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| IFLO > SEC Filings for IFLO > Form 10-Q on 10-Nov-2008 | All Recent SEC Filings |
10-Nov-2008
Quarterly Report
Results of Operations
Revenue
Net revenues from continuing operations increased 14%, or $4.0 million, to
$32.2 million for the three months ended September 30, 2008 from $28.2 million
for the three months ended September 30, 2007 and increased 18%, or
$14.4 million, to $96.0 million for the nine months ended September 30, 2008
from $81.6 million for the nine months ended September 30, 2007.
Prior to the acquisition of AcryMed on February 15, 2008, the Company operated
in one reportable operating segment. The Company's products were predominately
assembled from common subassembly components in a single integrated
manufacturing facility, and operating results were reviewed by management on a
combined basis including all products as opposed to several operating segments.
Management currently evaluates AcryMed's performance on a separate internal
reporting basis. As such, the Company currently operates in two reportable
operating segments: Infusion Pumps and Antimicrobial Materials. The Company's
consolidated financial statements for the three and nine months ended
September 30, 2008 include AcryMed's contributions subsequent to the
February 15, 2008 acquisition date. Further, the Company believes it is most
meaningful for the purposes of revenue analyses to group the product lines in
the Infusion Pumps operating segment into two categories representing specific
clinical applications - Regional Anesthesia and IV Infusion Therapy.
The Company's revenues from the Infusion Pumps operating segment increased 9%,
or $2.5 million, to $30.8 million for the three months ended September 30, 2008
from $28.2 million for the three months ended September 30, 2007 and increased
13%, or $10.5 million, to $92.1 million for the nine months ended September 30,
2008 from $81.6 million for the nine months ended September 30, 2007.
Regional Anesthesia revenues increased 11%, or $2.5 million, to $24.8 million
for the three months ended September 30, 2008 from $22.3 million for the three
months ended September 30, 2007 and increased 14%, or $9.0 million, to
$73.5 million for the nine months ended September 30, 2008 from $64.5 million
for the nine months ended September 30, 2007. This increase was primarily due to
increased clinical usage of the ON-Q PainBuster® Post-Operative Pain Relief
System and C-bloc®Continuous Nerve Block System by surgeons in the United
States. Revenue from the C-bloc Continuous Nerve Block System increased 36%, or
$1.6 million, to $6.1 million for the three months ended September 30, 2008
compared to the same period in the prior year and increased 59%, or $6.4
million, to $17.1 million for the nine months ended September 30, 2008 compared
to the same period in the prior year. The increases in revenue from the C-bloc
Continuous Nerve Block System were primarily due to improved customer awareness
of clinical efficacy and favorable reimbursement from third parties. Other
Regional Anesthesia products include the Soaker® Catheter and the SilverSoaker™
Catheter.
Sales of IV Infusion Therapy products, which include the Company's intravenous
elastomeric pumps, mechanical infusion devices and disposables, increased 9%, or
$1.5 million, to $18.6 million for the nine months ended September 30, 2008 from
$17.1 million for the nine months ended September 30, 2007. Sales of IV Infusion
Therapy products for the three months ended September 30, 2008 was comparable to
the same period in the prior year. The increase during the nine months ended
September 30, 2008 was primarily due to increased unit sales of IV Infusion
Therapy products to B. Braun Medical Inc., a domestic distributor, and
international distributors, including B. Braun Medical S.A. (France). The
Company has a distribution agreement with B. Braun Medical S.A., a manufacturer
and distributor of pharmaceuticals and infusion products, to distribute the
Company's elastomeric infusion pumps in Western Europe, Eastern Europe, the
Middle East, Asia Pacific, South America and Africa.
The Company's revenues from the Antimicrobial Materials operating segment for
the three and nine months ended September 30, 2008 were $1.5 million and
$3.8 million, respectively. As discussed above, the revenues for the nine months
ended September 30, 2008 reflect AcryMed's net sales after February 15, 2008.
Cost of Revenues
Cost of revenues from continuing operations increased 14%, or $1.1 million, to
$8.6 million for the three months ended September 30, 2008 from $7.5 million for
the three months ended September 30, 2007 and increased 17%, or $3.7 million, to
$25.5 million for the nine months ended September 30, 2008 from $21.8 million
for the nine months ended September 30, 2007. These increases were primarily due
to higher sales volume.
As a percentage of revenues, cost of revenues for both the three and nine months
ended September 30, 2008 was comparable to the same periods in the prior year.
Selling and Marketing Expenses
Selling and marketing expenses from continuing operations decreased 1%, or
$0.2 million, to $17.0 million for the three months ended September 30, 2008
from $17.2 million for the three months ended September 30, 2007 and increased
4%, or $2.1 million, to $54.7 million for the nine months ended September 30,
2008 from $52.6 million for the nine months ended September 30, 2007.
For the three months ended September 30, 2008, the decrease in selling and
marketing expenses was primarily attributable to decreases in commissions
($0.6 million) and non-cash compensation expense related to the amortization of
deferred compensation ($0.4 million), offset in part by increases in travel and
entertainment expenses ($0.2 million), compensation and related expenses
($0.2 million), consulting fees ($0.3 million) and rebates ($0.1 million). For
the nine months ended September 30, 2008, the increase in selling and marketing
expenses was primarily attributable to increases in compensation and related
expenses ($1.3 million), consulting fees ($0.9 million), travel and
entertainment expenses ($0.7 million), national sales meeting ($0.3 million),
rebates ($0.2 million) and equipment rental fees ($0.2 million), offset in part
by decreases in non-cash compensation expense related to the amortization of
deferred compensation related to stock awards ($1.1 million) and commissions
($0.5 million).
Increases for the three and nine months ended September 30, 2008 relating to
compensation and related expenses, travel and entertainment expenses and
national sales meeting were primarily due to costs related to the expansion of
the Company's direct sales force in the United States. In a transaction
effective January 1, 2002, I-Flow re-acquired from Ethicon Endo-Surgery, Inc.
the contractual rights to distribute ON-Q products on a direct basis. Since that
time, ON-Q revenues have increased rapidly, and the Company's primary strategy
in the Regional Anesthesia market has been to rapidly increase market awareness
of the clinical and economic advantages of ON-Q technology through a combination
of clinical studies, sales force expansion and marketing programs. The increases
in compensation and related expenses, consulting, travel and entertainment
expenses and national sales meeting were directly related to the increase in
revenue, an increase in the number of quota-carrying sales representatives and
changes in the Company's direct sales force and sales management. The decrease
in commissions was primarily due to a decrease in the number of sales
representatives achieving quota, resulting in lower commission rates earned on
revenues. The decrease in non-cash compensation expense related to the
amortization of deferred compensation was due to a decrease in the number of
shares of restricted stock awards granted to sales representatives during the
three and nine months ended September 30, 2008 compared to the same periods in
the prior year.
As a percentage of net revenues, selling and marketing expenses decreased by
approximately eight percentage points for both the three and nine months ended
September 30, 2008 versus the same periods in the prior year primarily because
net revenues increased at a rate that outpaced the increase in selling and
marketing expenses described above.
General and Administrative Expenses
General and administrative expenses from continuing operations increased 28%, or
$1.2 million, to $5.6 million for the three months ended September 30, 2008 from
$4.4 million for the three months ended September 30, 2007 and increased 23%, or
$2.9 million, to $16.0 million for the nine months ended September 30, 2008 from
$13.1 million for the nine months ended September 30, 2007.
For the three months ended September 30, 2008, the increase was primarily
attributable to increases in general and administrative expenses incurred by
AcryMed ($0.6 million), legal fees ($0.4 million), non-cash stock-based
compensation expense related to the amortization of deferred compensation
($0.4 million) and management services fees ($0.1 million), offset in part by a
decrease in bonus expense ($0.4 million). For the nine months ended
September 30, 2008, the increase was primarily attributable to general and
administrative expenses incurred by AcryMed ($1.6 million), increases in
non-cash stock-based compensation expense related to the amortization of
deferred compensation ($1.4 million), legal fees ($0.7 million), management
services fees ($0.4 million) and compensation and related expenses
($0.2 million), offset in part by decreases in bonus expense ($1.2 million) and
bad debt expense ($0.5 million).
The increases in non-cash compensation expense related to the amortization of
deferred compensation for the three and nine months ended September 30, 2008
were primarily due to the adoption of SFAS 123R, which began in fiscal 2006 and
requires the measurement and recognition of compensation expense based on
estimated fair values for all equity-based compensation, including unvested
stock options previously granted to employees at exercise prices equal to the
fair market value of the underlying shares at the grant date. The general and
administrative expenses incurred by AcryMed subsequent to its acquisition by the
Company were consolidated with the Company's operations effective February 15,
2008. The management services fees were paid for processing costs related to the
Company's ON-Q billings as part of the services agreement entered into with
InfuSystem in October 2007.
As a percentage of net revenues, general and administrative expenses increased
by approximately two percentage points for three months ended September 30, 2008
compared to the same period in the prior year and increased by approximately one
percentage point for the nine months ended September 30, 2008 compared to the
same period in the prior year. The increases were primarily due to the increases
in general and administrative expenses, as described above, outpacing the
increases in net revenues.
Product Development Expenses
Product development expenses from continuing operations include research and
development for new products and the cost of obtaining and maintaining
regulatory approvals of products and processes. Product development expenses
increased 130%, or $0.7 million, to $1.3 million for the three months ended
September 30, 2008 from $0.6 million for the three months ended September 30,
2007 and increased 85%, or $1.5 million, to $3.4 million for the nine months
ended September 30, 2008 from $1.9 million for the nine months ended
September 30, 2007. The increases were primarily due to expenses incurred by
AcryMed and an increase in compensation and related expenses that resulted from
an increase in the number of headcount. Expenses incurred by AcryMed subsequent
to its acquisition by the Company were consolidated with the Company's
operations effective February 15, 2008. The Company will continue to incur
product development expenses as it continues its efforts to introduce new
technology and cost-efficient products into the market.
Certain Litigation and Insurance Charges
For the three and nine months ended September 30, 2008, the Company recorded
$0.1 million and $12.3 million in certain litigation and insurance charges. The
increase of $0.1 million in certain litigation and insurance charges during the
three months ended September 30, 2008 was recorded to adjust the loss
contingency for estimated self-insured retention payments. Certain litigation
and insurance charges for the nine months ended September 30, 2008 was comprised
of $3.5 million in expense for additional retroactive product liability coverage
and $8.8 million in loss contingency. The Company has, to date, been served as a
defendant in approximately 39 ongoing lawsuits seeking damages as a result of
alleged chondrolysis. Many of these lawsuits name defendants in addition to the
Company such as physicians, drug companies and other device manufacturers. For
the policy period beginning June 1, 2008, the Company has in place product
liability insurance in the aggregate amount of $50 million for liability losses,
including legal defense costs. For the expired period prior to June 1, 2008, the
Company increased its product liability insurance on a claims-made basis from an
aggregate amount of $10 million to $35 million, which includes a $5 million
self-insured layer above the original $10 million primary policy and below the
additional $20 million in excess policies the Company purchased. The additional
excess policies for the retroactive period cost the Company $3.5 million in
additional insurance expense during the second quarter of 2008.
In addition, SFAS No. 5, Accounting for Contingencies ("SFAS 5"), and FASB
Interpretation No. 14, Reasonable Estimation of the Amount of a Loss ("FIN 14"),
requires the Company to record an estimated loss from loss contingency such as
the legal proceedings described immediately above when a loss is known or
considered probable and the amount can be reasonably estimated. If the
reasonable estimate of a known or probable loss is a range and no amount within
the range is a better estimate, the minimum amount of the range is accrued. In
most cases, significant judgment is required to estimate the range of potential
loss and timing of a loss to be recorded. Events may arise that were not
anticipated and the outcome of a contingency may result in a loss to the Company
that differs from previously estimated liability, which could result in a
material difference from that recorded in the current period. During the second
quarter of 2008, the Company believed the range of potential loss to the Company
for the legal proceedings described immediately above as of June 30, 2008 was
between $8.7 million to $21.4 million. The range of potential loss included the
cost of litigation, which is in compliance with the Company's accounting policy.
Since the Company was unable to determine the best estimate within the range,
the Company recorded $8.7 million in loss contingency during the second quarter
of 2008, which represented the low end of the estimated range. See Note 10 of
the Notes to Condensed Consolidated Financial Statements for further
information.
Purchased In-Process Research and Development
On February 15, 2008, the Company acquired AcryMed, a privately held
Oregon-based corporation, for $26.7 million in cash. As a result of the AcryMed
acquisition, the Company recorded $12.4 million of goodwill, $2.0 million of
acquired intangible assets and $11.6 million of in-process research and
development that was expensed as of the date of acquisition. The Company's
methodology for allocating the purchase price of purchased acquisitions to
in-process research and development is determined through established valuation
techniques. In-process research and development is expensed upon acquisition
because technological feasibility has not been established and no future
alternative uses exist.
Interest Income, Net
Interest income, net of interest expense, from continuing operations increased
307%, or $0.8 million, to $1.1 million for the three months ended September 30,
2008 from $0.3 million for the three months ended September 30, 2007 and
increased 403%, or $3.2 million, to $4.0 million for the nine months ended
September 30, 2008 from $0.8 million for the nine months ended September 30,
2007. The increases during the three and nine months ended September 30, 2008
compared to the same periods in the prior year were primarily due to the
interest earned from the HAPC note receivable, amortization of deferred
financing fees received from HAPC at the close of the sale of InfuSystem and
increased investment income from higher cash and cash equivalents and short-term
investment balances.
Income Taxes
Income tax benefit from continuing operations increased $0.9 million to
$1.2 million for the three months ended September 30, 2008 from $0.3 million for
the three months ended September 30, 2007 and decreased $0.3 million to
$2.1 million for the nine months ended September 30, 2008 from $2.4 million for
the nine months ended September 30, 2007. The Company's effective tax benefit
rates for continuing operations for the three and nine months ended
September 30, 2008 were 8.1% and 7.5%, respectively, compared to tax benefit
rates of 24.8% and 33.9%, respectively, in the same periods of the prior year.
The decreases in the effective income tax benefit rates for the three and nine
months ended September 30, 2008 were primarily due to the Company not receiving
a tax benefit for the $11.6 million in purchased in-process research and
development charges recorded during the third quarter of 2008 and an increase in
the valuation allowance for deferred tax assets due to the $8.7 million in loss
contingency recorded during the second quarter of 2008. See Note 10 on
Commitments and Contingencies for additional information on the loss
contingency.
Liquidity and Capital Resources
During the nine-month period ended September 30, 2008, cash used in operating
activities from continuing operations was $12.4 million compared to $0.3 million
for the same period in the prior year. The increase in cash used by operating
activities is primarily due to federal income tax payments of $12.9 million made
during the first
and third quarters of 2008 in connection with the taxable gain from sale of
InfuSystem in October 2007, an increase in inventories and a decrease in
accounts payable, accrued payroll and related expenses due to the timing of
payments, offset in part by a decrease in accounts receivable resulting from
improved collections.
During the nine-month period ended September 30, 2008, cash used in investing
activities from continuing operations was $19.1 million compared to cash
provided by investing activities from continuing operations of $8.9 million for
the same period in the prior year. The increase in cash used in investing
activities was primarily due to the cash payment made for the acquisition of
AcryMed in February 2008 and an increase in the purchases of investments, offset
in part by the increase in net proceeds from the maturities of investments and
the repayments from HAPC on the note receivable.
The Company's investing activities are impacted by sales, maturities and
purchases of its short-term investments. The principal objective of the
Company's asset management activities is to maximize net investment income while
maintaining acceptable levels of credit and interest rate risk and facilitating
its funding needs. Thus, the Company's policy is to invest its excess cash in
highly liquid money market funds, U.S. government agency notes and investment
grade corporate bonds and commercial paper. The Company does not hold any direct
investments in auction rate securities.
During the nine-month period ended September 30, 2008, cash used in financing
activities from continuing operations was $11.7 million compared to cash
provided by financing activities of $3.5 million for the same period in the
prior year. The increase in cash used in financing activities was due to a
decrease in proceeds from the exercise of stock options and the repurchase of
approximately 832,000 shares of Company stock totaling $10.3 million in open
market transactions and approximately 182,000 shares of Company stock totaling
$2.3 million repurchased by the Company related to employee payroll tax
withholdings from the vesting of certain restricted stock and restricted stock
units and the exercise of certain outstanding stock options during the nine
months ended September 30, 2008. This compares to approximately 95,000 shares
purchased during the nine months ended September 30, 2007 totaling $1.5 million
related to employee payroll tax withholdings. No shares of Company stock were
repurchased in the open market during the nine months ended September 30, 2007.
As of September 30, 2008, the Company had cash and cash equivalents of
$35.4 million, short-term investments of $12.3 million, net accounts receivable
of $17.5 million and net working capital of $72.0 million. Management believes
the current funds, together with possible borrowings on the existing line of
credit and other bank loans, are sufficient to provide for the Company's
projected needs to maintain operations for at least the next 12 months. The
Company may decide to sell additional equity securities or increase its
borrowings in order to fund or increase its expenditures for selling and
marketing, to fund increased product development, or for other purposes.
The Company has a $10.0 million working capital line of credit with Silicon
Valley Bank. The expiration of the line of credit facility has been extended
from July 14, 2008 to October 15, 2008. The Company expects to renew the line of
credit facility on at least as favorable of terms as originally established
between the Company and Silicon Valley Bank. The Company is able to borrow,
repay and reborrow under the line of credit facility at any time. The line of
credit facility bears interest at either Silicon Valley Bank's prime rate (5.0%
at September 30, 2008) or LIBOR per annum plus 2.75%, at the Company's option.
The Company's line of credit is collateralized by substantially all of the
Company's assets and requires the Company to comply with covenants principally
relating to the achievement of a minimum profitability level and satisfaction of
a quick ratio test. As of September 30, 2008, the Company believes it was in
compliance with, or received a waiver with respect to, all related covenants.
On February 26, 2008, the Company announced that its board of directors had
authorized the repurchase of up to 1,000,000 shares of the Company's common
stock under a new stock repurchase program, which would be in existence for
12 months, unless the program was terminated sooner by the board of directors.
This new stock repurchase program superseded and replaced any other repurchase
. . .
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