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| IFLO > SEC Filings for IFLO > Form 10-K on 10-Mar-2009 | All Recent SEC Filings |
10-Mar-2009
Annual Report
Forward-Looking Statements
Statements by the Company in this report and in other reports and statements released by the Company are and will be forward-looking in nature and express the Company's current opinions about trends and factors that may impact future operating results. Statements that use words such as "may," "will," "should," "believes," "predicts," "estimates," "projects," "anticipates" or "expects" or use similar expressions are intended to identify forward-looking statements. Forward-looking statements are subject to material risks, assumptions and uncertainties, which could cause actual results to differ materially from those currently expected, and readers are cautioned not to place undue reliance on these forward-looking statements. Except as required by law, the Company undertakes no obligation to publish revised forward-looking statements to reflect the occurrence of unanticipated or subsequent events. Readers are also urged to carefully review and consider the various disclosures made by the Company in this report that seek to advise interested parties of the risks and other factors that affect the Company's business. Interested parties should also review the Company's reports on Forms 10-Q and 8-K and other reports that are periodically filed with the Securities and Exchange Commission. The risks affecting the Company's business include, among others: physician acceptance of infusion-based therapeutic regimens; implementation of the Company's direct sales strategy; successful integration of the Company's recent acquisition of AcryMed Incorporated and further development and commercialization of AcryMed's technologies; potential inadequacy of insurance to cover existing and future product liability claims; dependence on the Company's suppliers and distributors; the Company's continuing compliance with applicable laws and regulations, such as the Medicare Supplier Standards and Food, Drug and Cosmetic Act, and the Medicare's and FDA's concurrence with management's subjective judgment on compliance issues, including those related to the recent FDA warning letter; the reimbursement system currently in place and future changes to that system; product availability, acceptance and safety; competition in the industry; technological changes; intellectual property challenges and claims; economic and political conditions in foreign countries; currency exchange rates; inadequacy of booked reserves; and reliance on the success of the home health care industry. All forward-looking statements, whether made in this report or elsewhere, should be considered in context with the various disclosures made by the Company about its business.
Overview
The Company is improving surgical outcomes by designing, developing and
marketing technically advanced, low cost drug delivery systems and innovative
surgical products for post-surgical pain relief and surgical site care. The
Company's products are used in hospitals, free-standing surgery centers, homes
and other settings. The Company previously focused on three distinct markets:
Regional Anesthesia, IV Infusion Therapy, and Oncology Infusion Services.
Revenue from the Oncology Infusion Services market was generated by InfuSystem,
Inc. ("InfuSystem"), which was previously a wholly-owned subsidiary of the
Company. InfuSystem primarily engages in the rental of infusion pumps on a
month-to-month basis for the treatment of cancer. On October 25, 2007, the
Company completed the sale of InfuSystem to InfuSystem Holdings, Inc., formerly
known as HAPC, Inc. ("HAPC"). See Note 4 of the Notes to Consolidated Financial
Statements for further discussion on the sale of InfuSystem.
The Company sought to expand its strategic focus to include a bigger emphasis in the broader category of acute care products in addition to its leadership position in Regional Anesthesia for post-surgical pain management. To that end, the Company acquired AcryMed Incorporated ("AcryMed"), a privately held Oregon-based developer of innovative infection control and wound healing products, on February 15, 2008 for $26.7 million in cash. The Company intends to leverage its dedicated sales and marketing organization by selling products from the AcryMed pipeline in the emerging market for acute care products. The results of operations for the year ended December 31, 2008 include AcryMed's contributions subsequent to the February 15, 2008 acquisition date. See Note 5 of the Notes to Consolidated Financial Statements for further discussion on the acquisition of AcryMed.
The Company is continuing its strategic focus for future growth on the growing Regional Anesthesia market, with particular emphasis on the Company's pain relief products marketed under its ON-Q® brand. The Company intends to continue its sales and marketing efforts to further penetrate the United States post-surgical pain relief market with its ON-Q products.
The Company is aware that economic conditions in the United States and in the foreign markets where the Company's products are sold could substantially affect its sales and profitability. Economic activity in the United States and throughout much of the world has undergone a sudden, sharp economic downturn following the recent housing downturn and subprime lending collapse in both the United States and Europe. As a result, the Company has seen a decline in elective surgeries where the Company's products may be used. Global credit and capital markets have also experienced unprecedented volatility and disruption, and business credit and liquidity have tightened in much of the world. This has also adversely affected the stock market resulting in material adverse declines in stock prices. The Company's stock price declined significantly during this period. During the fourth quarter of 2008, the Company's market capitalization fell below its recorded book value, which triggered impairment testings of its goodwill, other intangible assets and long-lived assets with finite lives. The Company is currently monitoring its market capitalization. A sustained decrease in the Company's market capitalization may be an indicator of impairments in the future, which could result in future charges and adverse effects on reported financial results for the period in which the charges are taken. See Notes 1 and 2 of the Notes to Consolidated Financial Statements for further discussion on the impairment testing performed as of December 31, 2008. It is difficult to predict the breadth and duration of the economic and financial market problems and the many ways in which they may adversely affect the Company's suppliers, customers and its business in general.
Consolidated Results of Operations for the Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007
Revenues
Net revenues from continuing operations increased 14%, or $16.6 million, to $133.1 million for the year ended December 31, 2008 from $116.5 million for the year ended December 31, 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 and the chief operating decision-maker on a combined basis due to shared infrastructure. Within this single operating segment, the Company has identified two product lines representing specific clinical applications - Regional Anesthesia and Intravenous ("IV") Infusion Therapy. Management and the chief operating decision-maker currently evaluate AcryMed's performance on a separate internal reporting basis. As such, the Company currently operates in two reportable operating segments: Infusion Pumps for its Regional Anesthesia and IV Infusion Therapy products and Antimicrobial Materials for AcryMed's products. The Company's consolidated financial statements for the year ended December 31, 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 10%, or $11.3 million, to $127.8 million for the year ended December 31, 2008 from $116.5 million for the year ended December 31, 2007.
Regional Anesthesia revenues increased 11%, or $9.7 million, to $99.4 million for the year ended December 31, 2008 from $89.6 million for the year ended December 31, 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 51%, or $8.1 million, to $24.0 million for the year ended December 31, 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 Soakertm Catheter and the SilverSoakertm Catheter.
Sales of IV Infusion Therapy products, which include the Company's intravenous elastomeric pumps, mechanical infusion devices and disposables, increased 6%, or $1.6 million, to $28.4 million for the year ended December 31, 2008 from $26.8 million for the year ended December 31, 2007. The increase 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 revenue from the Antimicrobial Materials operating segment for the year ended December 31, 2008 was $5.2 million, which reflects AcryMed's net sales after February 15, 2008.
Cost of Revenues
Cost of revenues from continuing operations increased 14%, or $4.6 million, to $36.6 million for the year ended December 31, 2008 from $32.0 million for the year ended December 31, 2007. The increase was primarily due to higher sales volume. As a percentage of net revenues, cost of revenues increased for the year ended December 31, 2008 by approximately one percentage point compared to the prior year.
Selling and Marketing Expenses
Selling and marketing expenses from continuing operations increased 2%, or
$1.2 million, to $73.1 million for the year ended December 31, 2008 from
$71.9 million for the year ended December 31, 2007. This increase was primarily
attributable to increases in compensation and related expenses ($1.1 million),
travel and entertainment expenses ($1.0 million), consulting fees
($0.6 million), national sales meeting ($0.4 million), rebates ($0.4 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 ($1.4 million) and commissions
($0.8 million).
Increases for the year ended December 31, 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 effective 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 units granted to sales representatives during the year ended December 31, 2008 compared to the same period in the prior year.
As a percentage of net revenues, selling and marketing expenses decreased by approximately seven percentage points for the year ended December 31, 2008 versus the prior year 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 26%, or $4.6 million, to $22.3 million for the year ended December 31, 2008 from $17.7 million for the year ended December 31, 2007. This increase was primarily attributable to general and administrative expenses incurred by AcryMed ($1.5 million), increases in non-cash stock-based compensation expense related to the amortization of deferred compensation ($1.8 million), legal fees ($1.6 million), insurance ($0.4 million), management services fees ($0.4 million) and compensation and related expenses ($0.2 million), offset in part by decreases in bonus expense ($1.1 million) and bad debt expense ($0.3 million).
The increase in non-cash stock-based compensation expense was primarily due to the expense recognized for the additional shares of restricted stock awards and restricted stock units that were granted during the year ended December 31, 2008. The increase in legal fees was primarily due to increased litigation costs including the patent
infringement cases as discussed in Note 9 of the Notes to Consolidated Financial Statements. The increase in insurance expense was primarily due to the increase in product liability insurance from an aggregate amount of $10 million to $50 million for liability losses effective June 1, 2008. 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 the year ended December 31, 2008 versus the prior year because general and administrative expenses increased at a rate that outpaced the increase in net revenues described above.
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 90%, or $2.4 million, to $5.0 million for the year ended December 31, 2008 from $2.7 million for the year ended December 31, 2007. The increase was 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 year ended December 31, 2008, the Company recorded $14.4 million in certain litigation and insurance charges. Certain litigation and insurance charges for the year ended December 31, 2008 were comprised of $3.5 million in expense for additional retroactive product liability coverage and $10.9 million in loss contingency. The Company has, to date, been named as a defendant in approximately 63 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, excluding chondrolysis claims for pre-June 1, 2008 surgeries, which are covered under separate policies. For chondrolysis claims made in 2008 through 2013 arising out of pre-June 1, 2008 surgeries, 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. As noted, these polices for pre-June 1, 2008 surgeries will remain in place until 2013. The additional excess policies for the retroactive period for pre-June 1, 2008 surgeries 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"), require 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 probable 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 an uninsured loss to the Company that differs from the previously estimated liability, which could result in a material difference from that recorded in the current period. The Company estimates that the range of probable potential loss to the Company for the legal proceedings described immediately above as of December 31, 2008 is $10.9 million to $80.0 million. The range of probable 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 the low end of the estimated range of $10.9 million in loss contingency. See Note 9 of the Notes to Consolidated Financial Statements for further information.
Purchased In-Process Research and Development
As a result of the AcryMed acquisition, the Company recorded $12.2 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 based on estimated fair value. In-process research and development was expensed upon acquisition because technological feasibility had not been established and no future alternative uses existed.
Impairment on Intangibles
For the year ended December 31, 2008, the Company recognized an impairment charge of $380,000. General economic and stock market conditions during 2008 worsened considerably resulting in material adverse declines in stock prices. The Company's stock price declined significantly during this period. During the fourth quarter of 2008, the Company's market capitalization fell below its recorded book value. The Company considered this a triggering event and, as a result, performed impairment testing on its goodwill, other intangible assets and long-lived assets with finite lives. Based on the results of the impairment testing, it was determined that the developed technology intangible asset acquired in the AcryMed transaction was impaired. No impairment was identified for its goodwill or other long-lived assets. If the current economic and market conditions persist and if there is a prolonged period of weakness in the business environment, the Company's business may be adversely affected, which could result in future impairment charges and adverse effects on reported financial results for the period in which the charges are taken.
Impairment Loss on Investments
For the year ended December 31, 2008, the Company recognized an other-than-temporary impairment of $4.6 million on its investment in the common stock of InfuSystem Holdings, Inc. (formerly known as HAPC) ("HAPC common stock"). In October 2007, the Company purchased approximately 2.8 million shares of HAPC common stock at $5.97 per share through private transactions with third parties totaling approximately $17 million in connection with the then-pending sale of InfuSystem. With the shares purchased as of that date, the Company owned approximately 15% of the issued and outstanding HAPC common stock and disclosed its intention to vote such shares in favor of the acquisition. As of February 27, 2009, the latest date reported by HAPC, the 2.8 million shares held by the Company remained at approximately 15% of the issued and outstanding common stock of HAPC. Since the time the shares of HAPC common stock were purchased by the Company, the share price of HAPC common stock has significantly decreased from the Company's purchase price of $5.97 per share. During the third quarter of 2008, the Company determined that the decline in the fair value of the investment in HAPC common stock was other than temporary based primarily on the significant decline in the market value and the uncertainty of the current market conditions. As such, the Company recorded the impairment loss and established a new cost basis in the investment as of September 30, 2008 in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities ("SFAS 115"). During the fourth quarter of 2008, the Company determined that the further decline in the fair value of the investment in HAPC common stock was temporary based on the Company's belief that a short three-month period lapse from the most recent other-than-temporary impairment recognition at September 30, 2008 is insufficient to determine that the decline in the fourth quarter of 2008 was other-than-temporary. Further, the Company was not aware of any adverse changes to HAPC's financial condition and considered the decline to be immaterial. The decline in the fair value of the HAPC common stock during the fourth quarter was recorded as an unrealized loss and reflected in other comprehensive loss.
Interest and Other Income
Interest and other income, net, from continuing operations increased 103%, or $2.5 million, to $4.9 million for the year ended December 31, 2008 from $2.4 million for the year ended December 31, 2007. The increase was primarily due to the interest earned from the HAPC note receivable and the amortization of deferred financing fees received from HAPC at the close of the sale of InfuSystem, which reflected twelve months of income in 2008 and approximately two months of income in 2007.
Income Taxes
During the year ended December 31, 2008, the Company recorded an income tax provision from continuing operations of approximately $448,000, compared to an income tax benefit from continuing operations of $2.5 million for the year ended December 31, 2007. The Company's effective tax rate for the year ended December 31, 2008 was a tax expense rate of 1.5% compared to a tax benefit rate of 21.8% for the year ended December 31, 2007. The decrease in the effective income tax benefit rates for the year ended December 31, 2008 was primarily due to $11.6 million of expense not deductible for tax purposes related to purchased in-process research and development charges recorded during the third quarter of 2008 and an increase in the federal valuation allowance for non-current deferred tax assets recorded during the year ended December 31, 2008. See Note 8 of the Notes to Consolidated Financial Statements for further information.
Consolidated Results of Operations for the Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006
Revenues
Net revenues from continuing operations increased 24%, or $22.9 million, to $116.5 million for the year ended December 31, 2007 from $93.6 million for the year ended December 31, 2006.
Regional Anesthesia product revenues increased 32%, or $21.7 million, to $89.6 million for the year ended December 31, 2007 from $67.9 million for the year ended December 31, 2006. 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 Systems increased 141%, or $9.3 million, to $15.9 million for the year ended December 31, 2007 compared to the prior year, primarily due to improved customer awareness of clinical efficacy and favorable reimbursement from third parties. The average selling price for the year ended December 31, 2007 was comparable to the prior year. 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 4%, or $1.1 million, to $26.8 million for the year ended December 31, 2007 from $25.7 million for the year ended December 31, 2006. The increase primarily resulted from increased unit sales of IV Infusion Therapy products to B. Braun Medical Inc., a domestic distributor, offset in part by a decrease in unit sales to international distributors, including B. Braun Medical S.A. (France). The average selling price for the year ended December 31, 2007 was comparable to the prior year. 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.
Cost of Revenues
Cost of revenues from continuing operations increased 22%, or $5.7 million, to $32.0 million for the year ended December 31, 2007 from $26.3 million for the year ended December 31, 2006. The increase was primarily due to higher sales volume. As a percentage of net revenues, cost of revenues decreased for the year ended December 31, 2007 by approximately one percentage point compared to the prior year. The decrease in cost of revenues as a percentage of net revenues is primarily due to the favorable change in sales mix toward high-margin Regional Anesthesia products.
Selling and Marketing Expenses
Selling and marketing expenses from continuing operations increased 25%, or . . .
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