IRadimed Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; financial statements are unaudited. IRadimed develops and sells MRI-compatible medical devices, disposables, accessories and services, principally to hospitals and acute-care facilities.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $7.38 million | $5.52 million | $14.48 million | $10.69 million |
| Gross margin | 76.8% | 77.7% | 76.5% | 75.5% |
| Operating income | $1.68 million | $0.33 million | $2.76 million | $0.09 million |
| Net income | $1.35 million | $0.36 million | $2.20 million | $0.12 million |
| Diluted EPS | $0.11 | $0.03 | $0.18 | $0.01 |
- Q2 revenue rose 33.5% year over year; six-month revenue rose 35.5%. Growth reflected higher device sales, disposables and services, and extended-warranty revenue.
- Q2 device revenue increased 38.5%, led by MRI-compatible patient vital signs monitors, up 277.0%; infusion-pump system revenue grew 9.5%. International revenue rose 141.4%, compared with U.S. growth of 18.4%.
- Q2 gross margin declined 0.9 percentage point, attributed mainly to lower infusion-pump average selling prices as international sales formed a larger share, and unfavorable overhead and service costs. Six-month gross margin improved 1.0 point.
- Q2 operating margin was 22.7%, versus 5.9% a year earlier; six-month operating margin was 19.1%, versus 0.8%. Operating expenses increased modestly overall in the first half: higher sales and marketing costs were partly offset by lower R&D costs.
- Cash from operations was $3.11 million for the first half, versus $0.11 million in 2017. Cash and cash equivalents were $21.33 million at June 30; investments were $8.17 million. Working capital was $34.1 million and stockholders’ equity was $36.2 million.
- The balance sheet reports no interest-bearing debt. Total liabilities were $6.66 million, including $3.93 million of current and long-term deferred revenue. Cash, cash equivalents and investments totaled approximately $29.5 million.
Material changes and management outlook
- Management expects revenue for the remainder of 2018 to increase versus the comparable 2017 period, citing efforts to win first-time infusion-pump adopters and expand global sales of the 3880 patient vital signs monitor. It expects higher full-year operating expenses, primarily from sales and marketing. No quantified revenue or earnings guidance is provided.
- Monitor sales expanded following its U.S. launch; management noted average selling prices for both device categories were affected by introductory promotions and were below levels expected in the future.
- The company adopted the new revenue-recognition standard on January 1, 2018; it reported no material financial-statement impact and no opening retained-earnings adjustment.
- Management stated existing cash and expected operating cash generation should fund requirements for at least 12 months; it did not anticipate needing additional capital.
Risks, contingencies and unusual items
- The FDA Warning Letter related to earlier device software and quality-system issues remained open as of June 30, 2018, although the FDA had determined in its 2016 inspection that no further actions were necessary in response to the Warning Letter, and the 3860+ pump had received 510(k) clearance in 2016.
- Revenue and near-term profitability remain significantly dependent on the MRidium 3860+ infusion-pump system and related disposables and services. The company also identifies sole-source suppliers, including the pump’s ultrasonic motor vendor, and its single Florida manufacturing facility as operational risks.
- The manufacturing and headquarters facility is leased from an entity controlled by CEO Roger Susi. The lease has automatic renewal provisions; disclosed non-cancelable commitments were $364,880 as of June 30, 2018.
- The IRS was examining the company’s 2016 tax year; no adjustments had been proposed, but the filing says a tax examination could result in material adjustments. The company reported no accrued uncertain tax positions.
- Investments are corporate bonds. Management estimated that a 100-basis-point interest-rate change would change their fair value by approximately $120,000. A 10% currency move against the yen was estimated to have an immaterial effect on net income.
- Management identified no material off-balance-sheet arrangements. The company disclosed ordinary-course legal claims but did not identify a pending matter expected to materially affect results or financial position.
Important facts for investors to verify
- Whether strong revenue growth, particularly international growth and monitor sales, continues without reliance on introductory pricing or adverse effects on gross margin.
- How much revenue and profitability remain concentrated in the infusion pump and its recurring disposables and services.
- The status of the open FDA Warning Letter and the remaining follow-up action associated with the 2016 inspection.
- Whether sole-source component supply and the single manufacturing site can support planned growth without interruption.
- Developments in the IRS examination, the related-party facility lease and the company’s liquidity as working-capital needs evolve.