IRADIMED CORPORATION You should read this discussion and analysis together with our audited financial statements, the notes to such statements and the other financial information included in this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under the section entitled "Risk Factors" and elsewhere in this Form 10-K, our actual results may differ materially from those anticipated in these forward-looking statements. See "CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS" for a discussion of the uncertainties, risks and assumptions associated with these statements. Our Business
We develop, manufacture, market and distribute Magnetic Resonance Imaging ("MRI") compatible medical devices and accessories and services relating to them.
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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 contain additional optional upgrade accessories.
Our 3880 MRI compatible patient vital signs monitoring system has been designed
with non-magnetic components and other special features to safely and accurately
monitor a patient's vital signs during various MRI procedures. The IRADIMED 3880
system operates dependably in magnetic fields up to 30,000 gauss, which means it
can operate virtually anywhere in the MRI scanner room. The IRADIMED 3880 has a
compact, lightweight design allowing it to travel with the patient from their
critical care unit, to the MRI and back, resulting in increased patient safety
through uninterrupted vital signs monitoring and decreasing the amount of time
critically ill patients are away from critical care units. The features of the
IRADIMED 3880 include: wireless ECG with dynamic gradient filtering; wireless
SpO2 using Masimo® algorithms; non-magnetic respiratory CO2; invasive and
non-invasive blood pressure; patient temperature, and; optional advanced
multi-gas anesthetic agent unit featuring continuous Minimum Alveolar
Concentration measurements. The IRADIMED 3880 MRI compatible patient vital signs
monitoring system has an easy-to-use design and allows for the effective
communication of patient vital signs information to clinicians.
We generate revenue from the sale of MRI compatible medical devices and
accessories, extended warranty agreements, services related to maintaining our
products and the sale of disposable products used with our devices. The
principal customers for our MRI compatible products include hospitals and acute
care facilities, both in the United States and internationally. As of
December 31, 2019 , our direct U.S. sales force consisted of 29 field sales
representatives, 4 regional sales directors and supplemented by 6 clinical
support representatives. Internationally, we have distribution agreements with
independent distributors selling our products.
Historical selling cycles for our devices have varied widely and are typically
three to six months in duration. We also enter into agreements with healthcare
supply contracting companies in the U.S. , which enable us to sell and distribute
our MRidium MRI compatible IV infusion pump system 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 95 percent of all U.S. hospitals and acute care
facilities.
U.S. Tax Reform
On December 22, 2017 , the Tax Cuts and Jobs Act ("2017 Act") was enacted. The
2017 Act represents major tax reform that, among other provisions, reduced the
U.S. corporate tax rate. Certain income tax effects of the 2017 Act, including
$0.5 million of tax expense recorded principally due to the remeasurement of our
net deferred tax assets as of December 31, 2017 , are reflected in our Financial
Statements in accordance with Staff Accounting Bulletin No. 118 ("SAB 118"),
which provides SEC staff guidance regarding the application of Accounting
Standards Codification ("ASC") Topic 740, Income Taxes, in the reporting period
in which the 2017 Act became law. See Note 11 to the Financial Statements for
further information on the financial impact of the 2017 Act.
Financial Highlights and Outlook
Our revenue was$38.5 million in 2019,$30.4 million in 2018 and$23.1 million in 2017. Our diluted earnings per share was$0.78 in 2019,$0.52 in 2018 and$0.04 in 2017. Our cash provided by operations was$10.2 million in 2019,$7.4 million in 2018 and$3.4 million in 2017.
Our estimated installed base of medical devices is as follows:
Years Ended December 31,
2019 2018 2017
IV Infusion Pump Systems 5,515 5,000 4,500Patient Vital Signs Monitoring Systems 539 261 75
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In 2020, we expect our revenues to increase 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 an increased number of hospitals and acute care
facilities that have yet to adopt our technology and furthering our penetration
into 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 operating expenses
to increase in 2020 due to growth in headcount and higher sales commission costs
due to anticipated higher sales.
Application of Critical Accounting Policies
We prepare our financial statements in conformity withU.S. GAAP. The preparation of these financial statements requires us to make estimates and use assumptions that affect the reported amounts of assets, liabilities and related disclosures at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Our significant accounting policies are more fully described in Note 1 to the Financial Statements. However, we believe that the following critical accounting policies require the use of significant estimates, assumptions and judgments. The use of different estimates, assumptions and judgments could have a material effect on the reported amounts of assets, liabilities and related disclosures as of the date of the financial statements and revenue and expenses during the
reporting period. Revenue Recognition We generate revenue from the sale of MRI compatible medical devices and accessories, extended warranty agreements, services related to maintaining our products and the sale of disposable products used with our devices. The principal customers for our MRI compatible products include hospitals and acute care facilities, both in theU.S. and internationally. In theU.S. we sell our products through our direct sales force and outside of theU.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.
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 toU.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
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.
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. 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.
The estimates we use in projecting future product demand may prove to be incorrect. Any future determination that our inventory is overvalued could result in increases to our cost of sales and decreases to our operating margins and results of operations.
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.
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Stock-based Compensation
We apply the fair value recognition provisions of Financial Accounting Standards
Board Accounting Standards Codification Topic 718, Compensation - Stock
Compensation("ASC 718"). Determining the amount of stock-based compensation to
be recorded for stock options that we grant requires us to develop estimates of
the fair value as of the grant date. Calculating the fair value of stock option
awards requires that we make highly subjective assumptions. We use the
Black-Scholes option pricing model to value our stock option awards. Use of this
valuation methodology requires that we make assumptions as to the volatility of
our common stock, the expected term of our stock options, the risk-free interest
rate for a period that approximates the expected term of our stock options and
our expected dividend yield. As we completed our IPO in July 2014 , we utilize
the historical stock price volatility from a representative group of public
companies, which includes the Company, to estimate expected stock price
volatility. We selected companies from the medical device industry with market
capitalizations that are similar to ours. We intend to continue to utilize the
historical volatility of the same or similar public companies to estimate
expected volatility until a sufficient amount of historical information
regarding the price of our publicly traded stock becomes available. We use the
simplified method as prescribed by ASC 718 to calculate the expected term of
stock options granted to employees as we do not have sufficient historical
exercise data to provide a reasonable basis upon which to estimate the expected
term of our stock option awards. The risk-free interest rate used for each grant
is based on the U.S. Treasury yield curve in effect at the time of the grant for
instruments with a similar expected life. We utilize a dividend yield of zero as
we have no current intention to pay cash dividends. We elect to recognize
forfeitures as they occur.
As stock-based compensation is an important part of our employee compensation
reward strategy, we expect the future impact of stock-based compensation expense
on our financial results to grow due to additional stock grants and increased
headcount.
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.
On December 22, 2017 , the Tax Cuts and Jobs Act ("2017 Act") was enacted. As a
result of the 2017 Act, we were required to revalue our deferred tax assets and
deferred tax liabilities to account for the future impact of lower corporate tax
rates on these deferred amounts. The reduction in the federal corporate tax rate
increased our income tax expense for the year ended December 31, 2017 . See Note
11 for further information on the financial impact of the 2017 Act.
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Results of Operations
The following table sets forth for the periods indicated selected statements of
operations data as a percentage of total revenue. Our historical operating
results are not necessarily indicative of the results for any future period.
Percent of Revenue
Years Ended December 31,
2019 2018 2017
Revenue 100.0 % 100.0 % 100.0 %
Cost of revenue 22.9 23.7 24.1
Gross profit 77.1 76.3 75.9
Operating expenses:
General and administrative 27.1 28.6 39.0
Sales and marketing 23.8 23.0 23.8
Research and development 3.7 5.0 7.5
Total operating expenses 54.7 56.6 70.3
Income from operations 22.5 19.7 5.6
Other income, net 1.0 0.6 0.5Income before provision for income taxes 23.5 20.4 6.0 Provision for income tax (benefit) expense (1.5 ) (0.3 )
3.9 Net income 25.0 % 20.7 % 2.2 %
Comparison of the Years Ended
Revenue by
Years Ended December 31,
(In millions, except percent change) 2019 2018 Change
United States $ 30.9 $ 24.5 26.2 %
International 7.6 5.9 27.9 %
Total revenue $ 38.5 $ 30.4 26.5 %
Revenue by Type
Years Ended December 31,
(In millions, except percent change) 2019 2018 Change
Devices:
MRI compatible IV infusion pump system $ 18.1 $ 14.5 24.2 %
MRI compatible patient vital signs monitoring system 9.7 6.7 45.9 %
Total Devices revenue 27.8 21.2 31.0 %
Disposables, services and other 8.9 7.7 15.3 %
Amortization of extended warranty agreements 1.8 1.5 21.3 %
Total revenue $ 38.5 $ 30.4 26.5 %
Revenue increased $8.1 million , or 26.5 percent, to $38.5 million from
$30.4 million for the same period in 2018. This increase is primarily due to an
increase in the number of our MRI compatible medical devices that we recognized
in revenue, higher revenue from our disposables, services and other, and a
higher average selling price for our infusion pump system.
During the year ended December 31, 2019 , we recognized revenue on 519 MRI
compatible IV infusion pumps compared to 451 pumps in 2018. The average selling
price for our MRI compatible IV infusion pump systems recognized in revenue
during the year ended December 31, 2019 was approximately $34,800 , compared to
$32,200 for the same period in 2018. The increase in average selling price is
the result of higher domestic unit sales and a favorable product sales mix
during 2019 when compared to 2018.
We recognized revenue on 278 MRI compatible patient vital signs monitoring
systems during the year ended December 31, 2019 , compared to 186 systems for the
same period in 2018. The average selling price for our MRI compatible patient
vital signs monitoring systems recognized in revenue was approximately $34,700
during the year ended December 31, 2019 , compared to $35,100 for the same period
in 2018. The decrease in average selling price is due to higher international
unit sales in 2019 when compared to 2018.
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Revenue from sales in theU.S. increased$6.4 million , or 26.2 percent, to$30.9 million from$24.5 million for the same period in 2018. Revenue from sales internationally increased$1.7 million , or 27.9 percent, to$7.6 million from$5.9 million for the same period in 2018. Domestic sales accounted for 80.3 percent of total revenue for the year endedDecember 31, 2019 , compared to 80.5 percent for the same period in 2018. Revenue from sales of devices increased$6.6 million , or 31.0 percent, to$27.8 million from$21.2 million for the same period in 2018. Revenue from sales of our disposables, services and other increased$1.2 million , or 15.3 percent, to$8.9 million from$7.7 million for the same period in 2018. Revenue from the amortization of our extended maintenance contracts increased$0.3 million , or 21.3 percent, to$1.8 million from$1.5 million for the same period in 2018.
Cost of Revenue and Gross Profit
Years Ended December 31,
(In millions, except gross profit percentage) 2019 2018
Revenue $ 38.5 $ 30.4
Cost of revenue 8.8 7.2
Gross profit $ 29.7 $ 23.2
Gross profit percentage 77.1 % 76.3 %
Cost of revenue increased approximately $1.6 million , or 22.2 percent, to
$8.8 million for the year ended December 31, 2019 , from $7.2 million for the
same period in 2018. Gross profit increased approximately $6.5 million , or 27.9
percent, to $29.7 million for the year ended December 31, 2019 from
$23.2 million for the same period in 2018. The increase in cost of revenue and
gross profit is due to higher sales during the year ended December 31, 2019 ,
compared to the same period in 2018. Gross profit margin was 77.1 percent and
76.3 percent for the years ended December 31, 2019 and 2018, respectively. The
increase in gross profit margin is the result of favorable overhead variance
adjustments, partially offset by unfavorable pricing adjustments in 2019
compared to 2018.
Operating Expenses
Years Ended December 31,
(In millions, except percentage of revenue) 2019 2018
General and administrative $ 10.5 $ 8.7
Percentage of revenue 27.1 % 28.6 %
Sales and marketing $ 9.2 $ 7.0
Percentage of revenue 23.8 % 23.0 %
Research and development $ 1.4 $ 1.5
Percentage of revenue 3.7 % 5.0 %
General and Administrative
General and administrative expense increased approximately$1.8 million , or 20.0 percent, to$10.5 million for the year endedDecember 31, 2019 , from$8.7 million for the same period last year. This increase is primarily due to higher expenses for payroll and benefits, legal and professional costs, employee relocation and recruiting costs, regulatory approval and certification costs, GPO administrative fees due to higher sales and stock compensation expense.
Sales and Marketing Sales and marketing expense increased approximately$2.2 million , or 31.1 percent, to$9.2 million for the year endedDecember 31, 2019 , from$7.0 million for the same period in 2018. This is primarily the result of higher salary and commissions expenses resulting from the increased size of our sales team and higher sales during 2019 when compared to 2018. Research and Development
Research and development expense decreased approximately$(0.1) million , or (5.6) percent, to$1.4 million for the year endedDecember 31, 2019 , from$1.5 million for the same period in 2018. This is primarily due to lower expenses for payroll and stock compensation expense. 44 Other Income, Net Other income, net consists of interest income, foreign currency transactional gains and losses, and other miscellaneous income. We reported other income of approximately$0.4 million and$0.2 for the years endedDecember 31, 2019 and 2018, respectively. This increase is primarily the result of higher interest income and gains on maturities of investments during the year endedDecember 31, 2019 compared to the same period in 2018. Income Taxes We recorded a provision for income tax benefit of approximately$(0.6) million and$(0.1) million for the years endedDecember 31, 2019 and 2018, respectively. Our effective tax rate for the year endedDecember 31, 2019 was (6.5) percent compared to (1.7) percent for the same period in 2018. The decrease in our provision for income taxes and effective tax rate is primarily the result of discrete items related to tax benefits associated with the exercise and sale of employee options and vesting of restricted stock units.
Comparison of the Years Ended
Revenue by
Years Ended December 31,
(In millions, except percent change) 2018 2017 Change
United States $ 24.5 $ 19.5 25.7 %
International 5.9 3.6 65.6 %
Total revenue $ 30.4 $ 23.1 31.9 %
Revenue by Type
Years Ended December 31,
(In millions, except percent change) 2018 2017 Change
Devices:
MRI compatible IV infusion pump system $ 14.5 $ 13.6 6.7 %
MRI compatible patient vital signs monitoring systems 6.7 1.9 260.0 %
Total Devices revenue 21.2 15.5 37.0 %
Disposables, services and other 7.7 6.6 16.9 %
Amortization of extended warranty agreements 1.5 1.0 52.2 %
Total revenue $ 30.4 $ 23.1 31.9 %
Revenue increased $7.3 million , or 31.9 percent, to $30.4 million from
$23.1 million for the same period in 2017. This increase is primarily due to an
increase in the number of our MRI compatible medical devices that we recognized
in revenue and higher revenue from our disposables, services and other. The
increase was partially offset by a lower average selling price for our infusion
pump system resulting from higher international sales as a percent of total
sales in 2018 compared to 2017.
During the year ended December 31, 2018 , we recognized revenue on 451 MRI
compatible IV infusion pumps compared to 392 pumps in 2017. The average selling
price for our MRI compatible IV infusion pump systems recognized in revenue
during the year ended December 31, 2018 was approximately $32,200 , compared to
$34,700 for the same period in 2017. The decrease in average selling price is
the result of higher international unit sales and an unfavorable product sales
mix during 2018 when compared to 2017.
We recognized revenue on 186 MRI compatible patient vital signs monitoring
systems during the year ended December 31, 2018 , compared to 70 systems for the
same period in 2017. The average selling price for our MRI compatible patient
vital signs monitoring systems recognized in revenue was approximately $35,100
during the year ended December 31, 2018 , compared to $25,200 for the same period
in 2017. The increase in average selling price is due to higher domestic unit
sales in 2018 when compared to 2017.
Revenue from sales in the U.S. increased $5.0 million , or 25.7 percent, to
$24.5 million from $19.5 million for the same period in 2017. Revenue from sales
internationally increased $2.3 million , or 65.6 percent, to $5.9 million from
$3.6 million for the same period in 2017. Domestic sales accounted for 80.5
percent of total revenue for the year ended December 31, 2018 , compared to 84.5
percent for the same period in 2017.
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Revenue from sales of devices increased $5.7 million , or 37.0 percent, to $21.2
million from $15.5 million for the same period in 2017. Revenue from sales of
our disposables, services and other increased $1.1 million , or 16.9 percent, to
$7.7 million from $6.6 million for the same period in 2017. Revenue from the
amortization of our extended maintenance contracts increased $0.5 million , or
52.2 percent, to $1.5 million from $1.0 million for the same period in 2017.
Cost of Revenue and Gross Profit
Years Ended December 31,
(In millions, except gross profit percentage) 2018 2017
Revenue $ 30.4 $ 23.1
Cost of revenue 7.2 5.6
Gross profit $ 23.2 $ 17.5
Gross profit percentage 76.3 % 75.9 %
Cost of revenue increased approximately $1.6 million , or 29.5 percent, to
$7.2 million for the year ended December 31, 2018 , from $5.6 million for the
same period in 2017. Gross profit increased approximately $5.7 million , or 32.6
percent, to $23.2 million for the year ended December 31, 2018 from
$17.5 million for the same period in 2017. The increase in cost of revenue and
gross profit is due to higher sales during the year ended December 31, 2018 ,
compared to the same period in 2017. Gross profit margin was 76.3 percent and
75.9 percent for the years ended December 31, 2018 and 2017, respectively. The
increase in gross profit margin is the result of favorable overhead variance
adjustments and higher domestic revenue as a percent of total revenue in 2018
compared to 2017.
Operating Expenses
Years Ended December 31,
(In millions, except percentage of revenue) 2018 2017
General and administrative $ 8.7 $ 9.0
Percentage of revenue 28.6 % 39.0 %
Sales and marketing $ 7.0 $ 5.5
Percentage of revenue 23.0 % 23.8 %
Research and development $ 1.5 $ 1.7
Percentage of revenue 5.0 % 7.5 %
General and Administrative
General and administrative expense decreased approximately$(0.3) million , or (3.2) percent, to$8.7 million for the year endedDecember 31, 2018 , from$9.0 million for the same period last year. This decrease is primarily due to lower stock compensation expense primarily related to a one-time charge for the modification of the underwriters' warrants recognized in 2017, the write-off of non-trade accounts receivable during 2017 and lower consulting expenses during 2018, partially offset by higher expenses for payroll and benefits, computer software and supplies, legal and professional expenses. Sales and Marketing Sales and marketing expense increased approximately$1.5 million , or 27.1 percent, to$7.0 million for the year endedDecember 31, 2018 , from$5.5 million for the same period in 2017. This is primarily the result of higher salary and commissions expenses resulting from the increased size of our sales team and higher sales during 2018 when compared to 2017, partially offset by lower stock compensation expense. Research and Development
Research and development expense decreased approximately$(0.2) million , or (11.9) percent, to$1.5 million for the year endedDecember 31, 2018 , from$1.7 million for the same period in 2017. This is primarily due to lower expenses for consulting and outside engineering services, partially offset by higher payroll and stock compensation expense. Other Income, Net Other income, net consists of interest income, foreign currency transactional gains and losses, and other miscellaneous income. We reported other income of approximately$0.2 million and$0.1 million for the years endedDecember 31, 2018 and 2017, respectively. This increase is primarily the result of higher interest income, partially offset by higher losses on maturities of investments during the year endedDecember 31, 2018 compared to the same period in 2017. 46 Income Taxes We recorded a provision for income tax benefit of approximately$(0.1) million for the year endedDecember 31, 2018 . For the year endedDecember 31, 2017 , we recorded a provision for income tax expense of approximately$0.9 million . Our effective tax rate for the year endedDecember 31, 2018 was (1.7) percent compared to 64.2 percent for the same period in 2017. The decrease in our provision for income taxes and effective tax rate is primarily the result of discrete items related to tax benefits associated with the exercise and sale of employee options and underwriters' warrants during 2018 and$0.5 million of tax expense recorded during the year endedDecember 31, 2017 due to a one-time remeasurement of net deferred tax assets resulting from the 2017 Act, enacted onDecember 22, 2017 . See Note 11 to the Financial Statements for further information on the financial statement impact of the 2017 Act.
Liquidity and Capital Resources
Our principal sources of liquidity have historically been our cash and cash equivalents balances, our investments, cash flow from operations and access to the financial markets. Our principal uses of cash are operating expenses, working capital requirements and capital expenditures.
As ofDecember 31, 2019 , we had cash and cash equivalents and investments of$46.3 million , stockholders' equity of$55.5 million , and working capital of$53.1 million compared to cash and cash equivalents and investments of$34.4 million , stockholders' equity of$41.9 million , and working capital of$39.9 million as ofDecember 31, 2018 . For the Years Ended December 31, (In millions) 2019 2018 2017
Net cash provided by operating activities$ 10.2 $ 7.4 $ 3.4 Net cash provided by (used in) investing activities$ 3.2 $ 1.5 $ (1.0 ) Net cash provided by (used in) financing activities$ 2.0 $
0.9 $ (1.9 ) Comparison of the Years Ended
Operating Activities
For the year endedDecember 31, 2019 , cash provided by operations increased$2.8 million to$10.2 million , from$7.4 million in 2018. During 2019, cash provided by operations was positively impacted by higher net income, deferred revenue, other accrued taxes and accounts payable, partially offset by negative impacts from accounts receivable and other assets. For the year endedDecember 31, 2018 , cash provided by operations increased$4.0 million to$7.4 million , from$3.4 million in 2017. During 2018, cash provided by operations was positively impacted by higher net income, prepaid expenses and other current assets, and accounts payable, partially offset by negative impacts from prepaid income taxes and deferred revenue. Investing Activities
For the year endedDecember 31, 2019 , cash provided by investing activities increased$1.7 million to$3.2 million , from$1.5 million in 2018. During 2019, cash provided by investing activities was positively impacted by maturities of investments, partially offset by negative impacts from purchases of property and equipment, and capitalized intangible assets. For the year endedDecember 31, 2018 , cash provided by investing activities increased$2.5 million to$1.5 million , from cash used in investing activities of$(1.0) million in 2017. During 2018, cash provided by investing activities was positively impacted by maturities of investments, partially offset by negative impacts from purchases of securities, purchases of property and equipment, and capitalized intangible assets. Financing Activities
For the year endedDecember 31, 2019 , cash provided by financing activities increased$1.1 million to$2.0 , from$0.9 million in 2018. During 2019, cash provided by financing activities was positively impacted by proceeds from the exercise of stock options and warrants, partially offset by taxes paid for the net share settlement of restricted stock units. 47
For the year endedDecember 31, 2018 , cash provided by financing activities increased$2.8 million to$0.9 , from cash used in financing activities of$(1.9) million in 2017. During 2018, cash provided by financing activities was positively impacted by proceeds from the exercise of stock options and warrants, partially offset by taxes paid for the net share settlement of restricted stock units.
Sales to end users in
Our manufacturing operations and headquarters facility is approximately 23,100 square feet located inWinter Springs, Florida . This facility has been leased fromSusi, LLC , an entity controlled by our Chief Technology Officer and Chairman,Roger Susi . Pursuant to the terms of our lease, the monthly base rent is$34,133 , adjusted annually for changes in the consumer price index. We believe our sources of liquidity, including cash flow from operations, existing cash, investments, and available financing sources will be sufficient to meet our projected cash requirements for at least the next 12 months from the date the financial statements are issued. Any equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants that increase our costs. We monitor our capital requirements to ensure our needs are in line with available capital resources. From time to time, we may explore additional financing sources to meet our working capital requirements, make continued investment in research and development, expand our business and acquire products or businesses that complement our current business. These actions would likely affect our future capital requirements and the adequacy of our available funds. Our future liquidity and capital requirements will depend on numerous factors, including the:
· Amount and timing of revenue and expenses;
· Extent to which our existing and new products gain market acceptance;
· Extent to which we make acquisitions;
· Cost and timing of product development efforts and the success of these
development efforts;
· Cost and timing of selling and marketing activities; and
· Availability of borrowings or other means of financing.
Contractual Obligations
In the normal course of business, we enter into obligations and commitments that require future contractual payments. The commitments result primarily from purchase orders with vendors that supply components used in our medical devices and related disposables and commitments for our building and office equipment leases. The following table summarizes our contractual obligations and commercial commitments as ofDecember 31, 2019 : Payments due by Period Less than More than Total 1 Year 1-3 Years 3-5 Years 5 Years Unconditional purchase obligations$ 3,208,174 $ 3,189,242 $ 18,932 $ - $ - Operating lease obligations 3,857,029 409,596 819,192
819,192 1,809,049
Total $ 7,065,203 $ 3,598,838 $ 838,124 $ 819,192 $ 1,809,049
Purchase obligations are defined as agreements to purchase goods or services
that are enforceable and legally binding. Included in the purchase obligations
category above are obligations related to purchase orders for inventory
purchases under our standard terms and conditions and under negotiated
agreements with vendors. We expect to receive consideration (products or
services) for these purchase obligations. The purchase obligation amounts do not
represent all anticipated purchases in the future, but represent only those
items for which we are contractually obligated. The table above does not include
obligations under employment agreements for services rendered in the ordinary
course of business.
Off-Balance Sheet Arrangements
During the periods presented, we did not have and we do not currently have any
off-balance sheet arrangements, as defined under
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