IRadimed Corp (IRMD) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the iRadimed Corporation third-quarter 2014 financial results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. as a reminder, this conference call is being recorded today, October 30, 2014 and contains time-sensitive information that is accurate only as of today.

Earlier today, iRadimed released financial results for the third quarter of 2014. A copy of the press release announcement announcing the Company's earnings is available under the heading News on their website at iRadimed.com. A copy of the press release was also furnished to the Securities and Exchange Commission on Form 8-K. A copy of Form 8-K can be found at sec.gov. This call is being broadcast live over the Internet from the Company's website at iRadimed.com and a replay of the call will be available on the website for the next 90 days.

The agenda for today's call will be as follows. Roger Susi, President and Chief Executive Officer of iRadimed, will present opening comments. Then Chris Scott, iRadimed's Chief Financial Officer, will summarize the Company's financial results. Roger Susi will then conclude the prepared remarks with a few comments before opening the call for questions.

Some of the information to be furnished in today's session will constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those focused on the future performance, results, plans and events, and include the Company's expected results for 2014. iRadimed reminds you that the future results may differ materially from these forward-looking statements due to a number of risk factors. For a description of the relevant risks and uncertainties that may affect the Company's business, please see the Risk Factors section of the Company's most recent reports filed with the Securities and Exchange Commission, which may be obtained for free from the SEC's website at SEC.gov.

I would now like to turn the call over to Roger Susi, President and Chief Executive Officer of iRadimed Corporation. Mr. Susi?

Thank you, operator. Good morning. To start off, I will provide a status update in the progress we have made in preparing our new 5109k) for our 3860 pumps. Then I will briefly discuss our customer base and the orders.

As a refresher, on September 2, 2014 we announced that we had received a warning letter from FDA. A copy of the warning letter and our announcement was filed with the SEC on a Form 8-K on September 3 and can be found at the SEC's website. The warning letter was in response to a routine inspection conducted of our previous facility in April and addressed the observations made during that inspection. In addition to addressing the inspection observations, the warning letter stated that various modifications had been made to all models of our IV pumps over time. The FDA further noted that some of these modifications included revisions to software and that modified software, meaning software that had changed since the initial 510(k) clearance of our IV pumps, could significantly affect the safety and/or effectiveness of the device and concluded that a new 510(k) is required. The FDA further requested that iRadimed immediately cease activities such as commercial distribution of the devices.

Upon receipt of the letter on September 2, we immediately stopped all domestic shipments of all models of our pumps. On September 18, we hosted a conference call for the purpose of providing everyone with an update on our progress. A replay of this call is still available at our website. During the call, we stated that our target date for completing and submitting a new 510(k) was the end of October. That timing at least partially included our expectation of having a dialogue with the FDA to better understand the scope of a new 510(k) submission, and to date we have been unable to have such a dialogue.

In parallel, we engaged various consultants and experts to assist and advise us on current FDA guidance for 510(k) submissions. Through our work with our advisors, we came to believe that completing and including an assurance case, which is subject of a draft FDA guidance document, would be advisable. The inclusion of an assurance case was not something we factored into our original estimate for completing and submitting a new 510(k).

To assist us with completing the assurance case, we have made investment in various software platforms that are considered to be the best available, along with outside consultant assistance. We have been working through the assurance case for approximately three weeks now and we believe we have about another three weeks remaining.

The decision to include an assurance case has caused us to change our estimated completion date of our new 510(k) from the end of October to the week of November 17. Additionally, we believe that taking the extra time now to complete the assurance case may result in a shorter overall time taken by the FDA to work through their review process.

But let me be clear about this, however. There is no guarantee that including the assurance case will result in a shortened review process. So as we sit here today, we are still actively seeking FDA dialogue and our new target date for completing and submitting our new 510(k) is the week of November 17.

Now, moving on to customer orders, we continue to receive orders from both domestic and international customers, though of course domestic purchase orders will not be filled until the new 510(k) clearance is received. From our international customers, we saw strong orders during the quarter from Japan and Germany and we also had record orders from Canada and the United Kingdom. Additionally, we received another substantial order from Saudi Arabia.

Domestically, we continue to have open dialogue with our customers with current orders in place. To date, no orders have been canceled. One order for a single pump has been delayed to a later budget period with no previously delivered product returned or threatened to be returned. As we have previously stated, there is always a risk that customer sentiment might change, particularly if we fail to receive FDA clearance in a reasonably timely manner.

Now, I would like to turn over to Chris for a summary of our financial results.

Thank you, Roger, and good morning, everyone. Today, I will be discussing our financial results on a GAAP basis as well as a non-GAAP basis. Our non-GAAP operating results exclude stock-based compensation expense and the related tax effects, and our free cash flow measure is cash flow from operations less cash used for purchases of property and equipment. We believe that the presentation of these non-GAAP measures along with our GAAP financial statements provide a more thorough analysis of our ongoing financial performance. You can find a reconciliation of our earnings on a GAAP versus non-GAAP basis on the last page of today's press release.

Revenue in the third quarter increased 54% to $3.8 million compared to $2.5 million for the prior-year quarter. This increase was driven by higher demand for our pump systems and partially dampened as we stopped domestic shipments for the last month of the quarter. Revenue from domestic sales was approximately 93% of total revenue for the quarter compared to 67% for the same period in 2013. Revenue from devices was approximately 82% of total revenue for both the 2014 and 2013 quarters.

Gross margin increased to 74.8% in the most recent quarter compared to 73% in the same quarter last year. We sold 112 pumps in the third quarter of 2014 compared to 90 pumps in the third quarter last year. Our average selling price for the quarter was approximately $28,000 compared to $23,000 last year.

The increase in margin and ASP was significantly influenced by the amount of domestic sales as a percent of total revenue when compared to that same data point in the third quarter of 2013. This global mix of sales drives changes to margin and ASP as we sell at higher price points through our direct sales force domestically than we do through our distributors internationally.

Operating expenses for the third quarter of 2014 increased to 64% of revenue compared to 59% in the prior-year quarter. This increase primarily relates to higher payroll and employee benefits costs resulting from our growing employee base, higher sales commissions resulting from increased sales, higher legal and professional fees and higher stock compensation expenses.

Operating income for the current quarter decreased to 11% of revenue compared to 14% of revenue for the prior-year quarter. This resulted in non-GAAP operating income of 15% of revenue compared to 17% for the third quarter of 2013.

Our third-quarter effective tax rate was 40% compared to 30% for the 2013 period. Our higher effective tax rate is mostly due to higher estimated pretax income, higher state taxes and the expiration of the research and development tax credit at the end of 2013.

Net income for the current quarter was $0.02 per diluted share compared to $0.03 per diluted share in the same period last year. On a non-GAAP basis, net income was 0.03 per diluted share for both periods.

Now, taking a look at our balance sheet and cash flow, cash increased by approximately $13.9 million during the quarter to $18.1 million. This increase is primarily the result of net proceeds generated from our IPO and cash provided by operations during the quarter.

Accounts receivable decreased during the quarter, resulting from collections and lower sales due to the domestic stock shift. Cash provided by operations increased to $3.5 million for the first nine months of 2014 compared to approximately $707,000 for the same period last year. Our free cash flow, a non-GAAP measure, increased to $3 million for the first nine months of 2014 compared to $590,000 for the 2013 period. Capital expenditures for the first nine months of 2014 were $505,000 and included $286,000 related to the relocation into our new headquarters facility.

Now, on to our financial guidance. As we previously disclosed, we expect fourth-quarter revenue of $3 million and a loss of between $0.02 and $0.03 per diluted share.

Now I will turn the call back over to Roger.

Thanks, Chris. Before opening up the call to questions, I would like to say one more time that we are solely focused on resolving the FDA's concerns as quickly as possible. Our employees are holding steady and have great confidence in our ability to resolve these matters and resume domestic shipments. Our customers see the benefits that our pump systems provide and continue to submit orders in full knowledge of our current domestic circumstances.

And with that, I would like to turn the call over to questions. Operator?

(Operator Instructions). Chris Lewis of ROTH Capital Partners.

So I guess obviously I want to start on the FDA warning letter and the pending 510(k) application. So timing a couple of weeks delayed. Can you talk on your assurance case, what is required for that and then what makes you think that the inclusion of that could potentially accelerate the review time on the FDA's side?

Well, what's required of that -- essentially, an assurance case is -- when you boil it all down, it's basically a different format to look at what is conventionally, what we had done conventionally and what everybody did conventionally and most people still do, is a risk analysis of your product or drug. You have to submit these failure mode analyses and risk analysis. The assurance case is a different way to format what is essentially that same data. But it involves, at each and every small step, generating an argument that points to finer and finer details of your risks and how you mitigated them, ultimately with evidence that supports those arguments. So, basically, it's a very time-consuming process. It's not really requiring a whole lot of new information, but it's time-consuming. And it was something we hadn't done before. It's a very new thing for anybody to do, being that, as I mentioned, it's a draft guidance from the FDA. However, our consultants that we've engaged really, really pushed us to do it. They felt that if we do it, on the one hand, it helps the FDA see better through the risk analyses. And on the other hand, since it's really sort of a hot button thing for them to try out, this new draft guidance, and see people do it, especially with IV pumps, what we've heard is, when it comes to IV pumps, they essentially are demanding this. So we decided not to risk anything there and go ahead and do it. So, I hope that answers your question.

Yes, great. Thanks for the color there. So just in terms of overall timing expectations, so you expect the application submission on November 17 and then the 90-day working day FDA response window and maybe some potential back-and-forth dialogue. So that would imply the Company could theoretically, I guess, still regain clearance in the first quarter of 2015. Is that a reasonable way to think about it in terms of timing?

Still think of it in that sense, absolutely. Yes.

Okay, great. So once the application is submitted, do you expect that to open up some doors to hold some dialogue with the FDA around expectations? And what are the main topics you hope to discuss with them?

You know, as far as getting the dialogue with them, we really, as I said just a few minutes ago, we really look forward to doing that still very soon, ideally before we submit this new 510(k). I think, once it's submitted, if we can still get dialogue, that's great. But I think there's more value to having it beforehand.

Chris, I just wanted to just go back one question you had and just add something to Roger's comment there. Note that the week of the 17th I believe is also the Thanksgiving week and then you've also got the holidays coming into play, and I think all of that may impact the timing. And if we do, if the 90 days theoretically does play out and we do receive the clearance but it comes late in the quarter, late in Q1, we might not see the full impact of that just because these are domestic shipments and our shipping terms preclude us from recognizing revenue at certain times.

Understood. Okay. And then just moving on to the state of the US direct sales force, maybe you could just give an update there on what their focus is during this period. How are they being compensated? And have you seen any sales reps leave, or do you still have that group intact?

Oh, yes, the group is quite intact. Yes, they have now pretty much cleaned up the orders that had been delivered up until that time, early September, when we stopped deliveries. So from here on, they start to live more and more on the draw of their commission, if you will. But they have quite a bit at stake as far as orders that have been on the books. And in fact, orders, as I mentioned, continue to come in at quite a comforting level from quotes that were done before we stopped the sales activity. So, they have quite a bit at stake, and they realize that. And we are trying to find other things for them to do. We have other, smaller features that we still can sell, like service and to help customers utilize IV sets and those sorts of things. So we are finding things for them to do, and their confidence remains high and their motivation is high and is still supported by what is a rather comforting backlog.

And then, Chris, maybe a couple of financial questions for you. First, gross margin, maybe a two-part question. Can you talk about the sequential decline in the third quarter versus the second quarter of this year? And then second, how should we think about the gross margin in the fourth quarter, given the majority of revenues will be international at that lower ASP?

Let me tackle that question first. I think as I look and model out what the fourth quarter might look like, I'm modeling certainly a lower gross margin than what we've seen in Q3. I'm somewhere in the, probably in the 68% to 70% range on the margin side. And I think that's how I'm thinking about it there.

As far as the decline in gross margins on a sequential basis, I do think that it's that lack of that third month that caused the decline there. I think we were tracking pretty high on our domestic shipments as a percent of total for the second quarter. And when we stopped the shipments overall domestically for the last month of the quarter, we were short a lot of that revenue. So I think that's what the significant driver is between the two periods on the margin side.

And then in terms of the cash, I was happy to see you still generated $1 million of free cash in the quarter. What should we expect in terms of cash and potential burn, I guess, for the fourth quarter?

I think potentially, I think we will burn cash in the fourth quarter and I think it could be as high as $700,000. But I think overall, relative to our cash balance, we still have plenty of cash to work with there.

Okay. Thanks, guys. I'll hop back in the queue.

Yes. I was going to say, can we go to the next questioner, please?

Larry Haimovitch of HMTC.

Chris, you reviewed the mix of domestic and international business. And I may have caught those numbers incorrectly. Could you just go over them one more time? Because it brought some questions to mind if I heard it correctly.

Domestic sales 93% this quarter compared to 67% for the 2013 quarter.

Okay. So yes, that's what I thought I heard. So that surprised me. I realize you shipped a lot of domestic, a lot of the third quarter domestically, but that number seemed very high relative to historical, particularly because you did miss a couple of weeks in the quarter. Can you explain that a little bit more, a little more color on that, please, because it didn't make sense with what I was expecting?

Yes, absolutely. To ship internationally, it takes a little bit of coordination. Many of our international customers, we require money up front. And as we work through and notify them that we are prepared to make their shipments, they need to send their money in ahead of time and then ultimately when we receive it, we ship. It takes a little bit more coordination on the international side. So from an international shipment standpoint, we were I don't want to say slow but it didn't have the impact that you might think it would have for this period. I think you'll see the impact in the fourth quarter.

I was going to say it sounds like maybe we are talking about timing issues here where things didn't close on time or there was delays were whatever, and that Q4 could have a much stronger performance, because 7% of your sales internationally for the quarter, in my mind, where light.

Yes.

It sounds like you are just saying it's just more of a timing issue rather than any other issue.

It's the timing associated with the coordination of the international shipments. You are exactly right.

Right. So we should expect Q4 internationally to be stronger?

Yes. As a percentage of total sales, you will see a larger international there --

Okay.

-- which results in a lower margin and will likely have an impact on ASPs also.

Right. To Chris's point about the mix and how the international -- larger international means lower gross margins.

That's right.

And then the mix of capital equipment domestically and internationally versus the disposable part, could you just review that a little bit more and provide any color on that so I have a better feeling for what happened in the quarter?

What was that? Repeat that. I'm sorry.

The question is a little more color on the disposable side of the business, how you did there versus your expectations. I'm assuming that the installed base in the US continues to consume disposables at their historic or normal rates? There's been no change there?

Yes, that's right. That's right. And just when we talk about our breakout of sales and revenue, we lump our disposable business with our sets and service business. And that for the quarter was at 18% of total revenue, and I think that's what we've seen historically. We've seen sets and service range between 15% and 20% of total revenue for the quarters.

Okay. So that's very much in line with how it has been historically, then.

That's right.

Okay, great. I'll hop back in queue. Thank you.

(Operator Instructions). Chris Lewis of ROTH Capital Partners.

Thanks for taking the follow-up. Just a few -- first, manufacturing, are you able to continue -- have you continued pump and disposable manufacturing during this disruption?

Yes.

Absolutely.

Yes, we haven't really slowed down the manufacturing at all.

Okay, great. And in terms of operating spend visibility, there's obviously some legal and regulatory choppiness. But just talk about your visibility into OpEx and maybe how should we think about that trending in the fourth quarter.

I think OpEx will largely be consistent with the third quarter. We will likely have some additional G&A related to some of the legal matters and the FDA matter addressing those types of things and some of our related professional fees and things like that that would fall into the fourth quarter anyways that you didn't see in the third quarter. So I do see pretty consistent OpEx with a rise in G&A.

And then just one more for me. Roger, what steps has the Company taken or potentially already implemented in your regulatory controls and processes just to ensure this type of issue doesn't happen again going forward?

Well, I think we addressed that one last time. It's really -- the key difference has been the heightened desire to review revisions and changes that the FDA has on devices and especially IV pumps. And so what we will be doing going forward is we will probably err on the side of submitting a lot more 510(k)s rather than letters to file as we make revisions. That seems to be the key that got us into this situation, and we will be focused on that methodology and that method of thinking much more strongly.

Thank you. I'd like to turn the call back over to Mr. Roger Susi for any further remarks.

Okay. Well, Chris and I want to thank you for participating in today's call and for your interest in iRadimed and your support. We both look forward to providing an update in the future on our progress towards the 510(k) certainly and the resumption of domestic shipments. Thank you, operator.

Thank you. This concludes the call. Please disconnect.