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EXCEL - IDEA: XBRL DOCUMENT - IRIS INTERNATIONAL INC | Financial_Report.xls |
EX-31.2 - EX-31.2 - IRIS INTERNATIONAL INC | v59489exv31w2.htm |
EX-32.2 - EX-32.2 - IRIS INTERNATIONAL INC | v59489exv32w2.htm |
EX-32.1 - EX-32.1 - IRIS INTERNATIONAL INC | v59489exv32w1.htm |
EX-31.1 - EX-31.1 - IRIS INTERNATIONAL INC | v59489exv31w1.htm |
Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Washington, D.C. 20549
Form 10-Q
þ
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the quarterly period ended June 30, 2011 | ||
or
|
||
o
|
TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the transition period from to |
Commission file number 1-11181
IRIS INTERNATIONAL,
INC.
(Exact name of registrant as
specified in its charter)
Delaware
|
94-2579751 | |
(State or other jurisdiction
of incorporation or organization) |
(I.R.S. Employer Identification No.) |
9158 Eton Avenue
Chatsworth, California 91311
(Address of principal executive
offices, zip code)
(818) 527-7000
(Registrants telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer, and smaller reporting company in
Rule 12b-2
of the Exchange Act (Check one):
Large accelerated
filer o
|
Accelerated filer þ |
Non-accelerated
filer o (Do not check if smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of August 5, 2011, the issuer had 17,890,664 shares
of common stock issued and outstanding.
IRIS
INTERNATIONAL, INC.
INDEX TO
FORM 10-Q
2
Table of Contents
PART I:
FINANCIAL INFORMATION
Item 1. | Financial Statements |
IRIS
INTERNATIONAL, INC.
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except for per share data)
June 30, |
December 31, |
|||||||
2011 | 2010 | |||||||
(Unaudited) | ||||||||
ASSETS
|
||||||||
Current assets:
|
||||||||
Cash and cash equivalents
|
$ | 20,835 | $ | 25,531 | ||||
Accounts receivable, net of allowance for doubtful accounts and
sales returns of $557 and $453 at June 30, 2011 and
December 31, 2010, respectively
|
23,290 | 20,733 | ||||||
Inventories
|
13,410 | 10,310 | ||||||
Prepaid expenses and other current assets
|
1,663 | 1,661 | ||||||
Investment in sales-type leases, current portion
|
3,944 | 3,578 | ||||||
Deferred tax asset
|
4,009 | 3,135 | ||||||
Total current assets
|
67,151 | 64,948 | ||||||
Property and equipment, net of accumulated depreciation of
$16,304 and $14,491 at June 30, 2011 and December 31,
2010, respectively
|
15,042 | 12,035 | ||||||
Goodwill
|
3,911 | 3,957 | ||||||
Intangible assets, net of accumulated amortization of $698 and
$529 at June 30, 2011 and December 31, 2010,
respectively
|
9,087 | 9,345 | ||||||
Software development costs, net of accumulated amortization of
$4,710 and $4,226 at June 30, 2011 and December 31,
2010, respectively
|
2,317 | 2,637 | ||||||
Deferred tax asset
|
1,739 | 2,615 | ||||||
Investment in sales-type leases, non-current portion
|
11,423 | 10,002 | ||||||
Other assets
|
1,213 | 1,070 | ||||||
Total assets
|
$ | 111,883 | $ | 106,609 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY
|
||||||||
Current liabilities:
|
||||||||
Accounts payable
|
$ | 9,674 | $ | 5,795 | ||||
Accrued expenses
|
7,378 | 7,513 | ||||||
Deferred service contract revenue, current portion
|
3,779 | 3,205 | ||||||
Total current liabilities
|
20,831 | 16,513 | ||||||
Deferred service contract revenue, non-current portion
|
49 | 71 | ||||||
Other long term liabilities
|
122 | 1,374 | ||||||
Total liabilities
|
$ | 21,002 | $ | 17,958 | ||||
Commitments and contingencies
|
||||||||
Stockholders equity:
|
||||||||
Common stock, $0.01 par value; authorized:
50,000 shares; issued and outstanding: 17,889 shares
and 17,791 shares
|
179 | 178 | ||||||
Preferred stock, $0.01 par value; authorized
1,000 shares: Callable Series C shares issued and
outstanding: none
|
| | ||||||
Additional paid-in capital
|
91,698 | 89,703 | ||||||
Other comprehensive income
|
195 | 140 | ||||||
Accumulated deficit
|
(1,191 | ) | (1,370 | ) | ||||
Total stockholders equity
|
90,881 | 88,651 | ||||||
Total liabilities and stockholders equity
|
$ | 111,883 | $ | 106,609 | ||||
The accompanying notes are an integral part of these
consolidated financial statements.
3
Table of Contents
IRIS
INTERNATIONAL, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited
in thousands, except for per share data)
For the Three Months |
||||||||
Ended June 30, | ||||||||
2011 | 2010 | |||||||
Revenues
|
||||||||
IDD instruments
|
$ | 9,087 | $ | 7,412 | ||||
IDD consumables and service
|
17,288 | 15,325 | ||||||
Sample processing instruments and supplies
|
3,686 | 3,951 | ||||||
Personalized medicine services
|
104 | | ||||||
Total revenues
|
30,165 | 26,688 | ||||||
Cost of goods sold
|
||||||||
IDD instruments
|
5,097 | 4,679 | ||||||
IDD consumables and service
|
7,191 | 5,787 | ||||||
Sample processing instruments and supplies
|
1,682 | 1,727 | ||||||
Personalized medicine services
|
542 | | ||||||
Total cost of goods sold
|
14,512 | 12,193 | ||||||
Gross profit
|
15,653 | 14,495 | ||||||
Marketing and selling
|
5,964 | 4,769 | ||||||
General and administrative
|
5,838 | 4,623 | ||||||
Research and development, net
|
4,504 | 3,845 | ||||||
Total operating expenses
|
16,306 | 13,237 | ||||||
Operating income (loss)
|
(653 | ) | 1,258 | |||||
Other income (expense):
|
||||||||
Interest income
|
272 | 279 | ||||||
Interest expense
|
(4 | ) | (2 | ) | ||||
Other income (expense)
|
28 | (616 | ) | |||||
Income (loss) before provision for income taxes
|
(357 | ) | 919 | |||||
Provision for income taxes
|
(13 | ) | 295 | |||||
Net income (loss)
|
$ | (344 | ) | $ | 624 | |||
Net income (loss) per share basic
|
$ | (0.02 | ) | $ | 0.03 | |||
Net income (loss) per share diluted
|
$ | (0.02 | ) | $ | 0.03 | |||
Weighted average common shares outstanding basic
|
17,764 | 17,991 | ||||||
Weighted average common shares outstanding diluted
|
17,764 | 18,094 | ||||||
The accompanying notes are an integral part of these
consolidated financial statements.
4
Table of Contents
IRIS
INTERNATIONAL, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited
in thousands, except for per share data)
For the Six Months |
||||||||
Ended June 30, | ||||||||
2011 | 2010 | |||||||
Revenues
|
||||||||
IDD instruments
|
$ | 15,624 | $ | 15,301 | ||||
IDD consumables and service
|
34,032 | 29,716 | ||||||
Sample processing instruments and supplies
|
7,280 | 7,651 | ||||||
Personalized medicine services
|
168 | | ||||||
Total revenues
|
57,104 | 52,668 | ||||||
Cost of goods sold
|
||||||||
IDD instruments
|
9,362 | 9,747 | ||||||
IDD consumables and service
|
14,567 | 11,742 | ||||||
Sample processing instruments and supplies
|
3,351 | 3,430 | ||||||
Personalized medicine services
|
1,064 | | ||||||
Total cost of goods sold
|
28,344 | 24,919 | ||||||
Gross profit
|
28,760 | 27,749 | ||||||
Marketing and selling
|
11,935 | 9,196 | ||||||
General and administrative
|
10,640 | 8,360 | ||||||
Research and development, net
|
8,139 | 7,533 | ||||||
Gain on revaluation of contingent consideration
|
(1,225 | ) | | |||||
Total operating expenses
|
29,489 | 25,089 | ||||||
Operating income (loss)
|
(729 | ) | 2,660 | |||||
Other income (expense):
|
||||||||
Interest income
|
549 | 516 | ||||||
Interest expense
|
(6 | ) | (5 | ) | ||||
Other income (expense)
|
414 | (673 | ) | |||||
Income before provision for income taxes
|
228 | 2,498 | ||||||
Provision for income taxes
|
49 | 832 | ||||||
Net income
|
$ | 179 | $ | 1,666 | ||||
Net income per share basic
|
$ | 0.01 | $ | 0.09 | ||||
Net income per share diluted
|
$ | 0.01 | $ | 0.09 | ||||
Weighted average common shares outstanding basic
|
17,753 | 17,959 | ||||||
Weighted average common shares outstanding diluted
|
17,829 | 18,079 | ||||||
The accompanying notes are an integral part of these
consolidated financial statements.
5
Table of Contents
IRIS
INTERNATIONAL, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited
in thousands)
For the Six Months |
||||||||
Ended June 30, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities:
|
||||||||
Net income
|
$ | 179 | $ | 1,666 | ||||
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||
Loss on disposal of fixed assets
|
13 | | ||||||
Gain on foreign currency remeasurement of intercompany balances
|
(397 | ) | | |||||
Gain on revaluation of contingent consideration
|
(1,225 | ) | | |||||
Deferred taxes
|
(233 | ) | | |||||
Tax benefit from stock option exercises
|
(64 | ) | | |||||
Depreciation and amortization
|
2,599 | 1,980 | ||||||
Stock based compensation
|
2,354 | 2,210 | ||||||
Changes in operating assets and liabilities:
|
||||||||
Accounts receivable
|
(2,380 | ) | (412 | ) | ||||
Inventories
|
(3,013 | ) | (2,241 | ) | ||||
Prepaid expenses and other current assets
|
(129 | ) | (814 | ) | ||||
Investment in sales-type leases
|
(1,743 | ) | (1,547 | ) | ||||
Accounts payable
|
3,859 | 3,037 | ||||||
Accrued expenses
|
(119 | ) | 707 | |||||
Deferred service contract revenue
|
460 | 746 | ||||||
Other liabilities
|
(28 | ) | | |||||
Net cash provided by operating activities
|
133 | 5,332 | ||||||
Cash flows from investing activities:
|
||||||||
Purchase of assets from European distributor
|
| (660 | ) | |||||
Increase in notes receivable
|
| (450 | ) | |||||
Refund on acquisition of business
|
46 | | ||||||
Acquisition of property and equipment
|
(4,826 | ) | (665 | ) | ||||
Software development costs capitalized
|
(116 | ) | (380 | ) | ||||
Net cash used in investing activities
|
(4,896 | ) | (2,155 | ) | ||||
Cash flows from financing activities:
|
||||||||
Issuance of common stocks for cash
|
49 | 28 | ||||||
Settlement on restricted stock tax withholding
|
(171 | ) | (181 | ) | ||||
Tax benefit from stock option exercises
|
64 | | ||||||
Net cash used in financing activities
|
(58 | ) | (153 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents
|
125 | (251 | ) | |||||
Net increase (decrease) in cash and cash equivalents
|
(4,696 | ) | 2,773 | |||||
Cash and cash equivalents at beginning of period
|
25,531 | 34,253 | ||||||
Cash and cash equivalents at end of period
|
$ | 20,835 | $ | 37,026 | ||||
Supplemental disclosure of cash flow information:
|
||||||||
Cash paid for income taxes
|
$ | 1,137 | $ | 1,606 | ||||
Cash paid for interest
|
$ | 6 | $ | 5 | ||||
Supplemental schedule of non-cash financing activities:
|
||||||||
During the six months ended June 30, 2011, the Company disposed
of property and equipment with a cost and accumulated
depreciation of $259 and $246, respectively.
|
The accompanying notes are an integral part of these
consolidated financial statements.
6
Table of Contents
IRIS
INTERNATIONAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
1. | Description of Business |
IRIS International, Inc. (the Company) was
incorporated in California in 1979 and reincorporated in 1987 in
Delaware. IRIS International, Inc. consists of three operating
units. The Companys in-vitro diagnostics segment also
called Iris Diagnostics Division (IDD), designs,
manufactures and markets systems, consumables and supplies for
urinalysis and body fluids. The Sample Processing segment
markets small centrifuges and other processing equipment and
accessories for rapid specimen processing, as well as, equipment
for fluorescent in-situ hybridization (FISH). The Personalized
Medicine segment combines the research and development
operations of the Companys Iris Molecular Diagnostics and
Arista Molecular, Inc. subsidiaries. Under this new segment we
consolidate all operations for the development and
commercialization of cancer diagnostic testing services and
related products.
2. | Interim Financial Reporting |
Basis of Presentation The financial
statements have been prepared in accordance with the
instructions to
Form 10-Q
under the Securities Exchange Act of 1934, as amended, and do
not include all of the information and note disclosures required
by accounting principles generally accepted in the United States
(GAAP). These financial statements should be read in
conjunction with the Consolidated Financial Statements and
accompanying notes contained in the Companys Annual Report
on
Form 10-K
for the year ended December 31, 2010.
The Consolidated Financial Statements included herein are
unaudited, but in the opinion of management, such financial
statements include all adjustments, including normal recurring
adjustments, necessary to summarize fairly the Companys
financial position and results of operations for the interim
periods. The results reported in these Consolidated Financial
Statements for the interim periods should not be taken as
indicative of results that may be expected for the entire year.
Use of Estimates The preparation of financial
statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
periods. The significant estimates in the preparation of the
consolidated financial statements relate to the assessment of
the carrying allowance for doubtful accounts, inventory
reserves, the useful lives, fair value and recoverability of
carrying value of long-lived and intangible assets, including
goodwill, unearned income on sales-type leases, estimated
provisions for warranty costs, laboratory information system
implementations, contingent consideration and deferred tax
assets. Actual results and outcomes may differ from
managements estimates and assumptions.
Earnings Per Share The Company computes and
presents earnings per share in accordance with Financial
Accounting Standards Board (FASB) ASC Topic 260,
Earnings per share. Basic earnings per share are computed
by dividing net income by the weighted average number of common
shares outstanding. Diluted earnings per share is computed by
dividing net income by the weighted average number of common
shares and common stock equivalents outstanding, calculated on
the treasury stock method for options and warrants using the
average market prices during the period. The weighted average
number of outstanding antidilutive common stock options excluded
from the computation of diluted net income per common share for
the three and six months ended June 30, 2011 were 2,636,703
and 2,465,746, respectively. The weighted average number of
outstanding antidilutive common stock options excluded from the
computation of diluted net income per common share for the three
and six months
7
Table of Contents
IRIS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
ended June 30, 2010 was 1,830,000 in both periods. A
reconciliation of the shares used in the calculation of basic
and diluted earnings per common share is as follows:
For the |
For the |
|||||||||||||||
Three Months Ended |
Six Months Ended |
|||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | ||||||||||||||||
Weighted average common shares outstanding basic
|
17,764 | 17,991 | 17,753 | 17,959 | ||||||||||||
Dilutive stock options and warrants
|
| 103 | 11 | 103 | ||||||||||||
Dilutive restricted common shares and restricted stock units
|
| 0 | 65 | 17 | ||||||||||||
Weighted average common shares outstanding diluted
|
17,764 | 18,094 | 17,829 | 18,079 | ||||||||||||
Foreign Currency Hedge The Company conducts
business in certain foreign markets, primarily in the European
Union and Asia. To mitigate the potential impact of adverse
fluctuations in the U.S. Dollar exchange rate for these
currencies, the Company may periodically purchase foreign
currency forward contracts. The Company does not speculate in
these hedging instruments in order to profit from foreign
currency exchanges nor does the Company enter into trades for
which there are no underlying exposures.
Under FASB ASC Topic 815, Accounting for Derivative
Instruments and Hedging Activities, the Company documents
all relationships between hedging instruments and hedged items,
as well as its risk management objective for undertaking these
hedging transactions. This process includes relating the forward
contracts that are designated as fair value or cash flow hedges
to specific assets and liabilities on the balance sheet or to
specific firm commitments or forecasted transactions. The
Company also formally assesses, both at the inception of the
hedge and on an ongoing basis, whether each derivative is highly
effective in offsetting changes in fair values or cash flows of
the hedged items.
At June 30, 2011 and 2010, the Company did not have any
foreign currency forward contracts.
Goodwill and Intangible Assets Goodwill
represents the excess of the aggregate purchase price over the
fair value of the tangible and identifiable intangible assets
acquired by the Company. Goodwill and intangible assets with
indefinite lives, which consists of a CLIA license, are not
amortized. Goodwill and intangible assets with indefinite lives
are subject to impairment tests on an annual basis or more
frequently if facts and circumstances warrant such a review.
Goodwill and intangible assets with indefinite lives are
evaluated in accordance with FASB ASC Topic 350,
Intangibles-Goodwill and Other (ASC 350), based on
various analyses, including a comparison of the carrying value
of the reporting unit to its estimated fair value and discounted
cash flows. The analysis necessarily involves significant
management judgment to evaluate the capacity of an acquired
business to perform within projections. If the carrying amount
of a reporting unit exceeds its fair value, the goodwill
impairment test is performed to measure the amount of the
impairment loss, if any. During the six months ended
June 30, 2011 and 2010, the Company did not record any
impairment charges related to goodwill or intangible assets with
indefinite lives.
Intangible assets are initially measured at their fair value,
determined either by the fair value of the consideration
exchanged for the intangible asset, or the estimated discounted
cash flows expected to be generated from the intangible asset.
Intangible assets with a finite life, such as core technology,
customer relationships and non-compete agreements are amortized
on a straight-line basis over their estimated useful life,
ranging from 3 to 20 years. Intangible assets with a finite
life are evaluated for impairment using the methodology set
forth in FASB ASC Topic 360, Property, Plant and Equipment.
Recoverability of these assets is assessed only when events have
occurred that may give rise to a potential impairment. When a
potential impairment has been identified, forecasted
undiscounted net cash flows of the operations to which the asset
relates are compared to the current carrying value of the
long-lived assets present in that operation. If such cash flows
are less than such carrying amounts, long-lived
8
Table of Contents
IRIS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
assets, including such intangibles, are written down to their
respective fair values. During the six months ended
June 30, 2011 and 2010, no intangible asset impairment was
recorded.
In determining the useful lives of intangible assets, the
Company considers the expected use of the assets and the effects
of obsolescence, demand, competition, anticipated technological
advances, market influences and other economic factors. For
technology based intangible assets, the Company considers the
expected life cycles of products which incorporate the
corresponding technology.
Goodwill decreased $46,000 during the six months ended
June 30, 2011 due to a return of purchase price from the
seller of AlliedPath, Inc. (now Arista Molecular, Inc.) as a
result of a settlement of claims made against funds escrowed as
security for representations and warranties pursuant to the
merger agreement, dated July 26, 2010. All of the goodwill
balance relates to the Personalized Medicine segment.
Foreign Currency Exchange Translation The
functional currencies of the Companys foreign subsidiaries
are primarily accounted for in their respective local
currencies. The statements of operations of foreign operations
are translated into U.S. dollars at rates of exchange in
effect each month. The balance sheets of these subsidiaries are
translated at period-end exchange rates, and the differences
from historical exchange rates are reflected in
stockholders equity as other comprehensive income (loss).
Foreign currency transaction gains and losses from certain
intercompany transactions are recorded in foreign currency
transaction gain (loss) in other income (expense). Transactions
denominated in currencies other than the functional currency are
recorded based on rates in effect at the time such transactions
arise. Subsequent changes in exchange rates result in
transaction gains and losses and are reflected in the
accompanying consolidated statements of operations as unrealized
(based on the applicable period-end exchange rate) or realized
based upon settlement of the transactions. All other foreign
currency gains and losses are also recorded in foreign currency
transaction gain (loss) and other. The Company recognized net
foreign currency transaction gain of $28,000 and $414,000 for
the three and six months ended June 30, 2011. The Company
recognized net foreign currency transaction losses of $589,000
and $692,000 for the three and six months ended June 30,
2010. Such gains and losses were primarily attributable to
volatility in the Euro and British Pound.
Foreign currency exchange gains (losses) related to intercompany
balances were recorded in the Companys statements of
operations through June 30, 2011 as they represented
short-term intercompany trade payables and receivables. On
March 31, 2011, a substantial portion of the Companys
intercompany balances from its European subsidiaries were
converted to promissory notes that are of a long-term investment
nature (settlement of these notes is not planned or anticipated
in the foreseeable future). As a result, foreign exchange gains
and losses attributable to these promissory notes are recorded
in stockholders equity as other comprehensive income
(loss) beginning April 1, 2011.
Reclassifications The Company reclassified
amounts in segment and geographic information in prior periods
to add the new operating segment, Personalized Medicine (which
is further described in the Segments and Geographic footnote),
to conform to the presentation used in the current period. The
Personalized Medicine composition includes the research and
development operations of Iris Molecular Diagnostics which had
been included with the IDD segment in prior periods. These
reclassifications had no impact on the Companys previously
reported income from operations, net income or basic or diluted
earnings per share.
Certain Risks and Uncertainties Financial
instruments, which potentially expose the Company to
concentration of credit risk, consist primarily of cash and cash
equivalents, accounts receivable and investment in sales-type
leases. Concentration of credit risk with respect to accounts
receivable and investment in sales-type leases is mitigated by
the Companys performance of on-going credit evaluations of
its customers and the Company maintains an allowance for
doubtful accounts. Investments in sales-type leases are secured
by the underlying instruments.
At June 30, 2011, the amount of the Companys cash
deposited in demand deposit accounts which are fully guaranteed
by the Federal Deposit Insurance Corporation was
$10.1 million. The rest of the cash balances on
9
Table of Contents
IRIS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
deposit with banks are guaranteed by the Federal Deposit
Insurance Corporation up to $250,000. The Company may be exposed
to risk for the amount of funds held in one bank in excess of
the insurance limit. In assessing the risk, the Companys
policy is to maintain cash balances with high quality financial
institutions.
The Company derives most of its revenues from the sale of the
urinalysis analyzers, and related supplies and services.
Relatively modest declines in unit sales or gross margins could
have a material adverse effect on the Companys revenues
and profits, respectively.
Certain of the Companys components are obtained from
outside vendors, and the loss or breakdown of the Companys
relationships with these outside vendors could subject the
Company to substantial delays in the delivery of its products to
its customers. Furthermore, certain key components of the
Companys instruments and certain consumables are
manufactured by only one supplier. The Companys inability
to sell products to meet delivery schedules could have a
material adverse effect on its reputation in the industry, as
well as its financial condition and results of operation.
3. | Acquisition |
On July 28, 2010, the Company acquired AlliedPath, Inc.
AlliedPath is a high complexity CLIA-certified molecular
pathology laboratory offering differentiated, high value
molecular diagnostic services in the rapidly growing field of
personalized medicine. Pursuant to the terms of the merger
agreement dated July 26, 2010, the Company acquired all the
issued and outstanding stock of AlliedPath for an amount in cash
equal to $4.6 million less certain indebtedness existing at
the closing, with an additional earn-out of up to
$1.3 million subject to the achievement of specific sales
and earnings targets through December 2013. We did not assume
any outstanding options or warrants of AlliedPath in connection
with the acquisition. AlliedPath is now called Arista Molecular,
Inc. (Arista) and operates under the Personalized
Medicine reporting segment of the consolidated financial
statements.
Through the acquisition of Arista, the Company seeks to achieve
the following goals:
| to expand beyond its initial molecular pathology test menu by adding other molecular panels, flow cytometry for the detection and monitoring of leukemia and lymphoma, FISH testing, and proprietary new tests based on the Companys NADiA technology platform; | |
| to have better control of all aspects of the commercial operations of the NADiA platform, starting with NADiA ProsVue; | |
| to enable the acceleration of the development efforts of the NADiA technology product pipeline; and | |
| to enter the attractive personalized medicine market due to its significant growth potential. |
The aggregate consideration paid for the acquisition of Arista
was as follows:
(In thousands) | ||||
Cash
|
$ | 4,584 | ||
Fair value of contingent consideration
|
1,210 | |||
Total purchase price
|
$ | 5,794 | ||
The aggregate consideration shown above reflects a $46,000
return of purchase price recorded during the six months ended
June 30, 2011 (see Note 2, Goodwill and Intangible
Assets).
10
Table of Contents
IRIS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the estimated fair values of
assets acquired and liabilities assumed as of July 28, 2010.
(In thousands) | ||||
Current assets
|
$ | 74 | ||
Property and equipment
|
523 | |||
Core technology
|
3,090 | |||
CLIA License
|
1,604 | |||
Customer relationships
|
6 | |||
Non-compete agreements
|
100 | |||
Goodwill
|
1,461 | |||
Other assets
|
31 | |||
Current liabilities
|
(316 | ) | ||
Lease obligations
|
(178 | ) | ||
Other liabilities
|
(61 | ) | ||
Deferred tax liability, net
|
(540 | ) | ||
Total purchase price
|
$ | 5,794 | ||
In determining the purchase price allocation, the Company
considered, among other factors, historical demand for products,
estimates of future demand for those services, customer
relationships, the revenue generating potential of core
technology, the assets useful lives, and agreements not to
compete. The market, income and cost approaches were used to
determine fair values of these intangibles. The rate used to
discount the net cash flows to their present value was a 16.5%
weighted average cost of capital for the business as a whole,
and from 16.5% to 17.5% for the individual intangible assets
depending on the risk associated with the assets potential
to generate revenues and its projected remaining useful economic
life. The weighted average cost of capital was determined after
consideration of market rates of return on debt and equity
capital of comparable companies, the weighted average return on
invested capital and the risk associated with achieving
forecasted sales related to technology and assets acquired. The
fair value of the contingent consideration was determined
considering the probability of payout and using a 3% discount
rate.
Subsequent changes in the fair value of the contingent
consideration are recognized as a gain or loss on revaluation of
contingent consideration within operating expenses in the
Companys consolidated statement of operations. The Company
considers the changes in the fair value of contingent
consideration obligation at each reporting date based on changes
in discount rates, timing and amount of revenue estimates and
changes in probability assumptions with respect to the
probability of achieving the obligations. Accretion expense
related to the increase in net present value of the contingent
liability is included in interest expense for the period. As a
result of significant revenue shortfalls at Arista relative to
previous projections for the three months ended March 31,
2011, sales projections for Arista were significantly reduced
for all future periods. The revised forecast projected revenues
are significantly below earn-out targets for all three years
covered by the earn-out period. Management thus determined that
the fair value contingent consideration obligation was zero,
which resulted in a decrease of $1.2 million from
December 31, 2010 to March 31, 2011. Consequently the
Company recognized a gain on revaluation of contingent
consideration for the six months ended June 30, 2011
(recorded in March 2011). As of June 30, 2011, the fair
value of the contingent consideration remains zero.
Property and equipment net book value was evaluated at
approximately fair value on the acquisition date due to the
nature and relative age of the assets acquired.
Acquired property and equipment are being depreciated on a
straight-line basis with estimated remaining useful lives
ranging from 1 year to 5 years. Intangible assets
except the CLIA license are being amortized on a
11
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IRIS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
straight-line basis with estimated remaining useful lives
ranging from 3 years to 15 years reflecting the
expected future value. The CLIA license is considered to have an
indefinite useful life. The purchase was structured as a stock
purchase therefore the value assigned to the core technology,
CLIA license, customers relationships, non-compete agreements
and goodwill is not deductible for tax purposes.
The following table summarizes unaudited pro forma financial
information assuming the acquisition of Arista had occurred in
the corresponding period of the fiscal year immediately
preceding the acquisition. This unaudited pro forma financial
information does not necessarily represent what would have
occurred if the transaction had taken place on January 1,
2009 (the beginning of the year prior to the acquisition) and
should not be taken as representative of the Companys
future consolidated results of operations or financial position.
For Three Months |
For Six Months |
|||||||
Ended June 30, 2010 | Ended June 30, 2010 | |||||||
(In thousands) | ||||||||
Revenue
|
$ | 26,707 | $ | 52,693 | ||||
Net income (loss)
|
$ | (95 | ) | $ | 320 | |||
Net income (loss) per basic and diluted share
|
$ | (0.01 | ) | $ | 0.02 |
On November 22, 2010, the Company acquired the assets of a
multi-purpose, bench-top instrument platform for automating
highly repetitive, manual laboratory protocols for FISH
(fluorescence in-situ hybridization) testing and other
slide-based cytogenetic applications. The product acquisition is
a natural extension to the successful
ThermoBrite®
DNA Hybridization System and in line with the Companys
entry into personalized medicine with emphasis on cancer
diagnostics. The product prototypes and proprietary technology
assets were purchased for $3.2 million in cash from
BioMicro Systems, Inc. The new product platform will be
integrated into the Iris Sample Processing Division and it is
expected to position IRIS as a major competitor in the high
growth cytogenetic instrumentation market. This acquisition was
recorded as an acquisition of assets determined not to be a
business, since no workforce nor strategic management,
operational or resource management processes were included in
the purchase.
The purchase price of $3.2 million plus related asset
acquisition costs of $94,000 was allocated as follows:
$3.2 million to core technology, recorded in intangible
assets, and $99,000 to property and equipment on the
Companys consolidated balance sheet as of June 30,
2011. The purchase price allocation was based on estimates and
available information. Although BioMicro Systems built and
tested a working prototype, which proved the technical
feasibility of the base technology, several elements of this
technology platform require continued development in order to
reach salability for its stated purpose. Once development is
completed, a useful life for the core technology will be
determined and the core technology will be amortized over the
useful life determined at that time.
4. | Inventories |
Inventories consist of the following:
June 30, |
December 31, |
|||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Finished goods
|
$ | 4,068 | $ | 3,423 | ||||
Work-in-process
|
260 | 181 | ||||||
Raw materials, parts and
sub-assemblies
|
9,082 | 6,706 | ||||||
Inventories
|
$ | 13,410 | $ | 10,310 | ||||
12
Table of Contents
IRIS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
5. | Sales-type Leases |
The components of net investment in sales-type leases consist of
the following:
June 30, |
December 31, |
|||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Total minimum lease payments
|
$ | 18,037 | $ | 16,044 | ||||
Less: unearned income
|
(2,670 | ) | (2,464 | ) | ||||
Net investment in sales-type leases
|
15,367 | 13,580 | ||||||
Less: current portion
|
(3,944 | ) | (3,578 | ) | ||||
Net investment in sales-type leases, non-current portion
|
$ | 11,423 | $ | 10,002 | ||||
Future minimum lease payments due from customers under
sales-type leases for each of the five succeeding years and
thereafter:
(In thousands) | ||||
Year Ending December 31,
|
||||
2011 (six months remaining)
|
$ | 2,069 | ||
2012
|
3,803 | |||
2013
|
3,434 | |||
2014
|
3,092 | |||
2015
|
2,229 | |||
Thereafter
|
740 | |||
$ | 15,367 | |||
Our leases are primarily to customers in the health care
industry or to governments. We assess credit risk for all of our
customers including those who lease equipment. Credit risk is
assessed using an internally developed model which incorporates
credit scores from third party providers and our own custom risk
ratings and is updated on a quarterly basis. The external credit
scores are developed based on the customers historical
payment patterns and an overall assessment of the likelihood of
delinquent payments. Our internal ratings are weighted based on
company size, years in business, and other credit related
factors (i.e. profitability, cash flow, liquidity, tangible net
worth, etc.). Any one of the following factors may result in a
customer being classified as high risk: i) the customer has
a history of late payments; ii) the customer has open
lawsuits, liens or judgments; and iii) the customer has
been in business less than three years. Our lease receivables
are collateralized by the equipments fair value, which
mitigates our credit risk. The following table presents the risk
profile by creditworthiness category of our sales-type lease
receivables at June 30, 2011:
(In thousands) | ||||
Low risk
|
$ | 13,891 | ||
Moderate risk
|
820 | |||
High Risk
|
656 | |||
$ | 15,367 | |||
The balance of the allowance for uncollectible accounts for our
sales-type leases was zero as of June 30, 2011. We
determine the adequacy of our allowance for uncollectible
accounts for sales-type leases based on an analysis of
historical write-offs. There have been no write-offs of
sales-type lease receivables for the three or six months ended
June 30, 2011 or 2010. As of June 30, 2011, the amount
of sales-type leases which were past due was not significant
13
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IRIS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and there were no impaired sales-type leases. Accordingly, there
was no material risk of default with respect to sales-type
leases as of June 30, 2011.
6. | Bank Credit Facility |
The Company has a credit facility with a commercial bank. The
credit facility consists of a $6.5 million revolving line
of credit for working capital and a $10.0 million line of
credit for acquisitions and product opportunities. The credit
facility has variable interest rates, which will change from
time to time based on changes to either the LIBOR rate or the
lenders prime rate. Borrowings under the credit facility
are secured by all of the Companys assets and mature in
June 2012 and June 2015, respectively.
As of June 30, 2011 and December 31, 2010, there were
no borrowings under the credit facility. The Company, however,
is subject to certain financial and non-financial covenants
under the credit facility with the bank and as of June 30,
2011, the Company was in compliance with these covenants.
On July 22, 2011, the Company terminated its then existing
credit facility and replaced it with a new credit facility
entered into on July 27, 2011 with another commercial bank.
See Note 12, Subsequent Events.
7. | Income Taxes |
On a quarterly basis, the Company estimates the effective tax
rate for the full fiscal year and records a quarterly income tax
provision based on the projected effective tax rate. As the
fiscal year progresses, the Company refines its estimate based
on the facts and circumstances by each tax jurisdiction. The
effective tax rates for the three and six months ended
June 30, 2011 were 3.6% and 21.5%, respectively. The
effective tax rates for the three and six months ended
June 30, 2010 were 32% and 33%, respectively.
The Company will recognize potential interest and penalties
related to income tax positions as a component of the provision
for income taxes in the statements of operations in any future
periods in which the Company must record such a liability. Since
the Company has not recorded a liability at June 30, 2011,
no amount of interest or penalties were recorded in the
statement of financial condition or the statement of operations.
Accordingly, there was no impact on the Companys effective
tax rate for such items. The Company does anticipate an increase
of approximately $500,000 in its unrecognized tax benefits
related to certain credit carryforwards anticipated to be
generated within the next 12 months. The benefit of such
items will be recorded through its statement of operations when
recognized.
8. | Stock-Based Compensation |
The Company accounts for stock-based compensation pursuant to
FASB ASC Topic 505, Share-Based Payment, which
requires compensation costs related to share-based transactions,
including employee stock options, to be recognized in the
financial statements based on fair value. Share-based
compensation expense for the three and six months ended
June 30, 2011 and 2010 includes incremental share-based
compensation expense as follows:
For the |
For the |
|||||||||||||||
Three Months Ended |
Six Months Ended |
|||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | ||||||||||||||||
Cost of sales
|
$ | 75 | $ | 94 | $ | 166 | $ | 208 | ||||||||
Marketing and selling
|
129 | 187 | 287 | 374 | ||||||||||||
General and administrative
|
1,010 | 646 | 1,507 | 1,211 | ||||||||||||
Research and development
|
140 | 193 | 394 | 417 | ||||||||||||
Stock-based compensation
|
$ | 1,354 | $ | 1,120 | $ | 2,354 | $ | 2,210 | ||||||||
14
Table of Contents
IRIS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock
Options
The Company has a stock option plan (the 2007 Stock Incentive
Plan) under which the Company may grant future non-qualified
stock options, incentive stock options and stock appreciation
rights. No stock appreciation rights have been granted under any
of the Companys stock option plans. On July 13, 2007,
the Companys stockholders approved the adoption of the
IRIS International, Inc. 2007 Stock Incentive Plan, which
initially authorized the issuance of up to 1,750,000 shares
of common stock pursuant to equity awards granted under the
plan. On May 22, 2009, the Companys stockholders
approved an increase of 1,550,000 shares to the 2007 Stock
Incentive Plan for a total of 3,300,000 authorized shares.
In addition to the 2007 Stock Incentive Plan, on June 6,
2011, the Companys board of directors adopted the IRIS
International, Inc. 2011 Inducement Incentive Plan (the
2011 Inducement Plan). The plan provides for the
grant of equity-based awards in the form of stock options,
restricted common stock, restricted stock units, stock
appreciation rights and other stock-based awards solely to
New Employees as an inducement material to the New
Employees entering into employment with the Company or any
of its subsidiaries within the meaning of Listing
Rule 5635(c)(4) (or any successor thereto) of The NASDAQ
Stock Market. For purposes of the 2011 Inducement Plan, a
New Employee means any prospective employee of IRIS
International or any of its subsidiaries who either (i) was
not previously an employee or director of IRIS International or
any of our subsidiaries or (ii) was previously an employee
or director of IRIS International or any of its subsidiaries but
for which there has occurred a bona fide period of
non-employment.
The maximum number of shares available for grant under the 2011
Inducement Plan is 250,000 shares of common stock, which
number of shares is subject to adjustment for certain corporate
changes, as provided in the plan. The plan expires on
June 30, 2013. The plan is administered by the Compensation
Committee of the Companys Board. As of June 30, 2011,
no shares have been granted under the 2011 Inducement Plan.
The Company previously had other expired stock option plans
which have remaining outstanding shares.
The following schedule sets forth options authorized, exercised,
outstanding and available for grant under the Companys
existing stock option plans as of June 30, 2011:
Number of Option Shares | ||||||||||||||||
Available |
||||||||||||||||
Plan | Authorized | Exercised | Outstanding | for Grant | ||||||||||||
(In thousands) | ||||||||||||||||
1994 Plan
|
700 | 680 | 20 | | ||||||||||||
1998 Plan
|
4,100 | 2,742 | 624 | | ||||||||||||
2007 Plan
|
3,300 | | 1,993 | 415 | ||||||||||||
2011 Plan
|
250 | | | 250 | ||||||||||||
8,350 | 3,422 | 2,637 | 665 | |||||||||||||
15
Table of Contents
IRIS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock option activity during the six months ended June 30,
2011 is as follows:
Weighted |
Weighted |
|||||||||||||||
Average |
Average |
|||||||||||||||
Exercise |
Remaining |
Aggregate |
||||||||||||||
Price Per |
Contractual |
Intrinsic |
||||||||||||||
Shares | Share | Term | Value | |||||||||||||
(In thousands, except for per share amounts) | ||||||||||||||||
Outstanding at January 1, 2011
|
2,769 | $ | 12.26 | 4.8 years | $ | 1,564 | ||||||||||
Granted
|
272 | $ | 9.82 | |||||||||||||
Exercised
|
(24 | ) | $ | 2.00 | ||||||||||||
Canceled or expired
|
(380 | ) | $ | 16.58 | ||||||||||||
Outstanding at June 30, 2011
|
2,637 | $ | 11.48 | 4.2 years | $ | 1,089 | ||||||||||
Exercisable at June 30, 2011
|
1,657 | $ | 12.10 | 3.3 years | $ | 928 | ||||||||||
The aggregate intrinsic value in the table above represents the
total pretax intrinsic value (the difference between the closing
stock price on June 30, 2011 and the exercise price,
multiplied by the number of
in-the-money
options) that would have been received by the option holders,
had all option holders exercised their options on June 30,
2011. Total intrinsic value of options exercised for the six
months ended June 30, 2011 amounted to $171,000. As of
June 30, 2011, total unrecognized stock-based compensation
expense related to unvested stock options was $4,023,000, which
is expected to be recognized over the remaining weighted average
period of approximately 2.8 years.
The Compensation Committee of the board of directors determines
the total value of the stock based compensation grants. The
exercise price of options is the closing price on the date the
options are granted. Payment of the exercise price may be made
either in cash or with shares of common stock that have been
held at least six months. The options generally vest over four
years and expire either five or ten years from the date of
grant. The fair value of each option grant is estimated on the
date of the grant using the Black-Scholes option-pricing model
with the following weighted average assumptions:
For the Three Months |
||||||||
Ended June 30, | ||||||||
2011 | 2010 | |||||||
Risk free interest rate
|
1.7 | % | 2.4 | % | ||||
Expected lives (years)
|
3.96 | 5.08 | ||||||
Expected volatility
|
50.5 | % | 56.1 | % | ||||
Expected dividend yield
|
0 | % | 0 | % |
The expected volatilities are based on the historical volatility
of the Companys stock. The observation is made on a weekly
basis. The expected terms of the stock options are based on the
average vesting period on a basis consistent with the historical
experience for similar option grants. The risk-free interest
rate is consistent with the expected terms of the stock options
and based on the U.S. Treasury yield curve in effect at the
time of grant. The Company estimates forfeiture rates based on
historical data.
16
Table of Contents
IRIS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the Companys non-vested stock options during
the six months ended June 30, 2011 is as follows:
Weighted |
||||||||
Average |
||||||||
Grant Date |
||||||||
Fair Value |
||||||||
Shares | Per Share | |||||||
(In thousands except for fair value per share) | ||||||||
Non-vested options at January 1, 2011
|
1,127 | $ | 4.80 | |||||
Granted
|
272 | $ | 4.07 | |||||
Vested
|
(297 | ) | $ | 5.20 | ||||
Forfeited
|
(122 | ) | $ | 4.14 | ||||
Non-vested options at June 30, 2011
|
980 | $ | 4.55 | |||||
Restricted
Shares
The Company began awarding restricted shares of its common stock
in 2006. In March 2009, the Company began to grant restricted
stock units to its non-employee directors and to certain
employees. Such awards generally require that certain
performance conditions and service conditions be met before the
awards vest. Restricted shares currently vest 25% after one year
and
61/4%
quarterly thereafter. However, non-employee directors are
immediately vested on the grant date. Unvested restricted shares
are forfeited if the recipients employment terminates for
any reason other than death, disability or special circumstances
as determined by the Compensation Committee of the
Companys board of directors. Restricted share activity
during the six months ended June 30, 2011 was as follows:
Weighted |
||||||||
Average |
||||||||
Grant Date |
||||||||
Fair Value |
||||||||
Shares | Per Share | |||||||
(In thousands except for fair value per share) | ||||||||
Non-vested shares at January 1, 2011
|
286 | $ | 10.89 | |||||
Granted
|
204 | $ | 9.51 | |||||
Vested
|
(128 | ) | $ | 10.18 | ||||
Forfeited
|
(37 | ) | $ | 9.72 | ||||
Non-vested shares at June 30, 2011
|
325 | $ | 10.44 | |||||
Fair value of the Companys restricted shares is based on
the Companys closing stock price on the date of grant. As
of June 30, 2011, total unrecognized stock-based
compensation expense related to non-vested restricted share
grants was $3,204,000 which is expected to be recognized over
the remaining weighted average period of approximately
2.9 years.
9. | Contingencies |
Litigation
From time to time, the Company is party to certain litigation
arising in the normal course of business. Management believes
that the resolution of such matters will not have a material
adverse effect on the Companys financial position, results
of operations or cash flows.
17
Table of Contents
IRIS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Guarantees
The Company enters into indemnification provisions under
(i) agreements with other companies in the ordinary course
of business, typically with business partners, contractors,
customers and landlords, and (ii) agreements with
investors. Under these provisions, the Company generally
indemnifies and holds harmless the indemnified party for losses
suffered or incurred by the indemnified party as a result of the
Companys activities or, in some cases, as a result of the
indemnified partys activities under the agreement. These
indemnification provisions often include indemnifications
relating to representations made by the Company with regard to
intellectual property rights. These indemnification provisions
generally survive termination of the underlying agreement. In
addition, in some cases, the Company has agreed to reimburse
employees for certain expenses and to provide salary
continuation during short-term disability. The maximum potential
amount of future payments the Company could be required to make
under these indemnification provisions is unlimited. The Company
reviews its exposure under these agreements no less than
annually, or more frequently when events indicate. As a result,
the Company believes the estimated fair value of these
agreements is minimal. Accordingly, the Company has not recorded
any liabilities for these agreements as of June 30, 2011 or
December 31, 2010.
10. | Segments and Geographic Information |
The Companys operations are organized on the basis of
products and related services and under FASB ASC Topic 280,
Segment Reporting, the Company operates in three
segments: (1) Iris Diagnostics Division (IDD),
(2) Sample Processing and (3) Personalized Medicine.
The IDD segment designs, develops, manufactures, markets and
distributes in-vitro diagnostic systems based on patented and
proprietary technology for automating microscopic and clinical
chemistry procedures for urinalysis. The segment also provides
ongoing sales of consumables and services necessary for the
operation of installed urinalysis workstations. In the United
States, these products are sold through a direct sales and
service force. Internationally, these products are sold and
serviced through distributors, with the exception of France,
Germany, the United Kingdom and Puerto Rico.
The Sample Processing segment designs, develops, manufactures
and markets a variety of bench-top centrifuges, small
instruments and supplies. These products are used primarily for
manual specimen preparation and dedicated applications in
coagulation, cytology, hematology, urinalysis and DNA
processing. These products are sold worldwide through
distributors.
The Personalized Medicine segment operates a CLIA-certified
laboratory focused on oncology and molecular diagnostics
services in personalized medicine. This segment also includes
the research and development operations of Iris Molecular
Diagnostics, or IMD.
The accounting policies of the segments are the same as those
described in the Summary of Significant Accounting
Policies in the Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 2010. The Company
evaluates the performance of its segments and allocates
resources to them based on earnings before income taxes,
excluding corporate charges.
18
Table of Contents
IRIS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The tables below present information about reported segments for
the three and six months ended June 30, 2011 and 2010:
Unallocated |
||||||||||||||||||||
Sample |
Personalized |
Corporate |
||||||||||||||||||
IDD | Processing | Medicine(1) | Expenses | Total | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
For the three months ended June 30, 2011
|
||||||||||||||||||||
Revenues
|
$ | 26,375 | $ | 3,686 | $ | 104 | $ | | $ | 30,165 | ||||||||||
Gross profit (loss)
|
14,087 | 2,004 | (438 | ) | | 15,653 | ||||||||||||||
Marketing and selling
|
4,804 | 298 | 862 | | 5,964 | |||||||||||||||
General and administrative
|
1,666 | 416 | 713 | 3,043 | 5,838 | |||||||||||||||
Research and development, net
|
2,750 | 413 | 1,341 | | 4,504 | |||||||||||||||
Total operating expenses
|
9,220 | 1,127 | 2,916 | 3,043 | 16,306 | |||||||||||||||
Operating income (loss)
|
4,867 | 877 | (3,354 | ) | (3,043 | ) | (653 | ) | ||||||||||||
Interest income
|
27 | | | 245 | 272 | |||||||||||||||
Interest expense
|
| | | 4 | 4 | |||||||||||||||
Depreciation and amortization
|
1,146 | 37 | 194 | 4 | 1,381 | |||||||||||||||
Segment pre-tax income (loss)
|
4,908 | 852 | (3,353 | ) | (2,764 | ) | (357 | ) | ||||||||||||
Segment assets
|
84,076 | 9,573 | 12,486 | 5,748 | 111,883 | |||||||||||||||
Investment in long-lived assets
|
26,741 | 4,087 | 12,165 | | 42,993 | |||||||||||||||
For the three months ended June 30, 2010
|
||||||||||||||||||||
Revenues
|
$ | 22,737 | $ | 3,951 | $ | | $ | | $ | 26,688 | ||||||||||
Gross profit (loss)
|
12,271 | 2,224 | | | 14,495 | |||||||||||||||
Marketing and selling
|
4,469 | 300 | | | 4,769 | |||||||||||||||
General and administrative
|
1,747 | 349 | | 2,527 | 4,623 | |||||||||||||||
Research and development, net
|
2,326 | 185 | 1,334 | | 3,845 | |||||||||||||||
Total operating expenses
|
8,542 | 834 | 1,334 | 2,527 | 13,237 | |||||||||||||||
Operating income (loss)
|
3,729 | 1,390 | (1,334 | ) | (2,527 | ) | 1,258 | |||||||||||||
Interest income
|
18 | 9 | | 252 | 279 | |||||||||||||||
Interest expense
|
| | 2 | 2 | ||||||||||||||||
Depreciation and amortization
|
884 | 43 | 43 | 4 | 974 | |||||||||||||||
Segment pre-tax income (loss)
|
3,175 | 1,373 | (1,334 | ) | (2,295 | ) | 919 | |||||||||||||
Segment assets
|
83,497 | 11,210 | 4,883 | 6,136 | 105,726 | |||||||||||||||
Investment in long-lived assets
|
20,448 | 396 | 4,730 | | 25,574 |
(1) | Personalized Medicine includes the operations of Arista, which was acquired on July 28, 2010 (see Note 3). |
19
Table of Contents
IRIS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Unallocated |
||||||||||||||||||||
Sample |
Personalized |
Corporate |
||||||||||||||||||
IDD | Processing | Medicine(1) | Expenses | Total | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
For the six months ended June 30, 2011
|
||||||||||||||||||||
Revenues
|
$ | 49,656 | $ | 7,280 | $ | 168 | $ | | $ | 57,104 | ||||||||||
Gross profit (loss)
|
25,727 | 3,929 | (896 | ) | | 28,760 | ||||||||||||||
Marketing and selling
|
9,514 | 642 | 1,779 | | 11,935 | |||||||||||||||
General and administrative
|
3,274 | 800 | 1,461 | 5,105 | 10,640 | |||||||||||||||
Research and development, net
|
4,934 | 631 | 2,574 | | 8,139 | |||||||||||||||
Gain on revaluation of contingent consideration
|
| | (1,225 | ) | | (1,225 | ) | |||||||||||||
Total operating expenses
|
17,722 | 2,073 | 4,589 | 5,105 | 29,489 | |||||||||||||||
Operating income (loss)
|
8,005 | 1,856 | (5,485 | ) | (5,105 | ) | (729 | ) | ||||||||||||
Interest income
|
49 | | | 500 | 549 | |||||||||||||||
Interest expense
|
| | | 6 | 6 | |||||||||||||||
Depreciation and amortization
|
2,236 | 15 | 341 | 7 | 2,599 | |||||||||||||||
Segment pre-tax income (loss)
|
8,921 | 1,800 | (5,492 | ) | (5,001 | ) | 228 | |||||||||||||
Segment assets
|
84,076 | 9,573 | 12,486 | 5,748 | 111,883 | |||||||||||||||
Investment in long-lived assets
|
26,741 | 4,087 | 12,165 | | 42,993 | |||||||||||||||
For the six months ended June 30, 2010
|
||||||||||||||||||||
Revenues
|
$ | 45,017 | $ | 7,651 | $ | | $ | | $ | 52,668 | ||||||||||
Gross profit (loss)
|
23,528 | 4,221 | | | 27,749 | |||||||||||||||
Marketing and selling
|
8,612 | 584 | | | 9,196 | |||||||||||||||
General and administrative
|
3,284 | 762 | | 4,314 | 8,360 | |||||||||||||||
Research and development, net
|
4,458 | 318 | 2,757 | | 7,533 | |||||||||||||||
Gain on revaluation of contingent consideration
|
| | | | | |||||||||||||||
Total operating expenses
|
16,354 | 1,664 | 2,757 | 4,314 | 25,089 | |||||||||||||||
Operating income (loss)
|
7,174 | 2,557 | (2,757 | ) | (4,314 | ) | 2,660 | |||||||||||||
Interest income
|
38 | 17 | | 461 | 516 | |||||||||||||||
Interest expense
|
| | | 5 | 5 | |||||||||||||||
Depreciation and amortization
|
1,771 | 94 | 107 | 8 | 1,980 | |||||||||||||||
Segment pre-tax income (loss)
|
6,517 | 2,523 | (2,757 | ) | (3,785 | ) | 2,498 | |||||||||||||
Segment assets
|
83,497 | 11,210 | 4,883 | 6,136 | 105,726 | |||||||||||||||
Investment in long-lived assets
|
20,448 | 396 | 4,730 | | 25,574 |
(1) | Personalized Medicine includes the operations of Arista, which was acquired on July 28, 2010 (see Note 3). |
The Company ships products from two locations in the United
States and one location in Germany. Substantially all long-lived
assets are located in the United States. Sales to international
customers amounted to approximately $18.6 million and
$17.8 million during the six months ended June 30,
2011 and 2010, respectively.
Segment assets attributed to corporate unallocated expenses are
deferred taxes. Long-lived assets include property and
equipment, intangible assets, long-term portion of inventory and
other long-term assets. Deferred income tax is excluded from
long-lived assets.
20
Table of Contents
IRIS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
11. | Joint Development Agreement |
On March 25, 2011 the Company entered into a Joint
Development Agreement with Fujirebio Inc., one of the largest
in-vitro diagnostics companies in Japan, for the co-development
of the IRIS
3GEMStm
Hematology Analyzer product line.
Terms of the agreement call for Fujirebio to contribute
$6.0 million toward the costs of the joint development
program, with an initial payment of $500,000 upon signing of the
agreement in March 2011 and the balance to be paid in
installments during the course of the development period based
upon the achievement of certain milestones. The Company achieved
a milestone in June 2011 and recorded an additional $500,000 due
from Fujirebio as of June 30, 2011. These funds will be
utilized to accelerate the 3GEMS Hematology Analyzer development
program, which leverages IRISs proprietary image-based
technology to automate the identification and characterization
of blood cells, including an image-based expanded white blood
cell differential, and is expected to significantly reduce the
need for manual slide preparation and reviews. For the three and
six months ended June 30, 2011, the Company recorded
$500,000 and $1 million, respectively, as a reduction to
research and development expenses in the Companys
consolidated statement of operations.
12. | Subsequent Events |
The Company considers events or transactions that occur after
the balance sheet date but before the financial statements are
issued to provide additional evidence relative to certain
estimates or to identify matters that require additional
disclosure. The Company evaluated subsequent events through the
date the financial statements were issued.
On July 22, 2011, the Company terminated its then existing
credit facility and replaced it with a new credit facility
entered into on July 27, 2011 with JPMorgan Chase Bank,
N.A., as administrative agent for certain lenders. The credit
facility provides for borrowings of up to $15 million
pursuant to revolving loans, acquired participations in letters
of credit and swingline loans. The Company has not borrowed any
amounts under the credit facility. All amounts under the
revolving loans become due and payable on July 31, 2013.
The credit facility has variable interest rates, which will
change from time to time based on changes to either the
applicable LIBOR rate or the lenders prime rate. Interest
is generally payable monthly in arrears. The Companys
obligations under this credit facility are secured by a lien on
substantially all of the Companys assets and those of its
domestic subsidiaries. The credit facility contains several
performance covenants, limitations on additional indebtedness,
and customary default provisions, and all outstanding
obligations under the facility may become immediately due and
payable in the event of the Companys default.
21
Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Overview
IRIS International, Inc. consists of three operating units in
three business segments as determined in accordance with FASB
ASC Topic 280, Segment Reporting. Our in-vitro
diagnostics segment, also called Iris Diagnostics Division
(IDD), designs, manufactures and markets systems, consumables
and supplies for urinalysis and body fluids. Our Personalized
Medicine segment combines the research and development
operations of our Iris Molecular Diagnostics and Arista
Molecular, Inc. subsidiaries. Under this new segment we
consolidate all operations for the development and
commercialization of cancer diagnostic testing services and
related products. Our Sample Processing segment markets small
centrifuges and other processing equipment and accessories for
rapid specimen processing, as well as, equipment for fluorescent
in-situ hybridization (FISH).
Iris
Diagnostics Division
Our core business is in the urinalysis market and we are the
leading worldwide provider of automated urine microscopy
systems, with more than 3,200 iQ microscopy analyzers shipped to
date in over 50 countries. We generate revenues primarily from
sales of instruments, consumables and service. Revenues from
instruments include global sales of urine microscopy analyzers
and sales of chemistry analyzers. In September 2008, we released
our proprietary iChemVELOCITY automated urine chemistry analyzer
and a fully integrated urine microscopy and urine chemistry
work-cell, called the iRICELL in some international markets. In
March 2011, we received FDA clearance on our 510(k) application
for these products and commenced selling them in the United
States. Historically we sold our family of iQ analyzers
integrated with an automated chemistry analyzer that were
sourced from a Japanese manufacturer.
Our consumables revenues result from sales of chemical reagents,
urine test strips, calibrators and controls. Service revenues
are derived primarily from annual service contracts purchased by
our domestic customers after the initial year of sale, which is
covered by product warranty, and spare parts purchased by
international customers. Once the analyzers are installed, we
generate recurring revenue from sales of consumables. Recurring
consumable and service revenues should continue to expand as the
installed base of related instruments increases.
In the United States, France, Germany, and the United Kingdom
sales of our urinalysis systems are direct to the end-user
through our sales force. All other international sales are
through independent distributors. International sales
represented 33% and 34% of consolidated revenues for the six
months ended June 30, 2011 and 2010, respectively. Since
the majority of international sales are made through independent
distributors, gross profit margin is lower than domestic sales
of the same products, but we incur minimal sales, service and
marketing costs for such sales.
Personalized
Medicine
On July 28, 2010, we acquired Arista Molecular
(Arista), a high complexity CLIA-certified molecular
pathology laboratory offering differentiated, high value
molecular diagnostic services in the rapidly growing field of
personalized medicine. Pursuant to the terms of the merger
agreement dated July 26, 2010, we acquired all the issued
and outstanding stock for an amount in cash equal to
$4.6 million less certain indebtedness existing at the
closing, with an additional earn-out of up to $1.3 million
subject to the achievement of specific sales and earnings
targets through December 2013 (see discussion of gain on
revaluation of contingent consideration below). We did not
assume any outstanding options or warrants in connection with
the acquisition. Arista operates under the Personalized Medicine
reporting segment of the consolidated financial statements.
At the time of acquisition, Arista Molecular was an early-stage
laboratory with limited commercial operations. In 2010, we
focused the laboratorys efforts to broaden its menu of
diagnostic panels useful for the diagnosis, disease
characterization, treatment and monitoring of cancer. We added
testing for breast and prostate solid tumors beyond the existing
lung and colorectal offering. In addition, we now offer flow
cytometry for detection and monitoring of leukemia and lymphoma
and FISH testing. Further, we are building the commercial
infrastructure of the laboratory by adding sales and marketing
personnel. With the expansion of the test menu and sales force,
we
22
Table of Contents
expect the revenue contribution from this segment to improve in
2011, but continue to have a dilutive impact for the year.
Sample
Processing
Our IRIS Sample Processing group markets and develops
centrifuges, semi-automated DNA processing workstations and
sample processing consumables. Our
StatSpin®
brand bench-top centrifuges are used for specimen preparation in
coagulation, cytology, chemistry and urinalysis. Our worldwide
markets include medical institutions, commercial laboratories,
clinics, doctors offices, veterinary laboratories and
research facilities. Our Sample Processing products are sold
worldwide primarily through distributors and incorporated into
our OEM partners products.
On November 22, 2010, we acquired the assets of a
multi-purpose, bench-top instrument platform for automating
highly repetitive, manual laboratory protocols for FISH testing
and other slide-based cytogenetic applications. The product
acquisition is a natural extension to the successful
ThermoBrite®
DNA Hybridization System and in line with our entry into
personalized medicine with emphasis on cancer diagnostics. The
product prototypes and proprietary technology assets were
purchased for $3.2 million in cash from BioMicro Systems,
Inc. Although BioMicro Systems built and tested a working
prototype, which proved the technical feasibility of the base
technology, several elements of this technology platform require
continued development in order to reach salability for the
platforms stated purpose.
Critical
Accounting Policies
The preparation of financial statements and related disclosures
in conformity with U.S. generally accepted accounting
principles and our discussion and analysis of our financial
condition and results of operations require us to make
judgments, assumptions, and estimates that affect the amounts
reported in our consolidated financial statements and
accompanying notes. We base our estimates on historical
experience and on various other assumptions we believe to be
reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of
assets and liabilities. We regularly discuss with our audit
committee the basis of our estimates. Actual results may differ
from these estimates and such differences may be material.
A description of our critical accounting policies that represent
the more significant judgments and estimates used in the
preparation of our financial statements was provided in the
Managements Discussion and Analysis of Financial Condition
and Results of Operations section of our Annual Report on
Form 10-K
for the year ended December 31, 2010. There have been no
material changes in these critical accounting policies since
December 31, 2010.
23
Table of Contents
Results
of Operations
The following table summarizes results of operations data for
the periods indicated. The percentages in the table are based on
total revenues, with the exception of percentages for gross
profit margins, which are computed on related revenue, and
income taxes, which are based on income before taxes.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||
Revenues
|
||||||||||||||||||||||||||||||||
IDD instruments
|
$ | 9,087 | 30 | % | $ | 7,412 | 28 | % | $ | 15,624 | 27 | % | $ | 15,301 | 29 | % | ||||||||||||||||
IDD consumables and service
|
17,288 | 57 | % | 15,325 | 57 | % | 34,032 | 60 | % | 29,716 | 56 | % | ||||||||||||||||||||
Sample Processing instruments and supplies
|
3,686 | 12 | % | 3,951 | 15 | % | 7,280 | 13 | % | 7,651 | 15 | % | ||||||||||||||||||||
Personalized Medicine services
|
104 | 0 | % | | 0 | % | 168 | 0 | % | | 0 | % | ||||||||||||||||||||
Total revenues
|
30,165 | 100 | % | 26,688 | 100 | % | 57,104 | 100 | % | 52,668 | 100 | % | ||||||||||||||||||||
Gross
profit(1)
|
||||||||||||||||||||||||||||||||
IDD instruments
|
3,990 | 44 | % | 2,733 | 37 | % | 6,262 | 40 | % | 5,554 | 36 | % | ||||||||||||||||||||
IDD consumable and service
|
10,097 | 58 | % | 9,538 | 62 | % | 19,465 | 57 | % | 17,974 | 61 | % | ||||||||||||||||||||
Sample Processing instruments and supplies
|
2,004 | 54 | % | 2,224 | 56 | % | 3,929 | 54 | % | 4,221 | 55 | % | ||||||||||||||||||||
Personalized Medicine services
|
(438 | ) | NM | % | | 0 | % | (896 | ) | NM | % | | 0 | % | ||||||||||||||||||
Gross profit
|
15,653 | 52 | % | 14,495 | 54 | % | 28,760 | 50 | % | 27,749 | 53 | % | ||||||||||||||||||||
Operating expenses
|
||||||||||||||||||||||||||||||||
Marketing and selling
|
5,964 | 20 | % | 4,769 | 18 | % | 11,935 | 21 | % | 9,196 | 17 | % | ||||||||||||||||||||
General and administrative
|
5,838 | 19 | % | 4,623 | 17 | % | 10,640 | 19 | % | 8,360 | 16 | % | ||||||||||||||||||||
Research and development, net
|
4,504 | 15 | % | 3,845 | 14 | % | 8,139 | 14 | % | 7,533 | 14 | % | ||||||||||||||||||||
Gain on revaluation of contingent consideration
|
| 0 | % | | 0 | % | (1,225 | ) | (2 | )% | | 0 | % | |||||||||||||||||||
Total operating expenses
|
16,306 | 54 | % | 13,237 | 49 | % | 29,489 | 52 | % | 25,089 | 48 | % | ||||||||||||||||||||
Operating income (loss)
|
(653 | ) | (2 | )% | 1,258 | 5 | % | (729 | ) | (1 | )% | 2,660 | 5 | % | ||||||||||||||||||
Other income
|
296 | (339 | ) | 957 | (162 | ) | ||||||||||||||||||||||||||
Income (loss) before income taxes
|
(357 | ) | (1 | )% | 919 | 4 | % | 228 | 0 | % | 2,498 | 5 | % | |||||||||||||||||||
Income
taxes(2)
|
(13 | ) | 4 | % | 295 | 32 | % | 49 | 21 | % | 832 | 33 | % | |||||||||||||||||||
Net income (loss)
|
$ | (344 | ) | (1 | )% | $ | 624 | 2 | % | $ | 179 | 0 | % | $ | 1,666 | 3 | % | |||||||||||||||
(1) | Gross profit margin percentages are based on the related sales of each category. | |
(2) | Income tax percentage is computed based on the relationship of income taxes to pre-tax income. |
Comparison
of Three Months Ended June 30, 2011 to Three Months Ended
June 30, 2010
Consolidated revenues for the second quarter ended June 30,
2011 increased 13% to $30.2 million as compared to
$26.7 million in the prior year period. IDD urinalysis
segment revenues increased 16% to $26.4 million in the
second quarter of 2011 as compared to $22.8 million in the
prior year quarter. IDD instruments revenues increased 23% to
$9.1 million in the second quarter of 2011 as compared to
$7.4 million in the prior year quarter. The increase in IDD
instrument sales is primarily attributable to strong growth in
domestic sales of both iChemVelocity and iRICELL workstations,
following the recent FDA clearance of the iChemVelocity in March
2011. International instruments also experienced year over year
growth primarily due to increased sales in the Asia Pacific and
Latin America regions.
24
Table of Contents
IDD consumables and service revenues increased 13% to a record
$17.3 million in the second quarter of 2011 as compared to
$15.3 million in the prior year quarter. The increase in
both consumables and service revenue was primarily due to the
larger installed base of instruments. In particular, we
experienced an increase in sales of Japanese sourced chemistry
strips due to higher utilization, and an increase in sales of
our iChemVELOCITY strips as a result of increased placements of
our iChemVELOCITY analyzer. We expect sales of our iChemVELOCITY
strips to accelerate with the recent introduction of the
iChemVELOCITY in the domestic market and planned availability in
international markets that require FDA clearance prior to
product registration in those markets.
Revenues from Sample Processing instruments and supplies
decreased 7% to $3.7 million in the second quarter of 2011
as compared to $4.0 million in the prior year quarter. The
decrease was primarily attributable to lower instrument sales to
several of our OEM partners, partially offset by higher sales to
our North American distributors.
Personalized Medicine revenues in the second quarter of 2011
totaled $104,000 as we continue to expand our test menu and
build out our sales force. There were no revenues in this
segment in the prior year period as Arista was purchased in July
2010.
Consolidated gross profit margin was 52% during the second
quarter of 2011 compared to 54% in the prior year quarter.
Excluding losses from the Personalized Medicine segment,
consolidated gross margin was 54%. Decreases in consumables and
service margins and Sample Processing gross margins were offset
by an increase in IDD instrument margins.
The gross profit margin of our IDD instruments was 44% in the
second quarter of 2011 as compared to 37% in the prior year
quarter. The increase in instrument margins is primarily due to
increased volume, which drove overhead efficiencies in our
manufacturing operations, lower rework costs and regional mix as
a greater proportion of our sales were in the U.S. market.
The gross margin of our IDD consumables and services decreased
to 58% in the second quarter of 2011 from 62% in the prior year
quarter. The decrease was primarily attributable to higher costs
for Japanese sourced chemistry strips due to the appreciation of
the Yen versus a year ago as well as an increase in service
personnel to support our increasing installed base.
Gross profit margin for our Sample Processing segment was 54%
during the second quarter of 2011 and 56% in the prior year
quarter. The decrease was primarily due to product mix and lower
overhead absorption.
Marketing and selling expenses increased to $6.0 million,
or 20% of revenues, in the second quarter of 2011 as compared to
$4.8 million, or 18% of revenues, for the second quarter of
2010. Excluding $862,000 of expenses related to Arista, which
was not in the prior year period, marketing and selling expenses
were 17% of revenues due to higher commissions from increased
instrument sales and GPO fees of $140,000, and increased travel
and trade show expenses of $134,000 and $52,000 in other
miscellaneous items.
General and administrative expenses increased to
$5.8 million, or 19% of revenues, in the second quarter of
2011, as compared to $4.6 million, or 17% of revenues, in
the second quarter of 2010. Excluding $713,000 of expenses
related to Arista, which was not in the prior year period,
expenses were 17% of revenues due to an increase in stock based
compensation expenses of $369,000, board cash compensation
expense of $216,000 and an increase in bonus expense of
$259,000. In the second quarter of 2011, our board of directors
changed the composition of non-employee director compensation to
a higher proportion of stock versus stock options to conserve
options available for employee grants under our existing stock
incentive plan. While the total compensation paid to
non-employee directors remained the same, the change did cause
us to recognize in the second quarter 100% of the equity
compensation expense for non-employee directors. In previous
periods, equity compensation expense was recognized over a
twelve month period. We anticipate a decrease in equity
compensation expense for non-employee directors over the future
12-month
period. Additionally, we recognized $250,000 of bonus expense
during the second quarter of 2011 related to a performance based
cash award to our CEO upon his achievement of two critical
2010 milestones which were delayed into 2011. The above
items were partially offset by a decrease in professional
services, recruiting and other corporate expenses of
approximately $390,000.
25
Table of Contents
Research and development expenses increased to
$4.5 million, or 15% of revenues in the second quarter of
2011, as compared to $3.8 million, or 14% of revenues, in
the second quarter of 2010. The increase in research and
development expense includes the development of the FISH testing
bench-top platform for Sample Processing and IDD research and
development expenses to support our 3GEMS urinalysis and
hematology programs. The second quarter of 2011 R&D expense
is net of a $500,000 payment from Fujirebio related to the
achievement of a milestone in our 3GEMS Hematology joint
development agreement.
Interest income decreased during the second quarter of 2011 to
$272,000 from $279,000 during the second quarter of 2010, due
primarily to the decrease in cash and cash equivalents partially
offset by an increase in interest income from investment in
sales-type leases.
Foreign exchange gains and other totaled $28,000 for the second
quarter of 2011 as compared to a $589,000 loss in the prior year
period, primarily resulting from the effect of favorable foreign
currency fluctuations on U.S. dollar denominated
intercompany balances.
Income tax during the second quarter of 2011 amounted to a
benefit of 3.6% of pre-tax loss as compared to 32% of pre-tax
income during the prior year period. The lower tax rate reflects
the effects of permanent differences such as the gain on
revaluation of contingent consideration which is not taxable for
federal and state income tax purposes, as well as the impact of
federal and state research and development tax credits, relative
to the amounts of income projected for the year.
Comparison
of Six Months Ended June 30, 2011 to Six Months Ended
June 30, 2010
Consolidated revenues for the six months ended June 30,
2011 increased 8% to $57.1 million as compared to
$52.7 million in the prior year period. IDD urinalysis
segment revenues increased 10% to $49.7 million in the
first half of 2011 as compared to $45.0 million in the
prior year period. IDD instruments revenues increased 2% to
$15.6 million in the first half of 2011 as compared to
$15.3 million in the prior year period. The increase in IDD
instrument sales is primarily attributable to the growth in the
second quarter of 2011 as the first quarter included promotional
discounts offered to domestic customers who bought a
remanufactured version of the predecessor chemistry analyzers
prior to the recent FDA clearance of iChemVELOCITY and iRICELL.
IDD consumables and service revenues increased 15% to
$34.0 million in the first half of 2011 as compared to
$29.7 million in the prior year period. The increase in
both consumables and service revenue was primarily driven by the
larger installed base of instruments. In particular, we
experienced an increase in sales of Japanese sourced chemistry
strips due to higher utilization, and an increase in sales of
our iChemVELOCITY strips as a result of increased placements. We
expect sales of our iChemVELOCITY strips to accelerate now that
we are selling the iChemVELOCITY in the domestic market and
planned availability in international markets that require FDA
clearance prior to product registration in those markets.
Revenues from Sample Processing instruments and supplies
decreased 5% to $7.3 million in the first half of 2011 as
compared to $7.7 million in the prior year period. The
decrease was primarily attributable to lower service and spare
parts revenue and a non-recurring OEM order in the first half of
2010 for a product that we sold the manufacturing rights for to
one of our major customers.
Personalized Medicine revenues in the first half of 2011 totaled
$168,000 as we continue to expand our test menu and build out
our sales force. There were no revenues in this segment in the
prior year period as Arista was purchased in July 2010.
Overall gross profit margin was 50% during the first half of
2011 compared to 53% in the prior year period. Excluding losses
from the Personalized Medicine segment, consolidated gross
margin was 52%. The remaining 1% decrease was due to lower
margins in IDD consumables and service and Sample Processing
products, partially offset by an increase in IDD instrument
margins.
The gross profit margin of our IDD instruments was 40% in the
first half of 2011 as compared to 36% in the prior year period.
The increase in instrument margins is primarily due to increased
volume, which drove overhead efficiencies in our manufacturing
operations, lower rework costs and regional mix as a greater
proportion of our sales were in the U.S. market.
26
Table of Contents
The gross margin of our IDD consumables and services decreased
to 57% in the first half of 2011 from 61% in the prior year
period. The decrease was primarily attributable to higher costs
for Japanese sourced chemistry strips due to the appreciation of
the Yen versus a year ago, as well as an increase in service
personnel to support our increasing installed base.
Gross profit margin for our Sample Processing segment was 54%
during the first half of 2011 and 55% in the prior year period.
The decrease was primarily attributable to product mix and lower
overhead absorption that occurred in the second quarter of 2011.
Marketing and selling expenses increased to $11.9 million,
or 21% of revenues, in the first half of 2011 as compared to
$9.2 million, or 17% of revenues, for the first half of
2010. Excluding $1.8 million of expenses related to Arista,
which was not in the prior year period, expenses were 18% of
revenues driven by additional personnel and related costs of
$186,000, higher commissions on higher revenues and GPO fees of
$310,000, and increased travel and trade show expenses of
$465,000.
General and administrative expenses increased to
$10.6 million, or 19% of revenues, in the first half of
2011, as compared to $8.4 million, or 16% of revenues, in
the first half of 2010. Excluding $1.5 million of expenses
related to Arista, expenses were 16% of revenue reflecting an
increase in stock based compensation and board cash compensation
of $515,000 and other personnel and related costs of $357,000.
Research and development expenses increased to
$8.1 million, or 14% of revenues in the first half of 2011,
as compared to $7.5 million, or 14% of revenues, in the
first half of 2010. The increase in research and development
expense includes the development of the FISH testing bench-top
platform for Sample Processing, IDD research and development
costs to support our 3GEMS urinalysis and hematology programs
and assay development at Arista molecular. These were partially
offset by a decrease in expenses related to our NADiA platform
as we incurred costs in the prior year quarter associated with
preparing our 510(k) submission of our prostate cancer test,
NADiA ProsVue, to the FDA. The first half of 2011 R&D
expense includes two payments totaling $1 million from
Fujirebio related to our joint development agreement on the
3GEMS Hematology Analyzer which offsets research and development
expenditures for this product.
Gain on revaluation of contingent consideration of
$1.2 million recorded in the first half of 2011 is the
result of the reduction in the fair value of the contingent
consideration obligation associated with the acquisition of
Arista. As a result of significant revenue shortfalls at Arista
relative to previous projections for the three months ended
March 31, 2011, sales projections for Arista were
significantly reduced for all future periods. The revised
forecast projected revenues are significantly below targets for
all three years covered by the earn-out period. Management thus
determined that the fair value contingent consideration
obligation was zero, which resulted in a decrease of
$1.2 million from December 31, 2010 to March 31,
2011. Consequently the Company recognized a gain on revaluation
of contingent consideration for the six months ended
June 30, 2011 (recorded in March 2011). As of June 30,
2011, the fair value of the contingent consideration remains
zero.
Interest income increased during the first half of 2011 to
$549,000 from $516,000 during the first half of 2010, due
primarily to an increase in interest income from investment in
sales-type leases.
Foreign exchange gains and other totaled $414,000 for the first
half of 2011 as compared to a $692,000 loss in the prior year
period, primarily resulting from the effect of favorable foreign
currency fluctuations on U.S. dollar denominated
intercompany balances.
Income tax during the first half of 2011 amounted to a provision
of 21.5% of pre-tax income as compared to 33% during the prior
year period. The lower tax rate reflects the effects of
permanent differences such as the gain on revaluation of
contingent consideration which is not taxable for federal and
state income tax purposes, as well as the impact of federal and
state research and development tax credits, relative to the
amounts of income projected for the year.
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Liquidity
and Capital Resources
Our primary source of liquidity is cash from operations, which
depends heavily on sales of our IDD instruments, consumables and
service, as well as sales of sample processing instruments and
supplies. At June 30, 2011, our cash and cash equivalents
amounted to $20.8 million compared to $25.5 million at
December 31, 2010.
In the past few years, we have faced adverse macro-economic
forces, which have impacted our selling markets and the credit
markets of our customers. At this point the impact from these
forces are relatively mild, but in the future we may face the
following challenges: deferrals of purchases due to decreases in
capital budgets of our customers, delays in the purchasing cycle
due to greater scrutiny of deals and increased internal
competition for limited capital dollars, and an increase in
requests for quotes for operating leases. The aforementioned
factors may lead to a decrease in revenue, an increase of
deferred revenue, or could lead to installment cash collection.
Operating Cash Flows. Cash provided by
operations for the six months ended June 30, 2011 was
$0.1 million as compared to $5.3 million in the prior
year period, primarily due to the decrease in net income
adjusted for non-cash items and due to an increase in accounts
receivable and inventories.
As of June 30, 2011, the number of days sales in accounts
receivable increased to 74 days compared to 63 days
for the prior year first half. The number of days sales in
accounts receivable varies and may increase with extended
payment terms to our international distributors and end users.
Investing Activities. Cash used in investing
activities totaled $4.9 million in the six months ended
June 30, 2011 as compared to $2.2 million in the prior
year period, primarily due to increased purchases of property
and equipment resulting from an investment in leasehold
improvements for the Companys new research and development
facility located in Chatsworth, CA.
Financing Activities. Cash used in financing
activities totaled $58,000 in the six months ended June 30,
2011 compared to $153,000 in the prior year period. Financing
activities in both periods were primarily composed of settlement
on restricted stock tax withholding.
We currently have a credit facility with a commercial bank
consisting of a $6.5 million revolving line of credit for
working capital and a $10.0 million line of credit for
acquisitions and product opportunities. The credit facility has
variable interest rates, which will change from time to time
based on changes to either the LIBOR rate or the lenders
prime rate. As of June 30, 2011, there were no borrowings
under the credit facility. We are subject to certain financial
and non-financial covenants under the credit facility with the
bank and as of June 30, 2011, we were in compliance with
these covenants.
On July 22, 2011, we terminated our then existing credit
facility and replaced it with a new credit facility entered into
on July 27, 2011 with JPMorgan Chase Bank, N.A., as
administrative agent for certain lenders. The credit facility
provides for borrowings of up to $15 million pursuant to
revolving loans, acquired participations in letters of credit
and swingline loans. We have not borrowed any amounts under the
credit facility. All amounts under the revolving loans become
due and payable on July 31, 2013. The credit facility has
variable interest rates, which will change from time to time
based on changes to either the applicable LIBOR rate or the
lenders prime rate. Interest is generally payable monthly
in arrears. Our obligations under this credit facility are
secured by a lien on substantially all of our assets and those
of our domestic subsidiaries. The credit facility contains
several performance covenants, limitations on additional
indebtedness, and customary default provisions, and all
outstanding obligations under the facility may become
immediately due and payable in the event of our default.
We believe that our current cash on hand, together with cash
generated from operations and cash available under our new
credit facility with the bank will be sufficient to fund normal
operations for the foreseeable future. However, additional
funding may be required to fund expansion of our business. There
is no assurance that such funding will be available on terms
acceptable to us.
Off-Balance
Sheet Arrangements
At June 30, 2011 and 2010, we did not have any
relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured
finance or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or
28
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limited purposes. As such, we are not exposed to any financing,
liquidity, market or credit risk that could arise if we had
engaged in such relationships.
Recent
Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Update
(ASU) ASU
No. 2011-05,
Comprehensive Income (ASC Topic 220): Presentation of
Comprehensive Income. ASU
2011-05
amends current comprehensive income guidance. This accounting
update eliminates the option to present the components of other
comprehensive income as part of the statement of
stockholders equity. Instead, entities must report
comprehensive income in either a single continuous statement of
comprehensive income which contains two sections, net income and
other comprehensive income, or in two separate but consecutive
statements. ASU
2011-05 will
be effective for public companies during the interim and annual
periods beginning after December 15, 2011 with early
adoption permitted. We do not expect the adoption of ASU
2011-02 to
have a material impact on our financial statements as it only
requires a change in the format of our current presentation.
In April 2011, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Update
(ASU) ASU
2011-02,
Receivables: A Creditors Determination of Whether a
Restructuring is a Troubled Debt Restructuring. ASU
2011-02
provides guidance on whether a restructuring constitutes a
troubled debt restructuring. For public entities, the ASU is
effective for the first interim or annual period beginning on or
after June 15, 2011, and should be applied retrospectively
to the beginning of the annual period of adoption. For purposes
of measuring impairment of those receivables, an entity should
apply the amendments prospectively for the first interim or
annual period beginning on or after June 15, 2011. For
nonpublic entities, the ASU is effective for annual periods
ending on or after December 15, 2012, including interim
periods within those annual periods. Early adoption is
permitted. We do not expect the adoption of ASU
2011-02 to
have a material impact on our financial statements.
In December 2010, the FASB issued ASU
2010-29,
Business Combinations- Disclosure of Supplementary Pro Forma
Information, which specifies that if a public entity
presents comparative financial statements, the entity should
disclose revenue and earnings of the combined entity as though
the business combination(s) that occurred during the current
year had occurred as of the beginning of the comparable prior
annual reporting period only.
ASU 2010-29
is effective on a prospective basis for business combinations
for which the acquisition date is on or after the beginning of
the first annual reporting period beginning on or after
December 15, 2010 with early adoption permitted. The
adoption of ASU
2010-29 did
not have a material impact on our financial statements.
In December 2010, the FASB issued ASU
No. 2010-28
When to Perform Step 2 of the Goodwill Impairment Test for
Reporting Units with Zero or Negative Carrying Amounts. This
update provides amendments to ASC Topic 350
Intangibles, Goodwill and Other that requires an entity to
perform Step 2 impairment test even if a reporting unit has zero
or negative carrying amount. Step 1 tests whether the carrying
amount of a reporting unit exceeds its fair value. Previously
reporting units with zero or negative carrying value passed Step
1 because the fair value was generally greater than zero. Step 2
requires impairment testing and impairment valuation be
calculated in between annual tests if an event or circumstances
indicate that it is more likely than not that goodwill has been
impaired. ASU
2010-28 is
effective beginning January 1, 2011. As a result of this
standard, goodwill impairments may be reported sooner than under
current practice. The adoption of ASU
2010-28 did
not have a material impact on our financial statements.
In April 2010, the FASB issued ASU
2010-17,
Milestone Method of Revenue Recognition, provides guidance on
defining a milestone and determining when it may be appropriate
to apply the milestone method of revenue recognition for
research and development transactions. It is effective on a
prospective basis for milestones achieved in fiscal years, and
interim periods within those years, beginning on or after
June 15, 2010. Early adoption is permitted. The adoption of
the ASU
2010-17 did
not have a material impact on our consolidated financial
statements.
In October 2009, the FASB issued ASU
2009-14,
Certain Revenue Arrangements That Include Software
Elements, now codified under FASB ASC Topic 985,
Software. ASU
2009-14,
removes tangible products from the scope of software revenue
guidance and provides guidance on determining whether software
deliverables in an arrangement that includes a tangible product
are covered by the scope of the software revenue guidance. ASU
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2009-14 is
to be applied on a prospective basis for revenue arrangements
entered into or materially modified in fiscal years beginning on
or after June 15, 2010, with early adoption permitted. The
adoption of the ASU
2009-14 did
not have a material impact on our consolidated financial
statements.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Market
Risk
Our business is exposed to various market risks, including
changes in interest rates and foreign currency exchange rates.
Market risk is the potential loss arising from adverse changes
in market rates and prices, such as interest rates and foreign
currency exchange rates. We do not invest in derivatives,
foreign currency forward contracts or other financial
instruments for trading or speculative purposes. We had no debt
at June 30, 2011, thus were not subject to market risk for
changes in interest rates on debt obligations. We are subject to
market risk for changes in interest rates on our short-term
investment portfolio. We invest our excess cash in certificates
of deposit and, on occasion, other short-term investments, and
the market value of these investments fluctuates based on
changes in interest rates.
Foreign
Currencies
We conduct business in certain foreign markets, primarily in the
European Union and Asia. Our primary exposure to foreign
currency risk relates to investments in foreign subsidiaries
that transact business in a functional currency other than the
U.S. Dollar, primarily the Euro and British Pound. We are
subject to certain foreign currency risks in the importation of
goods from Japan and as a result of commercial operations in
Europe and Asia. Our consumables purchases from a major Japanese
IVD supplier are denominated in Japanese Yen. The impact from
fluctuation in the Yen should decrease over time, as we now sell
our own chemistry analyzer into the domestic market. All of our
sales are denominated in U.S. Dollars with the exception of
France, Germany, the United Kingdom and Ireland, where sales are
denominated in Euros and British Pound. Fluctuations in the
U.S. Dollar exchange rate for Japanese Yen, Euro and
British Pound could result in increased costs for our key
components and increased costs for commercial operations in
Europe.
Item 4. | Controls and Procedures |
Evaluation
of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined by
paragraph (e) of
Rules 13a-15(f)
or 15d-15(f)
under the Securities and Exchange Act of 1934, as amended,
designed to ensure that we are able to collect the information
we are required to disclose in the reports we file with the SEC
and to approve, summarize and disclose this information within
the time periods specified in the rules of the SEC. Our Chief
Executive Officer and Chief Financial Officer are responsible
for establishing and maintaining these procedures, and, as
required by the rules of the SEC, evaluate their effectiveness.
Our Chief Executive Officer and Chief Financial Officer
evaluated the effectiveness of our disclosure controls and
procedures as of June 30, 2011, the end of the period
covered by this report, and based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective.
Changes
in Internal Controls over Financial Reporting
There was no change in our internal control over financial
reporting during the period ended June 30, 2011 that
materially affected, or is reasonable likely to materially
affect, our internal control over financial reporting.
30
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PART II:
OTHER INFORMATION
Item 1A. | Risk Factors |
This Quarterly Report on
Form 10-Q
contains forward-looking statements, which are subject to a
variety of risks and uncertainties. Other actual results could
differ materially from those anticipated in those
forward-looking statements as a result of various factors,
including those set forth in the risk factors relating to our
business and common stock contained in Item 1A of our
Annual Report on
Form 10-K
for the year ended December 31, 2010. There have been no
material changes to such risk factors during the six months
ended June 30, 2011.
Item 6. | Exhibits |
Exhibit |
||||||||
Number | Description | Reference Document | ||||||
10 | .1 | Credit Agreement dated July 27, 2011 among IRIS International, Inc., the Lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent.. | (1) | |||||
10 | .2 | Continuing Security Agreement dated July 27, 2011 between Arista Molecular, Inc. and JPMorgan Chase Bank, N.A. as administrative agent. | (2) | |||||
10 | .3 | Continuing Security Agreement dated July 27, 2011 between StatSpin, Inc. and JPMorgan Chase Bank, N.A. as administrative agent. | (3) | |||||
10 | .4 | Continuing Security Agreement dated July 27, 2011 between IRIS International, Inc. and JPMorgan Chase Bank, N.A. as administrative agent. | (4) | |||||
10 | .5 | Continuing Security Agreement dated July 27, 2011 between IRIS Molecular Diagnostics, Inc. and JPMorgan Chase Bank, N.A. as administrative agent. | (5) | |||||
10 | .6 | Continuing Security Agreement dated July 27, 2011 between IRIS Global Network, Inc. and JPMorgan Chase Bank, N.A. as administrative agent. | (6) | |||||
10 | .7 | IRIS International, Inc. 2011 Inducement Incentive Plan. | (7) | |||||
31 | .1 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer | * | |||||
31 | .2 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer | * | |||||
32 | .1 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer | * | |||||
32 | .2 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer | * |
* | Filed herewith | |
| A management contract or compensatory plan or arrangement. | |
(1) | Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K, filed July 28, 2011. | |
(2) | Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K, filed July 28, 2011. | |
(3) | Incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K, filed July 28, 2011. | |
(4) | Incorporated by reference to Exhibit 10.4 to Current Report on Form 8-K, filed July 28, 2011. | |
(5) | Incorporated by reference to Exhibit 10.5 to Current Report on Form 8-K, filed July 28, 2011. | |
(6) | Incorporated by reference to Exhibit 10.6 to Current Report on Form 8-K, filed July 28, 2011. | |
(7) | Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K, filed June 10, 2011. |
31
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: August 9, 2011
IRIS INTERNATIONAL, INC.
By: |
/s/ César
M. García
|
César M. García
Chairman, President and Chief
Executive Officer
By: |
/s/ Amin
I. Khalifa
|
Amin I. Khalifa
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
32