Item 9A. Controls and Procedures
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain a set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. In accordance with Rule 13a-15(b) of the Exchange Act, as of the end of the period covered by this Annual Report on Form 10-K, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of the end of the period covered by this Annual Report on Form 10-K, were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining a system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). All internal control systems, no matter how well designed, have inherent limitations.
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We conducted an assessment of the effectiveness of our system of internal control over financial reporting as of December 31, 2020, the last day of our fiscal year. This assessment was based on criteria established in the framework Internal Control-Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission and included an evaluation of elements such as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. Based on our assessment, management has concluded that our internal control over financial reporting was effective as of the end of the fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. GAAP. We reviewed the results of management’s assessment with the Audit Committee of our Board of Directors.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended December 31, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Controls
Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
ITEM 9B. OTHER INFORMATION
Not applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information required by this Item 10 will be included in the Proxy Statement to be filed within 120 days after the fiscal year covered by this annual report on Form 10-K and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 will be included in the Proxy Statement, and such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item 12, including Equity Compensation Plan Information, will be included in the Proxy Statement, and such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item 13 will be included in the Proxy Statement, and such information is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item 14 will be included in the Proxy Statement, and such information is incorporated herein by reference.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
1.
Financial Statements: See “Index to Financial Statements” in Part II, Item 8 of this annual report on Form 10-K.
2.
Financial Statement Schedule: Not applicable.
3.
Exhibits: The exhibits listed in the accompanying “Exhibit Index” are filed or incorporated by reference as part of this Form 10-K.
ITEM 16. FORM 10-K SUMMARY
None.
EXHIBIT INDEX
Incorporated by Reference
Exhibit
Filing
Filed
Number
Description of Exhibit
Form
File No.
Date
Herewith
3.1
Amended and Restated Certificate of Incorporation
14C
001-36534
10/9/2015
3.2
Third Amended and Restated Bylaws of the Registrant
8-K
001-36534
9/19/2018
4.1
Specimen common stock certificate
S-1A
333-196875
7/9/2014
4.2
Description of Registrant’s Securities
10-K
001-36534
3/6/2020
10.1+
Form of Stock Option Agreement for Iradimed Corp. 2005 Incentive Stock Plan
S-1
333-196875
6/18/2014
10.2+
Iradimed Corporation Amended and Restated 2014 Equity Incentive Plan
10-Q
001-36534
8/6/2020
10.3+
Form of Stock Option Agreement for Iradimed Corporation 2014 Equity Incentive Plan
S-1
333-196875
6/18/2014
10.4+
Form of Restricted Stock Award Agreement for Iradimed Corporation 2014 Equity Incentive Plan
S-8
333-198971
9/26/2014
10.5+
Form of Restricted Stock Unit Agreement (Time-Vesting) for Iradimed Corporation 2014 Equity Incentive Plan
S-8
333-198971
9/26/2014
10.6+
Form of Restricted Stock Unit Agreement (Performance-Vesting) for Iradimed Corporation 2014 Equity Incentive Plan
S-8
333-198971
9/26/2014
10.7
Lease Agreement regarding 1025 Willa Springs Dr. between Susi, LLC and the Registrant, dated January 17, 2014
S-1
333-196875
6/18/2014
10.8+
Employment Agreement between the Registrant and Christopher K. Scott, dated December 16, 2013
S-1
333-196875
6/18/2014
10.9†
Supply Agreement between the Registrant and Fukoku Co., Ltd. entered into on January 26, 2014
S-1
333-196875
6/18/2014
10.10†
Amendment Agreement to Supply Agreement between the Registant and Fukoku Co., Ltd. entered into on March 26, 2019
8-K
001-36534
3/26/2019
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10.11+
Employment Agreement between the Registrant and Roger Susi, dated July 24, 2019
8-K
001-36534
7/29/2019
10.12+
Employment Agreement, dated as of January 3, 2020 by and between Iradimed Corporaiton and MaryBeth Smith
8-K
001-36534
1/07/2020
10.13+
Confidential Separation Agreement and General Release, dated May 28, 2020, by and between Iradimed Corporation and Leslie McDonnell
8-K
001-36534
6/18/2020
10.14+
Separation Agreement, dated as of July 15, 2020, by and between Iradimed Corporation and Louis Waldman
8-K
001-36534
7/16/2020
23.1
Consent of RSM US LLP, Independent Registered Public Accounting Firm
X
24.1
Power of Attorney (included on signature page)
X
31.1
Certification of Chief Executive Officer pursuant to Exchange Act Rule, 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
X
31.2
Certification of Chief Financial Officer pursuant to Exchange Act Rule, 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
X
32.1*
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 I.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
X
101.INS
XBRL Instance Document
X
101.SCH
XBRL Taxonomy Extensions Schema Document
X
101.CAL
XBRL Taxonomy Extension Label Calculation Linkbase Document
X
101.DEF
XBRL Taxonomy Extension Definition Document
X
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
X
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
X
104
Inline XBRL for the cover page of this Annual Report on Form 10-K, included as part of this Exhibit 101 inline XBRL Document set
X
+ Indicates a management contract or compensatory plan or arrangement.
† Confidential treatment has been granted for portions of this exhibit. These portions have been omitted from the exhibit filed with the Securities and Exchange Commission and submitted separately to the Securities and Exchange Commission.
* The certification attached as Exhibit 32.1 that accompanies this Form 10-K is not deemed filed with the SEC and is not to be incorporated by reference into any filing of Iradimed Corporation under the Securities Act or the Exchange Act, whether made before or after the date of this Form 10-K, irrespective of any general incorporation language contained in such filing.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Winter Springs, State of Florida, on March 5, 2021.
IRADIMED CORPORATION
(Registrant)
Dated: March 5, 2021
/s/ Roger Susi
By: Roger Susi
Chief Executive Officer and President
(Principal Executive Officer)
Each person whose signature appears below constitutes and appoints Leslie McDonnell and Chris Scott as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Roger Susi
Chairman of the Board, Chief Executive Officer and President (Principal Executive Officer)
March 5, 2021
Roger Susi
/s/ Chris Scott
Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)
March 5, 2021
Chris Scott
/s/ Monty Allen
Director
March 5, 2021
Monty Allen
/s/ Anthony Vuoto
Director
March 5, 2021
Anthony Vuoto
/s/ James Hawkins
Director
March 5, 2021
James Hawkins
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IRADIMED CORPORATION FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
F-2
Balance Sheets
F-3
Statements of Operations
F-4
Statements of Comprehensive Income
F-5
Statements of Stockholders’ Equity
F-6
Statements of Cash Flows
F-7
Notes to Financial Statements
F-8
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of IRADIMED CORPORATION
Opinion on the Financial Statements
We have audited the accompanying balance sheets of IRADIMED CORPORATION (the Company) as of December 31, 2020 and 2019, the related statements of operations, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes to the financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
We have served as the Company's auditor since 2013.
/s/ RSM US LLP
Orlando, Florida
March 5, 2021
F-2
Table of Contents
IRADIMED CORPORATION
BALANCE SHEETS
As of December 31,
2020
2019
ASSETS
Current assets:
Cash and cash equivalents
$
50,068,728
$
43,481,781
Accounts receivable, net
4,574,932
7,293,303
Investments
1,909,368
2,768,287
Inventory, net
3,933,987
3,641,561
Prepaid expenses and other current assets
771,666
407,802
Prepaid income taxes
2,477,211
1,370,947
Total current assets
63,735,892
58,963,681
Property and equipment, net
2,120,148
2,053,806
Intangible assets, net
960,885
860,087
Operating lease right-of-use asset, net
2,715,030
2,955,873
Deferred income taxes, net
1,272,672
1,663,415
Other assets
261,993
232,002
Total assets
$
71,066,620
$
66,728,864
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$
657,054
$
993,742
Accrued payroll and benefits
1,714,782
2,166,209
Other accrued taxes
103,981
596,576
Warranty reserve
90,054
81,761
Deferred revenue
1,949,259
1,671,420
Current portion of operating lease liability
255,698
240,843
Other current liabilities
146,435
108,421
Total current liabilities
4,917,263
5,858,972
Deferred revenue
2,305,413
2,630,467
Operating lease liability, less current portion
2,459,332
2,715,030
Total liabilities
9,682,008
11,204,469
Stockholders’ equity:
Common stock; $ 0.0001 par value; 31,500,000 shares authorized; 12,308,432 shares issued and outstanding as of December 31, 2020 and 11,765,875 shares issued and outstanding as of December 31, 2019
1,231
1,177
Additional paid-in capital
23,676,843
19,192,394
Retained earnings
37,669,451
36,300,450
Accumulated other comprehensive income
37,087
30,374
Total stockholders’ equity
61,384,612
55,524,395
Total liabilities and stockholders’ equity
$
71,066,620
$
66,728,864
See accompanying notes to financial statements.
F-3
Table of Contents
iRadimed Corporation
STATEMENTS OF OPERATIONS
For the Years Ended December 31,
2020
2019
2018
Revenue
$
31,717,372
$
38,517,141
$
30,438,983
Cost of revenue
8,142,962
8,816,161
7,211,633
Gross profit
23,574,410
29,700,980
23,227,350
Operating expenses:
General and administrative
12,269,079
10,451,266
8,710,882
Sales and marketing
10,158,892
9,169,590
6,995,586
Research and development
1,902,530
1,432,719
1,517,112
Total operating expenses
24,330,501
21,053,575
17,223,580
(Loss) income from operations
( 756,091 )
8,647,405
6,003,770
Other income, net
139,213
395,912
193,537
(Loss) income before provision for income taxes
( 616,878 )
9,043,317
6,197,307
Provision for income tax benefit
( 1,985,879 )
( 587,642 )
( 106,143 )
Net income
$
1,369,001
$
9,630,959
$
6,303,450
Net income per share:
Basic
$
0.11
$
0.85
$
0.59
Diluted
$
0.11
$
0.78
$
0.52
Weighted-average shares outstanding:
Basic
12,123,556
11,282,214
10,758,752
Diluted
12,440,086
12,276,444
12,110,117
See accompanying notes to financial statements.
F-4
Table of Contents
iRadimed Corporation
STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31,
2020
2019
2018
Net income
$
1,369,001
$
9,630,959
$
6,303,450
Other comprehensive income (loss):
Change in fair value of available-for-sale securities, net of tax expense (benefit) of $ 5,097 , $ 24,713 and $( 1,168 ) respectively
19,699
80,659
( 3,554 )
Realized loss on available-for-sale securities reclassified to net income, net of tax expense (benefit) of $ 4,286 , $ 2,671 and $( 7,269 ) respectively
( 12,986 )
( 8,093 )
20,767
Other comprehensive income
6,713
72,566
17,213
Comprehensive income
$
1,375,714
$
9,703,525
$
6,320,663
See accompanying notes to financial statements.
F-5
Table of Contents
iRadimed Corporation
STATEMENTS OF STOCKHOLDERS’ EQUITY
Accumulated
Additional
Other
Common Stock
Paid-in
Retained
Comprehensive
Stockholders’
Shares
Amount
Capital
Earnings
(Loss) Income
Equity
Balances, December 31, 2017
10,596,566
$
1,060
$
12,623,181
$
20,355,545
$
( 48,909 )
$
32,930,877
Net income
—
—
—
6,303,450
—
6,303,450
Other comprehensive income
—
—
—
—
17,213
17,213
Stock-based compensation
—
—
1,764,319
—
—
1,764,319
Net share settlement of restricted stock units
77,352
8
( 309,569 )
—
—
( 309,561 )
Exercise of stock options and warrants
315,193
31
1,239,404
—
—
1,239,435
Cumulative effect from adoption of accounting standard update
—
—
—
10,496
( 10,496 )
—
Balances, December 31, 2018
10,989,111
$
1,099
$
15,317,335
$
26,669,491
$
( 42,192 )
$
41,945,733
Net income
—
—
—
9,630,959
—
9,630,959
Other comprehensive income
—
—
—
—
72,566
72,566
Stock-based compensation
—
—
1,854,965
—
—
1,854,965
Net share settlement of restricted stock units
74,880
7
( 473,150 )
—
—
( 473,143 )
Exercise of stock options and warrants
701,884
71
2,493,244
—
—
2,493,315
Balances, December 31, 2019
11,765,875
$
1,177
$
19,192,394
$
36,300,450
$
30,374
$
55,524,395
Net income
—
—
—
1,369,001
—
1,369,001
Other comprehensive income
—
—
—
—
6,713
6,713
Stock-based compensation
—
—
3,962,021
—
—
3,962,021
Net share settlement of restricted stock units
137,706
14
( 1,207,632 )
—
—
( 1,207,618 )
Exercise of stock options
404,851
40
1,730,060
—
—
1,730,100
Balances, December 31, 2020
12,308,432
$
1,231
$
23,676,843
$
37,669,451
$
37,087
$
61,384,612
See accompanying notes to financial statements.
F-6
Table of Contents
iRadimed Corporation
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
2020
2019
2018
Operating activities:
Net income
$
1,369,001
$
9,630,959
$
6,303,450
Adjustments to reconcile net income to net cash provided by operating activities:
Change in allowance for doubtful accounts
27,884
31,338
15,833
Change in provision for excess and obsolete inventory
( 87,178 )
48,114
111,790
Depreciation and amortization
1,338,824
1,242,325
1,105,003
Disposal of property and equipment
6,496
—
—
Stock-based compensation
3,962,021
1,854,965
1,764,319
Deferred income taxes, net
389,932
( 596,755 )
( 144,430 )
(Gain) loss on maturity of investments
( 17,272 )
( 10,764 )
28,036
Changes in operating assets and liabilities:
Accounts receivable
2,690,487
( 3,114,649 )
( 446,896 )
Inventory
( 282,904 )
123,680
( 121,591 )
Prepaid expenses and other current assets
( 1,098,908 )
( 487,650 )
( 407,461 )
Other assets
( 65,187 )
( 171,002 )
65,135
Accounts payable
( 403,567 )
149,319
34,161
Accrued payroll and benefits
( 451,427 )
363,888
289,985
Other accrued taxes
( 492,595 )
463,576
23,498
Warranty reserve
8,293
7,237
13,986
Deferred revenue
( 12,202 )
700,348
( 5,885 )
Other current liabilities
38,014
—
( 150 )
Prepaid income taxes
( 1,106,264 )
( 3,055 )
( 1,252,768 )
Other
4,048
859
—
Net cash provided by operating activities
5,817,496
10,232,733
7,376,015
Investing activities:
Purchases of investments
—
—
( 1,124,512 )
Proceeds from maturity of investments
883,715
3,687,000
2,905,000
Purchases of property and equipment
( 443,003 )
( 368,281 )
( 228,315 )
Capitalized intangible assets
( 193,743 )
( 117,531 )
( 36,350 )
Net cash provided by investing activities
246,969
3,201,188
1,515,823
Financing activities:
Proceeds from stock option and warrant exercises
1,730,100
2,493,315
1,239,435
Taxes paid for the net share settlement of restricted stock units
( 1,207,618 )
( 473,143 )
( 309,561 )
Net cash provided by financing activities
522,482
2,020,172
929,874
Net increase in cash and cash equivalents
6,586,947
15,454,093
9,821,712
Cash and cash equivalents, beginning of year
43,481,781
28,027,688
18,205,976
Cash and cash equivalents, end of year
$
50,068,728
$
43,481,781
$
28,027,688
Supplemental disclosure of cash flow information:
Cash paid for income taxes
$
—
$
12,000
$
1,375,714
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
$
429,888
$
428,176
$
418,772
See accompanying notes to financial statements.
F-7
Table of Contents
iRadimed Corporation
NOTES TO FINANCIAL STATEMENTS
1 — Organization and Significant Accounting Policies
Organization
IRADIMED CORPORATION (“IRADIMED”, the “Company”, “we”, “our”) was incorporated in Oklahoma in July 1992 and reincorporated in Delaware in April 2014. We develop, manufacture, market and distribute a Magnetic Resonance Imaging (“MRI”) compatible intravenous (“IV”) infusion pump system and MRI compatible patient vital signs monitoring systems and related accessories and services.
We are a leader in the development of innovative MRI compatible medical devices . We are the only known provider of a non-magnetic IV infusion pump system that is specifically designed to be safe for use during MRI procedures. We were the first to develop an infusion delivery system that largely eliminates many of the dangers and problems present during MRI procedures. Standard infusion pumps contain magnetic and electronic components which can create radio frequency interference and are dangerous to operate in the presence of the powerful magnet that drives an MRI system. Our patented MRidium® MRI compatible IV infusion pump system has been designed with a non-magnetic ultrasonic motor, uniquely designed non-ferrous parts and other special features in order to safely and predictably deliver anesthesia and other IV fluids during various MRI procedures. Our pump solution provides a seamless approach that enables accurate, safe and dependable fluid delivery before, during and after an MRI scan, which is important to critically-ill patients who cannot be removed from their vital medications, and children and infants who must generally be sedated in order to remain immobile during an MRI scan.
Each IV infusion pump system consists of an MRidium® MRI compatible IV infusion pump, non-magnetic mobile stand, proprietary disposable IV tubing sets and many of these systems contain additional optional upgrade accessories.
Our 3880 MRI compatible patient vital signs monitoring system (“IRADIMED 3880”) has been designed with non-magnetic components and other special features in order to safely and accurately monitor a patient’s vital signs during various MRI procedures. The IRADIMED 3880 operates dependably in magnetic fields up to 30,000 gauss, which means it can operate virtually anywhere in the MRI scanner room, including in very close proximity to the MRI scanner bore. The IRADIMED 3880 has a compact, lightweight design allowing it to travel with the patient from their critical care unit, to the MRI and back, resulting in increased patient safety through uninterrupted vital signs monitoring and decreasing the amount of time critically ill patients are away from critical care units. Other MRI compatible patient vital signs monitors are large and heavy, creating workflow issues for users. The features of the IRADIMED 3880 include: wireless ECG with dynamic gradient filtering; wireless SpO2 using Masimo® algorithms; non-magnetic respiratory CO2; invasive and non-invasive blood pressure; invasive blood pressure; patient temperature, and; optional advanced multi-gas anesthetic agent unit featuring continuous Minimum Alveolar Concentration measurements. The IRADIMED 3880 MRI compatible patient vital signs monitoring system has an easy-to-use design and allows for the effective communication of patient vital signs information to clinicians.
Our headquarters is located in Winter Springs, Florida.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities in the financial statements and the reported amount of revenue and expenses during the reporting period. Such estimates include allowances for potentially uncollectible accounts receivable, valuation of inventory, intangible assets, stock-based compensation, deferred income taxes, reserves for warranty obligations, and the provision for income taxes. Actual results could differ from those estimates.
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Revenue Recognition
We generate revenue from the sale of MRI compatible medical devices and accessories, extended warranty agreements, services related to maintaining our products and the sale of disposable products used with our devices. The principal customers for our MRI compatible products include hospitals and acute care facilities, both in the U.S. and internationally. In the U.S. we sell our products through our direct sales force and outside of the U.S. we sell our products through third-party distributors who resell our products to end users.
For most domestic sales, we enter into agreements with healthcare supply contracting companies, commonly referred to as Group Purchasing Organizations ("GPOs"), which enable us to sell and distribute our products to their member hospitals. Our agreements with GPOs typically include negotiated pricing for all group members established at time of GPO contract execution. Under these agreements, we are required to pay the GPOs a fee of three percent of the sales of our products to members of the GPO.
We do not sell to GPOs. Hospitals, group practices and other acute care facilities that are members of a GPO, purchase products directly from us under the terms of our GPO agreements.
We recognize revenue when all of the following criteria are met: we have a contract with a customer that creates enforceable rights and obligations; promised products or services are identified; the transaction price, or the amount we expect to receive, is determinable and we have transferred control of the promised products or services to the customer. We consider transfer of control evidenced upon the passage of title and risks and rewards of ownership to the customer, which is typically at a point in time, except for our extended warranty agreements. We allocate the transaction price using the relative standalone selling price method. Customer sale prices for our MRI compatible IV infusion pump systems and related disposables and services are contractually fixed over the GPO contract term. We recognize a receivable at the point in time we have an unconditional right to payment. Payment terms are typically within 45 days after transferring control to U.S. customers. Most international distributors are required to pay a portion of the transaction price in advance and the remaining amount within 30 days of receiving the related products. Accordingly, we have elected to use the practical expedient that allows us to ignore the possible existence of a significant financing component within the contract.
We have elected to account for shipping and handling charges billed to customers as revenue and shipping and handling related expenses as cost of revenue.
In certain U.S. states we are required to collect sales taxes from our customers. We have elected to exclude the amounts collected for these taxes from revenue and record them as a liability until remitted to the taxing authority.
Contract Liabilities
We record contract liabilities, or deferred revenue, when we have an obligation to provide a product or service to the customer and payment is received in advance of our performance. When we sell a product or service with a future performance obligation, we defer revenue allocated to the unfulfilled performance obligation and recognize this revenue when, or as, the performance obligation is satisfied.
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Our deferred revenue consists of advance payments received from customers prior to the transfer of products or services, shipments that are in-transit at the end of a period and sales of extended warranty agreements. Advance payments received from customers and shipments in-transit are recognized in revenue at the time control of the related products has been transferred to the customer or services have been delivered. Amounts related to extended warranty agreements are deferred and recognized in revenue ratably over the agreement period, which is typically one to four years after control of the related products is transferred to the customer, as we believe this recognition pattern best depicts the transfer of services being provided.
Deferred revenue is classified as current or long-term deferred revenue in our Balance Sheets, depending on the expected timing of satisfying the related performance obligations.
Capitalized Contract Costs
We capitalize commissions paid to our sales managers related to contracts with customers when the associated revenue is expected to be earned over a period of time. Deferred commissions are primarily related to the sale of extended warranty agreements. Capitalized commissions are included in Prepaid Expenses and Other Current Assets in our Balance Sheets when the associated expense is expected to be recognized in one year or less, or in Other Assets when the associated expense is expected to be recognized in greater than one year. The associated expense is included in Sales and Marketing expenses in our Statements of Operations.
Variable Consideration
Most of our sales are subject to 30 to 60 -day customer-specified acceptance provisions primarily for purposes of ensuring products were not damaged during the shipping process. Historically, we have experienced immaterial product returns and, when experienced, we typically exchange the affected products with new products. Accordingly, variable consideration from contracts with customers is immaterial to our financial statements.
Cash Equivalents
All highly liquid instruments purchased with an original maturity of three months or less are classified as cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable is recorded at the transaction price of the related products and services. We regularly assess the sufficiency of the allowance for estimated uncollectible accounts receivable. Estimates are based on historical collection experience and other customer-specific information, such as bankruptcy filings or known liquidity problems of our customers. When it is determined that an account receivable is uncollectible, it is written off and relieved from the allowance. Any future determination that the allowance for estimated uncollectible accounts receivable is not properly stated could result in changes in operating expense and results of operations. As of December 31, 2020 and 2019, our allowance for doubtful accounts was $ 46,484 and $ 69,093 , respectively.
Investments
Our investments consist of corporate debt securities and are considered available-for-sale. The specific identification method is used to determine the cost basis of investments sold. Our investments are recorded in our Balance Sheets at fair value. We classify our investments as current based on the nature of the investments and their availability for use in current operations. Unrealized gains and losses on our investments are included in accumulated other comprehensive income (loss), net of tax. Realized gains or losses and impairment losses that are determined to be other-than-temporary are recorded in other income, net in our Statements of Operations.
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Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. A three-level valuation hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels of inputs are:
● Level 1 — quoted prices (unadjusted) in active markets for an identical asset or liability.
● Level 2 — quoted prices for a similar asset or liability in an active market or model-derived valuations in which all significant inputs are observable for substantially the full term of the asset or liability.
● Level 3 — unobservable and significant to the fair value measurement of the asset or liability.
Financial instruments include cash and cash equivalents, investments, accounts receivable, accounts payable and accrued expenses. Cash and cash equivalents and investments are reported at their respective fair values on the balance sheet dates. The recorded carrying amount of accounts receivable, accounts payable and accrued expenses approximates their fair values due to their short-term nature.
Inventory
Inventory is stated at the lower of standard cost, which approximates actual cost on a first-in, first-out basis, or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. We may be exposed to a number of factors that could result in portions of our inventory becoming either obsolete or in excess of anticipated usage. These factors include, but are not limited to, technological changes, competitive pressures in products and prices, and the introduction of new product lines. We regularly evaluate our ability to realize the value of inventory based on a combination of factors, including historical usage rates, forecasted sales, product life cycles, and market acceptance of new products. When inventory that is obsolete or in excess of anticipated usage is identified, it is written down to net realizable value or an inventory valuation allowance is established.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation expense is computed using the straight-line method over estimated useful lives of the respective assets, which are generally three to five years for computer software and hardware and five to seven years for furniture, fixtures, machinery and equipment . Leasehold improvements are depreciated over the shorter of the lease term or the estimated useful life of the improvements.
Repair and maintenance costs that do not extend the useful life of our property and equipment are expensed as incurred.
Intangible Assets
Intangible assets include application and legal costs incurred to obtain patents. We capitalize these costs when we determine that probable future economic benefits exist. In making this determination, we consider the projected future operating results associated with the patents, industry and economic trends, and the entry of new products in the market. Costs incurred prior to this determination are expensed in the period they are incurred. We amortize capitalized patent costs using the straight-line method over their useful lives, which is typically 20 years . Periodic costs incurred to maintain existing patents are expensed as incurred.
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Research & Development and Capitalized Software Development Costs
Research and development costs are expensed as incurred. Some of our products include embedded software which is essential to the products’ functionality. Costs incurred in the research and development of new software components and enhancements to existing software components are expensed as incurred until technological feasibility has been established. We capitalize software development costs when the project reaches technological feasibility and cease capitalization when the project is ready for release. Capitalized software development costs are included in intangible assets and are amortized on a straight-line basis over the estimated useful life of the product and included in cost of revenue. Amortization begins when the product is available for general release to the customer.
Long-lived Assets
Long-lived assets, including right-of-use assets, are tested for impairment whenever changes in circumstances indicate the carrying value of these assets may be impaired. Impairment indicators include, but are not limited to, technological obsolescence, unfavorable court rulings, significant negative industry and economic trends, and significant underperformance relative to historical and projected future operating results. Impairment is considered to have occurred when the estimated undiscounted future cash flows related to the asset groups are less than its carrying value. Estimates of future cash flows involve consideration of many factors including the marketability of new products, product acceptance and lifecycle, competition, appropriate discount rates and operating margins. An impairment is recognized as the amount by which the carrying value is greater than the fair value of the asset or asset group.
Warranty
We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in product quality programs and processes, including actively monitoring and evaluating the quality of our suppliers, the estimated warranty obligation is affected by ongoing product failure rates, material usage costs and direct labor incurred in correcting a product failure. Actual product failure rates, material usage costs and the amount of labor required to repair products that differ from estimates result in revisions to the estimated liability. We warrant for a limited period of time that our products will be free from defects in materials and workmanship. We estimate warranty allowances based on historical warranty experience. The estimates we use in projecting future product warranty costs may prove to be incorrect. Any future determination that our provision for product warranty is understated could result in increases to our cost of revenue and a reduction in our operating profits and results of operations. Historically, warranty expenses have not been material to our financial statements.
Advertising and Marketing
For the years ended December 31, 2020, 2019 and 2018, these costs were $ 6,959 , $ 155,983 and $ 123,451 , respectively. Advertising and marketing costs are expensed as incurred and included in sales and marketing expense.
Stock-Based Compensation
We recognize stock-based compensation expense associated with employee equity awards on a straight-line basis over the requisite service period for the entire award, which is generally four years for employees and two years for the board of directors.
Historically, we have granted two types of employee equity awards, stock options and restricted stock units.
The maximum contractual life of our stock options is ten years from the grant date. We utilize the Black-Scholes option pricing model to estimate the grant date fair value of those awards. The Black-Scholes option pricing model requires the input of certain assumptions including stock price, dividend yield, expected volatility, risk-free interest rate, and expected option life. Changes in these assumptions can materially affect the estimated fair value of our employee stock options.
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The grant date stock price was based on our closing stock price on the date of grant; dividend yield was based on our expectation of dividend payments over the expected life of the option; expected volatility was based on a study of our volatility and comparable, publicly traded companies with similar products and product life cycles; risk-free interest rate was the rate available on zero coupon U.S. government obligations with a term approximating the expected option life; the expected option life was calculated using the simplified method.
The grant date fair value of our restricted stock units is based on the closing price of our common stock on the date of grant.
We elect to recognize forfeitures as they occur.
We issue new shares of common stock upon exercise of stock options or vesting of restricted stock units.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. A valuation allowance is recorded to offset net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
We recognize the tax benefit of uncertain tax positions in the financial statements based on the technical merits of the position. When the tax position is deemed more likely than not of being sustained, we recognize the largest amount of tax benefit that is greater than 50 percent likely of being ultimately realized upon settlement.
Foreign Currency
Gains and losses from transactions denominated in currencies other than our functional currency are included in other income, net. Foreign currency gains and losses result primarily from fluctuations in the exchange rate between the U.S. Dollar and the Japanese Yen.
Comprehensive Income
Comprehensive income includes net income and other comprehensive income items that are excluded from net income under U.S. GAAP. Comprehensive income includes unrealized gains and losses on our investments classified as available for sale.
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Basic and Diluted Net Income per Share
Basic net income per share is based on the weighted-average number of common shares outstanding during the period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The Underwriters’ warrants, stock options and restricted stock units granted by us represent the only dilutive effect reflected in diluted weighted-average shares outstanding. See the Warrants portion of Note 9.
The following table presents the computation of basic and diluted net income per share:
For the Years Ended December, 31
2020
2019
2018
Net income
$
1,369,001
$
9,630,959
$
6,303,450
Weighted-average shares outstanding — Basic
12,123,556
11,282,214
10,758,752
Effect of dilutive securities:
Underwriters’ warrants
—
55,361
92,486
Stock options
267,815
843,957
1,137,270
Restricted stock units
48,715
94,912
121,609
Weighted-average shares outstanding — Diluted
12,440,086
12,276,444
12,110,117
Basic net income per share
$
0.11
$
0.85
$
0.59
Diluted net income per share
$
0.11
$
0.78
$
0.52
Stock options and warrants to purchase shares of our common stock and restricted stock units excluded from the calculation of diluted net income per share because the effect would have been anti-dilutive are as follows:
As of December, 31
2020
2019
2018
Anti-dilutive stock options and restricted stock units
42,690
25,439
21,488
Certain Significant Risks and Uncertainties
We market our products to end users in the United States and to third-party distributors internationally. Sales to end users in the United States are generally made on open credit terms. Management maintains an allowance for potential credit losses.
We have deposited our cash and cash equivalents with various financial institutions. Our cash and cash equivalents balances exceed federally insured limits throughout the year. We have not incurred any losses related to these balances.
Our products require clearance from the Food and Drug Administration and international regulatory agencies prior to commercialized sales. Our future products may not receive required approvals. If we were denied such approvals, or if such approvals were revoked or delayed or if we were unable to timely renew certain approvals for existing products, it would have a materially adverse impact on our business, results of operations and financial condition.
Certain key components of our products essential to their functionality are sole-sourced. Any disruption in the availability of these components would have a materially adverse impact on our business, results of operations and financial condition.
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COVID-19 Considerations
The COVID-19 global pandemic caused disruption in global supply and distribution channels and dramatically changed the way companies do business. From the beginning of this global health crisis, our first priority has been the safety and well-being of our employees.
We continue to monitor the developments associated with the COVID-19 pandemic and its effects on our employees, customers, supply chain and distribution channels. The ongoing impact of the pandemic depends on a number of factors including the severity and duration of the pandemic and the extent and severity of the impact on our customers, which is uncertain and unpredictable. Our future results of operations and cash flows may suffer adverse effects from delays in payments on outstanding accounts receivable, potential manufacturing, distribution and supply chain disruptions and uncertain demand, and effects of any actions we may take to address financial and operational challenges our customers may face. Other risks and uncertainties that we face include, but are not limited to:
● postponement or cancellation of MRI medical procedures and their uncertain return which adversely impacts our business;
● potential temporary or prolonged closure of our office and production facility;
● the health of our employees and ability to meet staffing needs;
● potential new or continued governmental actions that may limit employees’ ability to work;
● civil unrest relating to government, corporate and societal responses to the pandemic;
● volatility in economic conditions and the financial markets, and
● other unanticipated effects that remain unknown.
We are actively managing our response to the COVID-19 pandemic and working with our customers, distributors, vendors, and suppliers and assessing the potential effects to our financial position, results of operations and cash flows. As of the date of the issuance of these financial statements, the extent to which COVID-19 may materially impact our financial condition, liquidity, or results of operations in future periods remains uncertain. For further information regarding the potential impact of the COVID-19 pandemic on our company, see “Risk Factors” in Item 1A of this report.
Recent Accounting Pronouncements
Recently Issued Accounting Pronouncements to be Implemented
In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes . ASU 2019-12 will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2020. We do not expect ASU 2019-12 to have a material impact on financial condition, results of operations or cash flows.
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In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , which requires the Company to measure and recognize expected credit losses for financial assets held and not accounted for at fair value through net income. In November 2018, April 2019 and May 2019, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses , ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses and ASU 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief , which provided additional implementation guidance on ASU 2016-03. The previously mentioned ASUs are effective for fiscal years beginning after December 15, 2022, with early adoption permitted. We do not expect the adoption of these ASUs to have a material impact on our financial condition, results of operations or cash flows.
2 - Revenue
Disaggregation of Revenue
We disaggregate revenue from contracts with customers by geographic region and revenue type as we believe it best depicts the nature, amount, timing and uncertainty of our revenue and cash flow.
Revenue information by geographic region is as follows:
For the Years Ended December 31,
2020
2019
2018
United States
$
24,535,443
$
30,930,267
$
24,508,026
International
7,181,929
7,586,874
5,930,957
Total revenue
$
31,717,372
$
38,517,141
$
30,438,983
Revenue information by type is as follows:
For the Years Ended December 31,
2020
2019
2018
Devices:
MRI compatible IV infusion pump system
$
9,360,929
$
18,052,406
$
14,536,998
MRI compatible patient vital signs monitoring systems
9,763,075
9,709,233
6,655,618
Total Devices revenue
19,124,004
27,761,639
21,192,616
Disposables, service and other
10,723,847
8,914,822
7,728,624
Amortization of extended warranty agreements
1,869,521
1,840,680
1,517,743
Total revenue
$
31,717,372
$
38,517,141
$
30,438,983
Contract Liabilities
Our contract liabilities consist of:
As of December 31,
2020
2019
Advance payments from customers
$
85,590
$
12,765
Shipments in-transit
35,013
4,250
Extended warranty agreements
4,134,069
4,284,872
Total
$
4,254,672
$
4,301,887
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Changes in the contract liabilities during the period are as follows:
Deferred
Revenue
Contract liabilities, December 31, 2018
$
3,605,789
Increases due to cash received from customers
3,337,181
Decreases due to recognition of revenue
( 2,641,083 )
Contract liabilities, December 31, 2019
$
4,301,887
Increases due to cash received from customers
2,150,737
Decreases due to recognition of revenue
( 2,197,952 )
Contract liabilities, December 31, 2020
$
4,254,672
Capitalized Contract Costs
Our capitalized contract costs totaled $ 384,367 and 352,250 as of December 31, 2020 and 2019, respectively.
3 — Inventory
Inventory consists of:
As of December 31,
2020
2019
Raw materials
$
3,210,815
$
2,939,451
Work in process
207,807
229,479
Finished goods
653,038
697,483
Inventory before allowance for excess and obsolete
4,071,660
3,866,413
Allowance for excess and obsolete
( 137,673 )
( 224,852 )
Total
$
3,933,987
$
3,641,561
4 — Property and Equipment
Property and equipment consist of:
As of December 31,
2020
2019
Computer software and hardware
$
705,811
$
627,624
Furniture and fixtures
1,226,113
1,112,550
Leasehold improvements
230,351
225,841
Machinery and equipment
1,823,835
1,778,524
Tooling in-process
470,446
163,105
4,456,556
3,907,644
Accumulated depreciation
( 2,336,408 )
( 1,853,838 )
Total
$
2,120,148
$
2,053,806
Depreciation and amortization expense of property and equipment was $ 510,652 , $ 501,218 and $ 470,395 for the years ended December 31, 2020, 2019 and 2018, respectively.
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Property and equipment, net by geographic region is as follows:
As of December 31,
2020
2019
United States
$
1,349,435
$
1,689,740
International
770,713
364,066
Total property and equipment, net
$
2,120,148
$
2,053,806
Long-lived assets held outside of the United States consist principally of tooling, which is a component of machinery and equipment, net.
5 — Intangible Assets
The following table summarizes the components of intangible asset balances:
As of December 31,
2020
2019
Patents — in use
$
362,162
$
304,270
Patents — in process
69,733
120,581
Internally developed software — in use
872,253
867,569
Internally developed software — in process
261,622
80,721
Trademarks
27,247
26,133
1,593,017
1,399,274
Accumulated amortization
( 632,132 )
( 539,187 )
Total
$
960,885
$
860,087
Amortization expense of intangible assets was $ 92,945 , $ 89,963 and $ 89,333 for the years ended December 31, 2020, 2019 and 2018, respectively.
Expected annual amortization expense for the next five years related to intangible assets is as follows (excludes in-process intangible assets):
2021
$
100,274
2022
$
99,703
2023
$
99,051
2024
$
98,750
2025
$
96,533
6 — Investments
Our investments consist of bonds that we have classified as available-for-sale and are summarized in the following tables:
As of December 31, 2020
Gross
Gross
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
U.S. corporations
$
1,863,382
$
45,986
$
—
$
1,909,368
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As of December 31, 2019
Gross
Gross
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
Corporate bonds:
U.S. corporations
$
2,258,686
$
29,123
$
—
$
2,287,809
International corporations
471,139
9,339
—
480,478
Total
$
2,729,825
$
38,462
$
—
$
2,768,287
As of December 31, 2020, the scheduled maturities of our investments are as follows:
Cost
Fair Value
Less than 1 year
$
1,371,407
$
1,399,343
1 to 3 years
491,975
510,025
Total
$
1,863,382
$
1,909,368
7 — Fair Value Measurements
The fair value of our assets and liabilities subject to recurring fair value measurements are as follows:
Fair Value at December 31, 2020
Quoted Prices
Significant
in Active
Other
Significant
Market for
Observable
Unobservable
Fair
Identical Assets
Inputs
Inputs
Value
(Level 1)
(Level 2)
(Level 3)
U.S. corporations
$
1,909,368
$
—
$
1,909,368
$
—
Fair Value at December 31, 2019
Quoted Prices
Significant
in Active
Other
Significant
Market for
Observable
Unobservable
Fair
Identical Assets
Inputs
Inputs
Value
(Level 1)
(Level 2)
(Level 3)
Corporate bonds:
U.S. corporations
$
2,287,809
$
—
$
2,287,809
$
—
International corporations
480,478
—
480,478
—
Total
$
2,768,287
$
—
$
2,768,287
$
—
Our corporate bonds are valued by the third-party custodian at closing prices from national exchanges or pricing vendors on the valuation date.
There were no transfers into or out of any Levels during the years ended December 31, 2020 or 2019.
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8 — Accumulated Other Comprehensive Income
The only component of accumulated other comprehensive income relates to unrealized gains and (losses) on our investments and activity is as follows:
Unrealized Gains
(Losses) on
Available-For-Sale
Securities
Balance at December 31, 2017
$
( 48,909 )
Losses, net
( 3,554 )
Reclassification realized in net earnings
20,767
Cumulative effect from adoption of accounting standard update
( 10,496 )
Balance at December 31, 2018
$
( 42,192 )
Gains, net
80,659
Reclassification realized in net earnings
( 8,093 )
Balance at December 31, 2019
$
30,374
Gains, net
19,699
Reclassification realized in net earnings
( 12,986 )
Balance at December 31, 2020
$
37,087
9 — Stock-Based Compensation
In April 2014, our Board of Directors adopted and our shareholders approved the 2014 Equity Incentive Plan (“2014 Plan”). Upon adoption and approval of the 2014 Plan, the previous equity incentive plan was terminated and the remaining shares available for future awards were canceled. The 2014 Plan initially reserved 1,000,000 shares of our common stock for awards of incentive stock options, non-qualified stock option, stock appreciation rights, restricted stock, restricted stock units, performance awards and other stock-based and cash awards. On June 12, 2020, the shareholders approved an amendment to the 2014 Plan, which reserved an additional 1,000,000 shares of our common stock for the various equity awards mentioned above. As of December 31, 2020, there were 1,146,586 shares available for future awards under the 2014 Plan.
Stock-based compensation was recognized as follows in the Statements of Operations:
For the Years Ended December 31,
2020
2019
2018
Cost of revenue
$
198,037
$
256,924
$
279,221
General and administrative
3,309,007
1,167,161
1,000,002
Sales and marketing
371,819
348,603
329,644
Research and development
83,158
82,277
155,452
Total stock-based compensation expense
$
3,962,021
$
1,854,965
$
1,764,319
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Stock Options
The following table presents a summary of our stock option activity as of and for the year ended December 31, 2020:
Weighted-Average
Weighted-Average
Remaining
Aggregate
Exercise Price
Contractual
Intrinsic
Options
Per Share
Life (Yrs.)
Value
Outstanding beginning of period
638,860
$
4.31
4.3
$
12,192,995
Options granted
—
—
Options exercised
( 404,850 )
4.27
Options cancelled
—
—
Options expired
( 3,500 )
13.91
Outstanding end of period
230,510
$
4.24
3.2
$
4,293,465
Exercisable
230,510
$
4.24
3.2
$
4,293,465
The total grant date fair value of stock options that vested during the year ended December 31, 2020 was $ 609,875 . The total intrinsic value of options exercised during the year ended December 31, 2020, 2019 and 2018 was $ 7,764,920 , $ 11,870,492 and $ 6,071,319 , respectively.
No options were granted during the years ended December 31, 2020 and December 31, 2018. The weighted-average grant-date fair value of options granted during the year ended December 31, 2019 was $ 11.84 . For the years ended December 31, 2020, 2019 and 2018, we estimated the fair value of options granted using a Black-Scholes option pricing model with the following weighted average assumptions:
For the Years Ended December, 31
2020
2019
2018
Volatility
—
%
59.1
%
—
%
Expected term (years)
0
6.3
0
Risk-free interest rate
—
%
1.5
%
—
%
Dividend yield
—
%
0.0
%
—
%
Restricted Stock Units
The following table presents a summary of our restricted stock unit activity as of and for the year ended December 31, 2020:
Restricted
Weighted-Average
Stock
Grant Date
Units
Fair Value
Unvested at December 31, 2019
297,048
$
19.36
Granted
90,975
$
24.08
Vested
( 190,023 )
$
19.32
Cancelled
( 34,970 )
$
15.39
Unvested at December 31, 2020
163,030
$
22.89
As of December 31, 2020, we had $ 3,491,004 of unrecognized compensation cost related to the unvested restricted stock units, which is expected to be recognized over a weighted-average period of 2.8 years.
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Warrants
Associated with our IPO completed on July 21, 2014, we issued Underwriters Warrants (the “Warrants”) to purchase up to a total of 201,600 shares of our common stock. The grant date aggregate fair value of the Warrants was $ 611,000 . The Warrants were exercisable, in whole or in part, commencing July 21, 2015 through July 21, 2017. The Warrants were exercisable at $ 8.125 per share, or 130 percent of the public offering price per share of our common stock in the IPO. On the grant date, we classified the Warrants as equity and incremental direct costs associated with our IPO. Accordingly, the issuance of the Warrants had no impact on our financial statements.
On July 17, 2017, our Board of Directors approved a modification to the Warrants. This modification extended the expiration date of the Warrants from July 17, 2017 to July 17, 2019 and revised the strike price from $ 8.125 to $ 10.05 . During the year ended December 31, 2019, the remaining 162,031 warrants were exercised.
10 — Other Income, Net
Other income, net consists of:
For the Years Ended December 31,
2020
2019
2018
Interest income
$
132,185
$
388,801
$
238,106
Realized gain (losses) on maturities of investments
17,272
10,764
( 29,308 )
Foreign currency exchange losses
( 10,244 )
( 3,653 )
( 15,261 )
Total other income, net
$
139,213
$
395,912
$
193,537
11 — Income Taxes
The components of the provision for income taxes are as follows:
For the Years Ended December 31,
2020
2019
2018
Current taxes:
U.S. federal
$
( 2,404,511 )
$
( 47,831 )
$
740
State
19,104
58,379
37,547
Foreign
10,390
—
—
Total current tax (benefit) expense
( 2,375,017 )
10,548
38,287
Deferred taxes:
U.S. federal
547,200
( 544,384 )
( 128,905 )
State
( 158,063 )
( 53,806 )
( 15,525 )
Total deferred tax expense (benefit)
389,138
( 598,190 )
( 144,430 )
Provision for income tax benefit
$
( 1,985,879 )
$
( 587,642 )
$
( 106,143 )
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Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred taxes are as follows:
As of December 31,
2020
2019
Deferred income tax assets (liabilities):
Stock compensation
$
491,686
$
790,357
Deferred revenue
641,607
446,562
Reserves and allowances
218,866
257,549
Research and development credits carryforward
325,006
146,320
Net operating loss carryforward
263,974
688,084
Depreciation and amortization
( 550,526 )
( 619,528 )
Accrued expenses
( 49,848 )
—
Other, net
( 68,093 )
( 45,929 )
Total deferred income taxes, net
$
1,272,672
$
1,663,415
As of December 31, 2020, we recorded a state net operating loss carryforward of $ 263,974 . Many states follow a 20-year carryforward period for net operating losses, however, certain states have a shorter expiration period.
A reconciliation of the statutory U.S. federal tax rate to our effective rate is as follows:
For the Years Ended December 31,
2020
2019
2018
Statutory U.S. federal tax rate
21.0
%
21.0
%
21.0
%
CARES Act NOL carryback
123.3
—
—
Tax (windfalls) deficiencies on exercise and vesting of equity awards
3.0
( 17.1 )
( 21.8 )
Stock compensation expense
197.1
( 9.8 )
( 0.2 )
State taxes, net of federal benefit
22.5
0.1
( 0.1 )
Permanent items
( 2.5 )
1.2
0.5
Provision to return adjustments
14.1
( 1.1 )
( 0.3 )
Compensation limitations
( 70.0 )
—
—
Foreign taxes
( 1.7 )
—
—
Research and development credits
15.1
( 0.8 )
( 0.8 )
Effective rate
321.9
%
( 6.5 )
%
( 1.7 )
%
As of December 31, 2020 and December 31, 2019, 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 file tax returns in the United States Federal jurisdiction and many U.S. state jurisdictions. Our returns are not currently under examination by the Internal Revenue Service. The Company remains subject to income tax examinations for our United States Federal and certain U.S. state income taxes for 2017 and subsequent years and various other U.S. state income taxes for 2016 and subsequent years.
12 — Leases
We have 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, Chief Executive Officer, and Chairman of the Board, 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.
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Unless advance written notice of termination is timely provided, the lease will automatically renew for one additional successive term of five years beginning in 2024, and thereafter, will be renewed for successive terms of one year each. We concluded that we will exercise the remaining five-year option, resulting in a remaining lease term of 8.4 years as of December 31, 2020. This lease agreement does not contain any residual value guarantee or material restrictive covenants.
Operating lease cost recognized in the Statements of Operations is as follows:
For the Years Ended
December 31,
2020
2019
Cost of revenue
$
186,139
$
186,139
General and administrative
184,177
184,177
Sales and marketing
10,417
10,417
Research and development
28,861
28,861
Total
$
409,594
$
409,594
Lease costs for short-term leases were immaterial for the year ended December 31, 2020 and 2019.
Maturity of Operating lease liability as of December 31, 2020 is as follows:
2021
$
409,596
2022
409,596
2023
409,596
2024
409,596
2025
409,596
Thereafter
1,399,454
Total lease payments
3,447,434
Imputed interest
( 732,404 )
Present value of lease liability
$
2,715,030
We used a discount rate of 6.0 % to determine the present value of the operating lease liability on January 1, 2019.
13 — Employee Benefit Plan
We sponsor a 401(k) tax-deferred savings plan under which eligible employees may elect to have a portion of their salary deferred and contributed to the plan. Employer matching contributions are determined by management and are discretionary. Employer matching contributions were $ 441,479 , $ 374,979 and $ 293,669 , respectively, for the years ended December 31, 2020, 2019 and 2018. Employer contributions vest immediately.
14 — Commitments and Contingencies
Purchase commitments. We had various purchase orders for goods or services totaling approximately $ 3,089,103 and $ 3,208,174 as of December 31, 2020 and 2019, respectively. No amounts related to these purchase orders have been recognized in our balance sheet.
Indemnifications. 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 determined
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that these agreements fall within the scope of ASC 460, Guarantees . We have obtained liability insurance providing coverage that limits our exposure for these indemnified matters. We have not incurred costs to defend lawsuits or settle claims related to these indemnities. We believe the estimated fair value of these indemnities is minimal and have not recorded a liability for these agreements as of December 31, 2020.
Legal matters. We may from time to time become a party to various legal proceedings or claims that arise in the ordinary course of business.
15 — Capital Stock
The rights and privileges of our Series A Preferred Stock and Common Stock are as follows:
Series A Preferred Stock
We are authorized to issue 3,500,000 shares of preferred stock, of which 800,000 of these shares shall be designated as Series A Preferred Stock (“Preferred Stock”) with a par value of $ 0.0001 per share. As of December 31, 2020, there was no preferred stock issued or outstanding .
Voting and Dividends. The holder of each share of Preferred Stock has the right to one vote for each share of Common Stock into which such Preferred Stock could then be converted. The holders of the Preferred Stock are entitled to receive dividends from legally available assets prior to any declaration or payment of dividends to Common Stock holders. Dividends on each share of Preferred Stock are initially at $ 0.06429 per year payable when and as declared by the Board and are non-cumulative. After payment of such dividends, any additional dividends or distributions are distributed among all holders of Common Stock and Preferred Stock in proportion to the number of shares of Common Stock that would be held by each holder if all shares of Preferred Stock were converted to Common Stock at the then effective conversion rate. To date, no dividends have been declared.
Liquidation. In the event of any liquidation, dissolution or winding up of our Company, either voluntary or involuntary, the holders of the Preferred Stock are entitled to receive, prior and in preference to any distribution of the proceeds resulting from such liquidation event to holders of the Common Stock, an amount equal to $ 1.07143 plus declared but unpaid dividends. If, upon occurrence of such liquidation event, the proceeds are insufficient to permit the payment of the aforementioned amount in full, then the entire proceeds shall be distributed ratably among all holders of the Preferred Stock in proportion to the full amount each holder would otherwise receive.
Conversion. Each share of Preferred Stock is convertible at any time, at the option of the holder, into such number of fully paid non-assessable shares of Common Stock as is determined by dividing the original issue price of each share of Preferred Stock by the applicable conversion price. The initial conversion price per share is $ 1.07143 . Adjustments to the initial conversion price may result from a recapitalization event or changes in the number of common shares outstanding. Each share of Preferred Stock automatically converts into shares of fully paid non-assessable shares of Common Stock, at the then applicable conversion rate, upon the date specified by written consent or agreement of the holders of a majority of the then outstanding shares of Preferred Stock, voting as a single class on an as-converted basis.
Redemption. Upon a majority vote of the then outstanding shares of Preferred Stock, we may, at our discretion, redeem or purchase shares of Preferred Stock. We also have a first right of refusal to repurchase shares of the Preferred Stock arising from a holder's proposal to sell such Preferred Stock.
Common Stock
We are authorized to issue 31,500,000 shares of Common Stock with a par value of $ 0.0001 per share.
Voting and Dividends. Each outstanding share of Common Stock shall entitle the holder thereof to one vote on each matter properly submitted to the stockholders of the Company for their vote except for matters related to potential amendments to our Certificate of Incorporation or matters that solely relate to the terms of one or more outstanding series of our Preferred Stock. Holders of our Common Stock are entitled to receive, when, as and if declared by the
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Board, dividends pro rata based on the number of shares of Common Stock held. These dividend rights are junior to those of the Preferred Stock holders’ rights to dividends.
Liquidation. Liquidation preference of the Common Stock holders is junior to that of the Preferred Stock holders.
Redemption. The Common Stock is not redeemable.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.