the U.S. increased $2.9 million, or 25.0 percent, to $14.6 million from $11.7 million for the same period in 2018. Revenue from sales internationally increased $0.2 million, or 9.1 percent, to $3.0 million for the six months ended June 30, 2019, from $2.8 million for the same period in 2018. Domestic sales accounted for 82.9 percent of revenue for the six months ended June 30, 2019, compared to 80.8 percent for the same period in 2018.

 

Revenue from sales of devices increased $2.5 million, or 24.9 percent, to $12.4 million from $9.9 million for the same period in 2018. Revenue from sales of our disposables and services increased $0.6 million, or 13.1 percent, to $4.4 million from $3.8 million for the same period in 2018. Revenue from the amortization of extended maintenance contracts increased $0.2 million, or 28.2%, to $0.9 million from $0.7 million for the same period in 2018.

 

Cost of Revenue and Gross Profit

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2019

 

2018

 

2019

 

2018

 

Revenue

 

$

9,225,596

 

$

7,376,785

 

$

17,663,189

 

$

14,484,936

 

Cost of revenue

 

1,858,288

 

1,710,890

 

3,906,115

 

3,402,425

 

Gross profit

 

$

7,367,308

 

$

5,665,895

 

$

13,757,074

 

$

11,082,511

 

Gross profit percentage

 

79.9

%

76.8

%

77.9

%

76.5

%

 

For the three months ended June 30, 2019, cost of revenue increased $0.2 million, or 8.6 percent, to $1.9 million from $1.7 million for the same period in 2018. Gross profit increased $1.7 million, or 30.0 percent, to $7.4 million for the second quarter 2019 from $5.7 million for the same period in 2018. The increase in cost of revenue and gross profit is primarily attributable to higher sales.

 

Gross profit margin was 79.9 percent for second quarter 2019, compared to 76.8 percent for the second quarter 2018. This increase is primarily due to favorable overhead variances.

 

For the six months ended June 30, 2019, cost of revenue increased $0.5 million, or 14.8 percent, to $3.9 million from $3.4 million for the same period in 2018. Gross profit increased $2.7 million, or 24.1 percent, to $13.8 million for the six months ended June 30, 2019 from $11.1 million for the same period in 2018. The increase in cost of revenue and gross profit is primarily attributable to higher sales.

 

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Table of Contents

 

Gross profit margin was 77.9 percent for six months ended June 30, 2019, compared to 76.5 percent for the same period in 2018. This increase is primarily due to favorable overhead variances and higher average selling prices of our IV infusion pump systems.

 

Operating Expenses

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2019

 

2018

 

2019

 

2018

 

General and administrative

 

$

2,460,372

 

$

2,078,356

 

$

4,873,068

 

$

4,381,888

 

Percentage of revenue

 

26.7

%

28.2

%

27.6

%

30.3

%

Sales and marketing

 

$

2,199,823

 

$

1,516,044

 

$

4,310,475

 

$

3,161,980

 

Percentage of revenue

 

23.8

%

20.6

%

24.4

%

21.8

%

Research and development

 

$

331,310

 

$

395,988

 

$

683,883

 

$

775,814

 

Percentage of revenue

 

3.6

%

5.4

%

3.9

%

5.4

%

 

General and Administrative

 

For the three months ended June 30, 2019, general and administrative expense increased $0.4 million, or 18.4 percent, to $2.5 million from $2.1 million for the same period last year. This increase is primarily due to higher legal and professional expenses and higher payroll and expenses, partially offset by lower regulatory expenses.

 

For the six months ended June 30, 2019, general and administrative expense increased $0.5 million, or 11.2 percent, to $4.9 million from $4.4 million for the same period last year. This increase is primarily due to higher expenses related to legal and professional costs, payroll, corporate franchise taxes and GPO administration fees, partially offset by lower regulatory expenses.

 

Sales and Marketing

 

For the three months ended June 30, 2019, sales and marketing expense increased $0.7 million, or 45.1 percent, to $2.2 million from $1.5 million for the same period last year. This increase is primarily the result of higher sales commissions and payroll expenses.

 

For the six months ended June 30, 2019, sales and marketing expense increased $1.1 million, or 36.3 percent, to $4.3 million from $3.2 million for the same period last year. This increase is primarily the result of higher sales commissions and payroll expenses.

 

Research and Development

 

For the three months ended June 30, 2019, research and development expense decreased $(0.1) million, or (16.3) percent, to $0.3 million from $0.4 million for the same period last year. The decrease is primarily the result of lower payroll and outside services expenses.

 

For the six months ended June 30, 2019, research and development expense decreased $(0.1) million, or (11.8) percent, to $0.7 million from $0.8 million for the same period last year. The decrease is primarily the result of lower payroll and stock compensation expenses.

 

Other Income, Net

 

Other income, net consists of interest income, foreign currency gains and losses, and other miscellaneous income. For the three months ended June 30, 2019 and 2018, we reported other income of approximately $78,000 and $28,000, respectively. This increase is primarily due to higher interest income.

 

For the six months ended June 30, 2019 and 2018, we reported other income of approximately $171,000 and $68,000, respectively. This increase is primarily due to higher interest income.

 

Income Taxes

 

For the three and six months ended June 30, 2019, we recorded a provision for income tax expense of $364,987 and $125,841, respectively. Our effective tax rate was 14.9 percent and 3.1 percent and differed from the U.S. Federal statutory rate primarily due to discrete items related to tax benefits associated with stock-based compensation and the foreign derived intangible income deduction, partially offset by U.S. state tax expense.

 

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For the three and six months ended June 30, 2018, we recorded a provision for income tax expense of $348,377 and $634,575, respectively. Our effective tax rate was 20.5 percent and 22.4 percent and differed from the U.S. Federal statutory rate primarily due to the foreign derived intangible income deduction and research and development credits, partially offset by U.S. state tax expense.

 

As of June 30, 2019 and December 31, 2018, we had not identified or accrued for any uncertain tax positions. We are currently unaware of any uncertain tax positions that could result in significant payments, accruals or other material deviations in this estimate over the next 12 months. We believe that our tax positions comply in all material respects with applicable tax law. However, tax law is subject to interpretation, and interpretations by taxing authorities could be different from ours, which could result in the imposition of additional taxes and penalties.

 

We file tax returns in the United States Federal jurisdiction and many U.S. state jurisdictions. The Company is subject to income tax examinations for our United States Federal and certain U.S. state income taxes for 2015 and subsequent years and various other U.S. state income taxes for 2014 and subsequent years.

 

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, capital expenditures and share repurchases.

 

As of June 30, 2019, we had cash, cash equivalents and investments of $37.8 million, stockholders’ equity of $47.1 million, and working capital of $45.1 million. As of December 31, 2018, we had cash and cash equivalents and investments of $34.4 million, stockholders’ equity of $41.9 million, and working capital of $39.9 million.

 

We believe that our current cash, 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.

 

 

 

Six Months Ended June 30,

 

 

 

2019

 

2018

 

Net cash provided by operating activities

 

$

3,145,632

 

$

3,105,709

 

Net cash provided by (used in) investing activities

 

896,639

 

(200,290

)

Net cash provided by financing activities

 

352,035

 

219,484

 

 

For the six months ended June 30, 2019 and 2018, cash provided by operating activities was consistent at $3.1 million. This was primarily the result of higher net income and lower cash outflows from prepaid expenses and accounts payable, partially offset by lower cash inflows from accounts receivable.

 

Cash provided by investing activities increased $1.1 million to $0.9 million for the six months ended June 30, 2019, compared to cash used in investing activities of $(0.2) million for the same period in 2018. This increase primarily relates to higher maturities of investments and lower purchases of new investments in the six months ended June 30, 2019 compared to the same period in 2018.

 

Cash provided by financing activities increased $0.2 million to $0.4 million for the six months ended June 30, 2019, compared to $0.2 million for the same period in 2018. This increase primarily relates to cash received from the exercise of stock options.

 

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.

 

We leased our manufacturing and headquarters facility 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 $34,133, adjusted annually for changes in the consumer price index.

 

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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 June 30, 2019. We had no other off-balance sheet arrangements during the six months ended June 30, 2019 or for the year ended December 31, 2018 that had, or are reasonably likely to have, a material effect on our financial condition, results of operations, or liquidity.

 

Contractual Obligations

 

There have been no material changes outside the ordinary course of business to our contractual obligations and commercial commitments since December 31, 2018.

 

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.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Foreign Currency Exchange Risk

 

We have foreign currency risks related to our revenue and operating expenses 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 because of transaction gains (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% relative to the Yen, our net income would have correspondingly increased or decreased by an immaterial amount for the three and six months ended June 30, 2019 and 2018.

 

Interest Rate Risk

 

When able, we invest excess cash in bank money-market funds, corporate debt securities or discrete short-term investments. The fair value of our cash equivalents and short-term investments is sensitive to changes in the general level of interest rates in the U.S., and the fair value of these investments will decline if market interest rates increase. As of June 30, 2019, we had $5.4 million in corporate bonds, with $3.1 million maturing in less than 1 year and $2.3 million maturing between 1 and 3 years. These corporate bonds have fixed interest rates and semi-annual interest payment dates. If market interest rates were to change by 100 basis points from levels at June 30, 2019, we expect the corresponding change in fair value of our investments would be approximately $61,000. This is based on sensitivity analyses performed on our financial position as of June 30, 2019. Actual results may differ as our analysis of the effects of changes in interest rates does not account for, among other things, sales of securities prior to maturity and repurchase of replacement securities, the change in mix or quality of the investments in the portfolio, and changes in the relationship between short-term and long-term interest rates.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and

 

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procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

Changes in Internal Control Over Financial Reporting

 

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We may from time to time become party to various legal proceedings or claims that arise in the ordinary course of business. Our management reviews these matters if and when they arise and believes that the resolution of any such matters currently known will not have a material effect on our results of operations or financial position.

 

Item 1A. Risk Factors

 

Risks Relating to Our Business and Financial Condition

 

Our financial performance is significantly dependent on a single product, and disruptions in our ability to sell this product may have a material adverse effect on our business.

 

Our current revenue and profitability are significantly dependent on the sale of the MRidium 3860+ MRI compatible IV infusion pump system (a Class II medical device) and the ongoing sale of disposable tubing sets and related services. Sales of the MRidium 3860+ MRI compatible IV infusion pump system have historically comprised a substantial majority of our net revenue. Although we have recently launched our marketing efforts for our new 3880 MRI compatible patient vital signs monitor in the U.S., our near-term revenue and profitability will be dependent upon our ability to successfully market and sell the MRidium 3860+ MRI compatible IV infusion pump system.

 

In the past, the FDA issued us a Warning Letter that impacted our ability to commercially distribute our MRidium 3860+ MRI compatible IV infusion pump system. Although we have resumed commercial distribution of the MRidium 3860+ MRI compatible IV infusion pump system, the Warning Letter remains open and there can be no guarantee that the FDA will not take similar action in the future. The FDA could require us to cease shipment of our products, notify health professionals and others that the devices present unreasonable risk or substantial harm to public health, order a recall, repair, replacement, or refund of the devices, detain or seize adulterated or misbranded medical devices, or ban the medical devices. The FDA may also issue further warning letters or untitled letters, refuse future requests for 510(k) submission or premarket approval, revoke existing 510(k) clearances or premarket approvals previously granted, impose operating restrictions, enjoin and restrain certain violations of applicable law pertaining to medical devices and assess civil or criminal penalties against our officers, employees, or us.

 

Our products could be rendered obsolete or economically impractical by numerous factors, many of which are beyond our control, including but not limited to:

 

·                              entrance of new competitors into our markets;

 

·                              technological advancements of MRI scanners;

 

·                              technological developments such as new imaging modalities which render MRI procedures obsolete or reduce the instances where MRI imaging is utilized;

 

·                              loss of key relationships with suppliers, group purchasing organizations, or end-user customers;

 

·                              manufacturing or supply interruptions;

 

·                              product liability claims;

 

·                              our reputation and product market acceptance;

 

·                              loss of existing regulatory approvals or the imposition of new requirements to maintain such approvals; and

 

·                              product recalls or safety alerts.

 

Any major factor adversely affecting the sale of our products or services would cause our revenues to decline and have a material adverse impact on our business, financial condition and our common stock.

 

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We have been subject to securities class action litigation and derivative litigation and we may be subject to similar or other litigation in the future.

 

In the past, following adverse action by the FDA or volatility in our stock price, securities class action litigation has been brought against us. There can be no assurance that we will not face other securities litigation in the future. With respect to any litigation, our insurance may not reimburse us or may not be sufficient to reimburse us for the expenses or losses we may suffer in contesting and concluding such lawsuits. A decision adverse to our interests on these actions or resulting from these matters could result in the payment of substantial damages and could have a material adverse effect on our business, financial condition and our common stock. Regardless of the outcome, these claims may result in injury to our reputation, significant costs, diversion of management’s attention and resources, and loss of revenue.

 

There is no assurance that our internal and external sources of liquidity will at all times be sufficient for our cash requirements.

 

We must have sufficient sources of liquidity to fund our working capital requirements, our capital improvement plans, and execute on our strategic initiatives. Our decline in operating results during 2017 limited our generation of capital resources and that situation could return if we are unable to continue to increase revenues or adjust our costs appropriately to changes in revenue. Further, future new product launches may demand increased working capital before any long-term return is realized from increased revenue. Our ability to achieve our business and cash flow plans is based on a number of assumptions which involve significant judgments and estimates of future performance, borrowing capacity and credit availability, which cannot at all times be assured. Accordingly, there is no assurance that cash flows from operations and other internal and external sources of liquidity will at all times be sufficient for our cash requirements. If necessary, we may need to consider actions and steps to improve our cash position and mitigate any potential liquidity shortfall, such as modifying our business plan, pursuing additional financing to the extent available, reducing capital expenditures, pursuing and evaluating other alternatives and opportunities to obtain additional sources of liquidity and other potential actions to reduce costs. There can be no assurance that any of these actions would be successful, sufficient or available on favorable terms. Any inability to generate or obtain sufficient levels of liquidity to meet our cash requirements at the level and times needed could have a material adverse impact on our business and financial position.

 

Our continued success depends on the integrity of our supply chain, including multiple single-source suppliers, the disruption of which could negatively impact our business.

 

Many of the component parts of our products are obtained through supply agreements with third parties. Some of these parts require our partners to engage in complex manufacturing processes and involve long lead times or delivery periods. Considering our dependence on third-party suppliers, several of which are single-source suppliers, we are subject to inherent uncertainties and risks related to their ability to produce or deliver parts on a timely basis, to comply with product safety and other regulatory requirements and to provide quality parts to us at a reasonable price.

 

For example, we are dependent upon a single vendor for the ultrasonic motor at the core of our MRidium MRI compatible IV infusion pump. If this vendor fails to meet our volume requirements, which we anticipate will increase over time, or if the vendor becomes unable or unwilling to continue supplying motors to us, this would impact our ability to supply our pumps to customers until a replacement source is secured. Our executed agreement with this vendor provides that the price at which we purchase products from the vendor is determined by agreement from time to time or should material costs change. Although we have had a long history of stable pricing with this supplier, this provision may make it difficult for us to continue to receive motors from this vendor on favorable terms or at all if we do not agree on pricing in the future. In such event, it could materially and adversely affect our commercial activities, operating results and financial condition.

 

In the near term, we do not anticipate finding alternative sources for our primary suppliers, including single source suppliers. Therefore, if our primary suppliers become unable or unwilling to manufacture or deliver materials, or manufacture or deliver such materials later than anticipated, we could experience protracted delays or interruptions in the supply of materials which would ultimately delay our manufacture of products for commercial sale, which could materially and adversely affect our development programs, commercial activities, operating results and financial condition.

 

Additionally, any failure by us to forecast demand for, or to maintain an adequate supply of raw materials, parts, or finished products, could result in an interruption in the supply of certain products and a decline in our sales.

 

We rely on third-party suppliers for certain of our raw materials and components.

 

We rely on unaffiliated third-party suppliers for certain raw materials and components necessary for the manufacturing and operation of our products. Certain of those raw materials and components are proprietary products of those unaffiliated third-party suppliers and are specifically cited in our applications with regulatory agencies so that they must be obtained from that specific sole

 

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source or sources and could not be obtained from another supplier unless and until an appropriate application amendment is approved by the regulatory agency. For example, the non-magnetic ultrasonic motor which drives our MRI compatible IV infusion pump is sole sourced from a major multinational Japanese manufacturing company.

 

Among the reasons we may be unable to obtain these raw materials and components include, but are not limited to:

 

·                              a supplier’s inability or unwillingness to continue supplying raw materials and/or components;

 

·                              regulatory requirements or action by regulatory agencies or others, including changes in international trade treaties and/or tariffs;

 

·                              adverse financial or other strategic developments at or affecting the supplier, including bankruptcy;

 

·                              unexpected demand for or shortage of raw materials or components;

 

·                              failure of the supplier to comply with quality standards which results in quality and product failures, product contamination and/or recall;

 

·                              discovery of previously unknown or undetected imperfections in raw materials or components;

 

·                              labor disputes or shortages, including from the effects of health emergencies and natural disasters; and

 

·                              political instability and actual or anticipated military or political conflicts.

 

These events could negatively impact our ability to satisfy demand for our products, which could have a material adverse effect on our product use and sales and our business and results of operations. We may experience these or other shortages in the future resulting in delayed shipments, supply constraints, contract disputes and/or stock-outs of our products.

 

The manufacture of our products requires strict adherence to regulatory requirements governing medical devices and if we or our suppliers encounter problems our business could suffer.

 

The manufacture of our products must comply with strict regulatory requirements governing Class II medical devices in the U.S. and other regulatory requirements in foreign locations. Problems may arise during manufacturing, quality control, storage or distribution of our products for a variety of reasons, including equipment malfunction, failure to follow specific protocols and procedures, manufacturing quality concerns, or problems with raw materials, electromechanical, software and other components, supplier issues, and natural disasters. If problems arise during production, the affected products may have to be discarded. Manufacturing problems or delays could also lead to increased costs, lost sales, damage to customer relations, failure to supply penalties, time and expense spent investigating the cause and, depending on the cause, similar losses with respect to other batches of products. If problems are not discovered before the product is released to the market, voluntary recalls, corrective actions or product liability related costs may also be incurred. Should we encounter difficulties in the manufacture of our products or be subject to a product recall, our business could suffer materially.

 

Our markets are very competitive and we sell certain of our products in a mature market.

 

The market for our 3880 MRI compatible patient vital signs monitoring system is well-developed and sales growth for our monitor could be slow. Our vital signs monitoring system could face difficult competition, including competitors offering lower prices, which could have an adverse effect on our revenue and margins. Our competitors may have certain advantages, which include the ability to devote greater resources to the development, promotion, and sale of their products. Consequently, we may need to increase our efforts, and related expenses for research and development, marketing, and selling to maintain or improve our position. We may not realize the per unit revenue we have planned for and expect. Continued sales to our existing customers are expected to be significant to our revenue in the future, and if our existing customers do not continue to purchase from us, our revenue may decline.

 

We manufacture and store our products at a single facility in Florida.

 

We manufacture and store our products at a single facility in Winter Springs, Florida. If by reason of fire, hurricane or other natural disaster, or for any other reason, the facility is destroyed or seriously damaged or our access to it is limited, our ability to provide products to our customers would be seriously interrupted or impaired and our operating results and financial condition would be materially and negatively affected.

 

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Our inability to collect on our accounts receivables held by customers may have an adverse effect on our business operations and financial condition.

 

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. From time to time, we have had, and may in the future have, accounts receivables from one or more customers that accounted for 10 percent or more of our gross accounts receivable. As a result, we may be exposed to a certain level of concentration of credit risk. If a major customer experiences financial difficulties, the effect on us could be material and have an adverse effect on our business, financial condition and results of operations.

 

If we fail to maintain relationships with Group Purchasing Organizations, sales of our products could decline.

 

Our ability to sell our products to U.S. hospitals, acute care facilities and outpatient imaging centers depends in part on our relationships with Group Purchasing Organizations (“GPOs”). Many existing and potential customers for our products are members of GPOs. GPOs negotiate pricing arrangements and contracts, which are sometimes exclusive, with medical supply manufacturers and distributors, and these negotiated prices are made available to a GPO’s affiliated hospitals and other members. We pay the GPOs an administrative fee in the form of a percentage of the volume of products sold to their affiliated hospitals and other members. If we are not an approved provider selected by a GPO, affiliated hospitals and other members may be less likely to purchase our products. Should a GPO negotiate a sole source or bundling contract covering a future or current competitor’s products, we may be precluded from making sales of our competing products to members of that GPO for the duration of the contractual arrangement. For example, even if we have an existing contract with a GPO for sales of our MRidium 3860+ MRI compatible IV infusion pump, we may encounter difficulties in selling, or be unable to sell, our 3880 MRI compatible patient vital signs monitoring system to that GPO’s affiliated hospitals and other members, which may result in a longer sales cycle or an inability to sell. Our failure to renew contracts with GPOs may cause us to lose market share and could have a material adverse effect on our sales, financial condition and results of operations. In the future, if another competitive supplier emerges, and we fail to keep our relationships and develop new relationships with GPOs, our competitive position would likely suffer.

 

Cost-containment efforts of our customers and purchasing groups could adversely affect our sales and profitability.

 

Our MRI compatible medical devices are considered capital equipment by many potential customers, and hence changes in the budgets of healthcare organizations and the timing of spending under these budgets and conflicting spending priorities can have a significant effect on the demand for our products and related services. Any decrease in expenditures by these healthcare facilities could decrease demand for our products and related services and reduce our revenue. Additionally, changes to reimbursement policies by third-party payors could also decrease demand for our products and related services and reduce our revenue.

 

Any failure in our efforts to educate clinicians, anesthesiologists, radiologists, and hospital administrators regarding the advantages of our products could significantly limit our product sales.

 

We believe our future success will require us to educate a sufficient number of clinicians, anesthesiologists, radiologists, hospital administrators and other purchasing decision-makers about our products and the costs and benefits of our products. If we fail to demonstrate the safety, reliability and economic benefits of our products to hospitals and acute medical facilities, our products may not be adopted and our expected and actual sales would suffer.

 

The lengthy sales cycle for medical devices could delay our sales.

 

The decision-making process of customers is often complex and time-consuming. Based on our experience, we believe the period between initial discussions with customers regarding our products and a customer’s purchase of our products is typically three to six months. Sales cycles can also be delayed because of capital budgeting procedures. Moreover, even if one or two units are sold to a hospital, we believe that it will take additional time and experience with our products before other medical professionals routinely use them for other procedures and in other departments of the hospital. Such time would delay potential sales of additional units and disposable products or additional optional accessories to that medical facility or hospital. These delays could have an adverse effect on our business, financial condition and results of operations.

 

Because we rely on distributors to sell our products outside of the U.S., our revenues could decline if our existing distributors do not continue to purchase products from us or if our relationship with any of these distributors is terminated.

 

We rely on distributors for all our sales outside the U.S. and hence do not have direct control over foreign sales activities. These distributors also assist us with regulatory approvals and the education of physicians and government agencies. Our revenues

 

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outside the U.S. have historically represented approximately one-tenth to one-third of our net revenues. If our existing international distributors fail to sell our products or sell at lower levels than we anticipate, we could experience a decline in revenues or fail to meet our forecasts. We cannot be certain that we will be able to attract new international distributors nor retain existing ones that market our products effectively or provide timely and cost-effective customer support and service. None of our existing distributors are obligated to continue selling our products.

 

If we do not successfully develop and commercialize enhanced products or new products that remain competitive, we could lose revenue opportunities and customers, and our ability to achieve growth would be impaired.

 

The medical device industry is characterized by rapid product development and technological advances, which places our products at risk of obsolescence. Our long-term success depends upon the development and successful commercialization of new products, new or improved technologies and additional applications for MRI compatible infusion, therapeutic, diagnostic and safety products and services. The research and development process is time-consuming and costly and may not result in products or applications that we can successfully commercialize. If we do not successfully adapt our technology, products and applications, we could lose revenue opportunities and customers. In addition, we may not be able to improve our products or develop new products or technologies quickly enough to maintain a competitive position in our markets and continue to grow our business.

 

We are highly dependent on our founder, CEO, President, Chairman and controlling shareholder, Roger Susi.

 

We believe that Mr. Susi will play a significant role in our continued success and in the development of new products. Our current and future operations could be adversely impacted if we were to lose his services. Accordingly, our success will be dependent on appropriately managing the risks related to executing a succession plan for Mr. Susi on a timely basis.

 

If we fail to attract and retain the talent required for our business, our business could be materially harmed.

 

Competition for highly skilled personnel is often intense in the medical device industry, including in the MRI compatible medical device segment. If our current employees with experience in the MRI compatible device industry leave our company, we may have difficulty finding replacements with an equivalent amount of experience and skill, which could harm our operations. Our future success will also depend in part on our ability to identify, hire and retain additional personnel, including skilled engineers to develop new products, and executives to oversee our marketing, sales, customer support and production staff. We may not be successful in attracting, integrating or retaining qualified personnel to meet our current growth plans or future needs. Our productivity may be adversely affected if we do not integrate and train our new employees quickly and effectively.

 

We may also have difficulty finding and retaining qualified Board members. Any failure to do so could be perceived negatively and could adversely affect our business.

 

Also, to the extent we hire personnel from competitors, we may be subject to allegations that we have improperly solicited, or that they have divulged proprietary or other confidential information, or that their former employers own their inventions or work product.

 

We may be unable to scale our operations successfully.

 

We are working to expand our size and scale via more penetration of existing markets and the launch of new complementary products. This growth, if it occurs as planned, will place significant demands on our management and manufacturing capacity, as well as our financial, administrative and other resources. We cannot guarantee that any of the personnel, systems, procedures and controls we put in place will be adequate to support the manufacture and distribution of our products. Our operating results will depend substantially on the ability of our officers and key employees to manage changing business conditions and to implement and improve our financial and administrative systems and manage other resources. If we are unable to respond to and manage changing business conditions, or the scale of our products, services and operations, then the quality of our services, our ability to retain key personnel and our business could be harmed.

 

We engage in related party transactions, which result in a conflict of interest involving our management.

 

We have engaged in the past, and continue to engage, in related party transactions, particularly between our company and Roger Susi and his affiliates. The only significant ongoing related party transaction is the lease agreement between our company and Susi, LLC, an affiliate of Roger Susi, with respect to our sole production and headquarters facility in Winter Springs, Florida. Related party transactions present difficult conflicts of interest, could result in disadvantages to our company and may impair investor confidence, which could materially and adversely affect us. Related party transactions could also cause us to become materially

 

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dependent on related parties in the ongoing conduct of our business, and related parties may be motivated by personal interests to pursue courses of action that are not necessarily in the best interests of our company and our stockholders.

 

Any acquisitions of technologies, products and businesses, may be difficult to integrate, could adversely affect our relationships with key customers, and/or could result in significant charges to earnings.

 

We plan to periodically review potential acquisitions of technologies, products and businesses that are complementary to our products and that could accelerate our growth. However, our company has never completed an acquisition and there can be no assurance that we will be successful in finding any acquisitions in the future. The process of identifying, executing and realizing attractive returns on acquisitions involves a high degree of uncertainty. Acquisitions typically entail many risks and could result in difficulties in integrating operations, personnel, technologies and products. If we are not able to successfully integrate our acquisitions, we may not obtain the advantages and synergies that the acquisitions were intended to create, which may have a material adverse effect on our business, results of operations, financial condition and cash flows, our ability to develop and introduce new products and the market price of our stock.

 

The environment in which we operate makes it increasingly difficult to accurately forecast our business performance.

 

Significant changes and volatility in most aspects of the current business environment, including financial markets, consumer behavior, speed of technological, regulatory and competitive changes, make it increasingly difficult for us to predict our revenues and earnings into the future. Our quarterly sales and profits depend substantially on the volume and timing of orders fulfilled during the quarter, and such orders are difficult to forecast. Product demand is dependent upon the capital spending budgets of our customers and prospects as well as government funding policies and matters of public policy as well as product and economic cycles that can affect the spending decisions of these entities. As a result, any revenue, earnings or financial guidance or outlook which we have given or might give may turn out to be inaccurate. Though we will endeavor to give reasonable estimates of future revenues, earnings and financial information at the time we give such guidance, based on then-current conditions, there is a significant risk that such guidance or outlook will turn out to be incorrect. Historically, companies that have overstated their operating guidance have suffered significant declines in their stock price when such results are announced to the public.

 

There are inherent uncertainties involved in estimates, judgments and assumptions used in the preparation of financial statements in accordance with United States Generally Accepted Accounting Principles (“GAAP”). Furthermore, portions of GAAP require the use of fair value models which are variable in application and methodology from appraiser to appraiser. Any changes in estimates, judgments and assumptions used could have a material adverse effect on our business, financial position and operating results.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Such assumptions and estimates include those related to revenue recognition, accruals for product returns, valuation of inventory, impairment of intangibles and long-lived assets, accounting for leases, accounting for income taxes and stock-based compensation and allowances for uncertainties. These factors are also influenced by regular changes to GAAP, some of which are material to most companies, such as recent changes to revenue recognition. These changes introduce risk to our financial reporting processes due to implementation and internal control implications.

 

We base the aforementioned estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as discussed in greater detail in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our actual operating results may differ and fall below our assumptions and the financial forecasts of securities analysts and investors, resulting in a significant decline in our stock price.

 

Our adoption and implementation of the new revenue accounting standard on January 1, 2018 included management’s judgments and assumptions based on our interpretation of the new standard. The new revenue standard is principle based and interpretation of those principles may vary from company to company based on their unique circumstances. If our initial judgments and assumptions require change or if actual circumstances differ from our assumptions, our operating results may be adversely affected and could fall below our publicly announced guidance or the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock.

 

Changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our results.

 

On December 22, 2017, President Trump signed into law new legislation that significantly revised the Internal Revenue Code of 1986, as amended. The newly enacted federal income tax law, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax

 

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deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal tax law, including potential U.S. state and foreign tax jurisdiction responses, is uncertain and our business and financial condition could be adversely affected.

 

In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service, or IRS, and other tax authorities. It is possible that tax authorities may disagree with certain positions we have taken, and any adverse outcome of such a review or audit could have a negative effect on our financial position and operating results. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes, but the determination of our provision for income taxes and other tax liabilities requires significant judgment by management, and there are transactions where the ultimate tax determination is uncertain. Although we believe that our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made. There can be no assurance that the outcomes from continuous examinations will not have an adverse effect on our business, financial condition, and results of operations.

 

We are subject to various privacy and consumer protection laws.

 

Our privacy policy is posted on our website, and any failure by us or our vendor or other business partners to comply with it or with federal, state or international privacy, data protection or security laws or regulations could result in regulatory or litigation-related actions against us, legal liability, fines, damages and other costs. Substantial expenses and operational changes may be required in connection with maintaining compliance with such laws, and in particular certain emerging privacy laws are still subject to a high degree of uncertainty as to their interpretation and application. For example, in May 2018, the General Data Protection Regulation (the “GDPR”) began to fully apply to the processing of personal information collected from individuals located in the European Union. The GDPR has created new compliance obligations and has significantly increased fines for noncompliance. Although we take steps to protect the security of our customers’ personal information, we may be required to expend significant resources to comply with data breach requirements if third parties improperly obtain and use the personal information of our customers or we otherwise experience a data loss with respect to customers’ personal information. A breach of our network security and systems could have negative consequences for our business and future prospects, including possible fines, penalties and damages, reduced customer demand for our products, and harm to our reputation and brand.

 

Political and economic uncertainty arising from the outcome of the United Kingdom’s referendum on its membership in the European Union could adversely affect our business and results of operations.

 

On June 23, 2016, the United Kingdom (UK) held a referendum in which voters approved a withdrawal from the European Union (EU), commonly referred to as “Brexit.” The timing of the UK’s exit from the EU remains uncertain; the EU has extended the deadline for the UK to exit the EU until October 31, 2019. The terms of the withdrawal are subject to ongoing negotiation that has created significant uncertainty about the future relationship between the UK and the EU. It is possible that the level of economic activity in this region will be adversely impacted and that there will be increased regulatory and legal complexities, including those relating to tax, trade, security and employees. In addition, Brexit could lead to economic uncertainty, including significant volatility in global stock markets and currency exchange rates, which may adversely impact our business. Although the specific terms and the timeframe of the negotiations are unknown, it is possible that these changes could adversely affect our business and results of operations. To attempt to reduce the impact of a potential Brexit on our ability to sell our products in the EU, we have changed from a UK-based notified body, UL International Ltd. (“UL”), to the Polish Center for Testing and Certification (Polskie Centrum Badań i Certyfikacji S.A.) based in Warsaw, Poland.

 

Risks Related to Our Industry

 

We are subject to substantial government regulation that is subject to change and could force us to make modifications to how we develop, manufacture, market and price our products.

 

The medical device industry is regulated extensively by governmental authorities, principally the FDA in the U.S. and corresponding state and foreign regulatory agencies. The majority of our manufacturing processes are required to comply with quality systems regulations, including current good manufacturing practice requirements that cover the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging and shipping of our products. Failure to comply with applicable medical device regulatory requirements could result in, among other things, warning letters, fines, injunctions, civil penalties, repairs, replacements, refunds, recalls or seizures of products, total or partial suspensions of production, refusal of the FDA

 

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or other regulatory agencies to grant pre-market clearances or approvals for our products, withdrawals or suspensions of future or current clearances or approvals and criminal prosecution.

 

In addition, our products are subject to pre-clearance requirements by the FDA and similar international agencies that govern a wide variety of product activities from design and development to labe