Exhibit 4.5


 


MANAGEMENT’S DISCUSSION AND ANALYSIS


 


This Management Discussion and
Analysis (“MD&A”) is dated as at February 26, 2010 and should be read
in conjunction with the annual audited consolidated financial statements and
the notes thereto for the year ended December 31, 2009.  In this MD&A, “IMRIS”, the “Company”, “we”,
“our” and “us” are used to refer to IMRIS Inc.


 


This MD&A contains forward-looking statements
about future events or future performance and reflects management’s
expectations and assumptions regarding our growth, results of operations,
performance and business prospects and opportunities.  Such forward-looking statements reflect
management’s current beliefs and are based on information currently available
to us.  In some cases, forward-looking
statements can be identified by terminology such as “may”, “would”, “could”, “will”,
“should”, “expect”, “plan”, “intend”, “anticipate”, “believe”, “estimate”, “predict”,
“potential”, “continue” or the negative of these terms or other similar expressions
concerning matters that are not historical facts.  In particular, statements regarding our
future operating results, economic performance and product development efforts
are or involve forward-looking statements.


 


A number of factors could cause actual
events, performance or results, including those in respect of the foregoing
items, to differ materially from the events, performance and results discussed
in the forward-looking statements. 
Factors which could cause future outcomes to differ materially from
those set forth in the forward-looking statements include, but are not limited
to: [i] timing and amount of revenue recognition of order backlog and the
Company’s expectation of sales and margin growth [ii] obtaining sufficient and
suitable financing to support operations and commercialization of products,
[iii] adequately protecting proprietary information and technology from
competitors, [iv] obtaining regulatory approvals and successfully completing
new product launches, [v] successfully competing in the targeted markets, and
[vi] maintaining third party relationships, including key personnel, and key
suppliers.  In evaluating these
forward-looking statements, readers should specifically consider various factors,
including the risks outlined under “Risks and Uncertainties”, which may cause
actual events, performance or results to differ materially from any
forward-looking statement.


 


Readers are cautioned that our
expectation, beliefs, projections and assumptions used in preparation of such
information, although considered reasonable at the time of preparation, may
prove to be wrong, and as such, undue reliance should not be placed on
forward-looking statements.  By their
nature, forward-looking statements are subject to numerous known and unknown risks
and uncertainties so as a result, we can give no assurance that any of the
actual events, performance, results, or expectations will occur or be
realized.  These forward-looking
statements are expressly qualified by this cautionary statement as of the date
of this MD&A and we do not intend, and do not assume any obligation, to
update or revise them to reflect new or future events or circumstances.


 


OVERVIEW


 


IMRIS
is a global provider of image guided therapy solutions that deliver timely
information to clinicians during surgical or interventional procedures.  IMRIS systems incorporate multiple imaging modalities
including magnetic resonance “MR” imaging, fluoroscopy and computed tomography
into fully integrated imaging suites.  Our systems use a variety of patented
technologies that enhance patient safety and operating room efficiency.


 


Our
Products


 


IMRISneuro — is our
flagship product, providing surgeons with high resolution MR images during
neurosurgical procedures.  Due to the invasive nature of brain
surgery and the importance of minimizing disturbance to healthy brain tissue,
neurosurgical procedures may benefit from an MRI’s unique ability to
distinguish between diseased and healthy brain tissue.  IMRISneuro allows surgeons to make adjustments to the procedure
while the procedure is in progress, which may lead to improved patient outcomes
and reduce the likelihood that repeat surgeries will be needed.


 


IMRIScardio — provides clinicians with timely and
accurate images for visualizing the cardiovascular system before, during and
after an intervention.  Cardiovascular
interventions demand a high level of accuracy in the diagnosis of patients and
in the assessment of treatments.  The
IMRIScardio suite includes a wide-bore 1.5 Tesla MR scanner and a single-plane
angiography system providing the ability to alternate between imaging
modalities and immediately assess treatment.


 


1

















 


IMRISNV  — sequentially employs MRI and fluoroscopy in an
integrated suite that provides interventional clinicians with imaging for the
rapid assessment and post procedure evaluation of neurovascular conditions
including stroke, where speed of treatment is a major determinant in the
success of patient outcomes.  The  IMRISNV suite features a wide-bore 3 Tesla MR scanner and a
bi-plane angiography system completely integrated into a single suite that
permits the patient to transition quickly and seamlessly between MR imaging and
intervention without transporting the patient between modalities.


 


Our Customer Value Proposition


 


All IMRIS products are
designed to assist clinicians to improve outcomes for their patients.  Our integrated imaging solutions are based on
three fundamental principles:


 


Patient Safety — The patient is never moved during the
course of a surgical or interventional procedure in an IMRIS integrated therapy
suite.  Unlike conventional imaging
solutions where the patient is moved for imaging, our solutions move the
imaging system to the patient at the right moment in the procedure.  This avoids any potential risks associated
with having to move the patient to the scanner, and maintains optimum patient
positioning during the procedure.


 


Clinical Efficiency — All aspects of IMRIS systems are
designed to enhance the workflow of the clinical team.  Imaging information is captured rapidly and
presented to maximize efficiency and effectiveness for clinicians.  In addition, because the imaging system is moved
to the patient during use, when not in use, clinicians are afforded unrestricted
access to the patient and do not require special MR-compatible instruments for
the procedures.


 


Financial Utility — IMRIS systems provide customers with
both intraoperative, interventional and diagnostic MR imaging
capabilities.  When not in use during a
surgery or interventional procedure, the MR scanner is located in an adjacent
room and is available for diagnostic imaging, thereby ensuring that the
hospital obtains maximum utility from its equipment.


 


Our
Technology


 


The creation of high
value intellectual property and advancements in technology is an important
element of our business.  To grow the
Company and remain competitive, we are continuously engaged in new product
development and enhancement and each year we invest significantly in research
and development to drive continuing innovation that supports our competitive
position.


 


Underlying all of our
image guided therapy solutions is advanced proprietary technology and
intellectual property that we have developed as part of our unique solutions.  The protection of these products, our
processes and know-how is integral to our business.  We have patents in place in the United
States, Canada and other countries where available to protect our core patent
family.  In addition, we have filed a
number of additional patent applications that are directed to specific aspects
of our technology.  We currently have 20
patents either issued or pending.  As we
develop our technologies we will continue to seek patent protection to
contribute to our competitive advantage.


 


Our Business Model


 


The purchase and
installation of an IMRIS system represents a significant capital project for
our customers that can range from approximately $4 million to $12 million. In
addition to our equipment, customers may require further capital expenditures
for room construction and ancillary operating room equipment.  The sales cycle for our systems is both
complex and lengthy as a result of the large capital expenditure associated
with the purchase of an IMRIS system and the number of stakeholders who are
engaged in the process.  As such, a
typical sales cycle can be more than 12 months from initial customer engagement
to receipt of a purchase order. Following the receipt of a customer purchase
order, the delivery and installation cycle for one of our systems typically
ranges from five months to twelve months or more depending in part on the
configuration of our system, but also dependent on the amount of additional
construction work that may be required to be completed by the customer. We
invoice customers for the system in installments spread over a number of
milestones which typically include a deposit at the time of order; and a
percentage of the total system price upon delivery of the equipment, completion
of installation and final acceptance. 
Due to the project nature of our system sales, we recognize revenues and
related cost of sales on a percentage-of-completion basis as the system is
installed.


 


2

















 


2009
HIGHLIGHTS


 


Throughout 2009 we made
solid progress advancing our business strategies and delivering strong
financial performance.  Highlights from
the year included:


 


·                  Record sales of $44.4 million, the
highest annual sales in the history of the Company and a 94% increase over
2008.


 


·                  Gross profit as a percentage of sales
improved to 44% compared with 20% in 2008.


 


·                  In the fourth quarter, recorded positive
EBITDA(1)and net income for the first time in our Company’s history at $1.4
million and $0.4 million respectively.


 


·                  Completed an equity financing that closed
on November 2nd 2009 for net proceeds of $19.3 million.


 


·                  Record annual order bookings of $73.1
million contributing to 32% year over year growth in order backlog, which
increased to $89.4 million at year end.


 


·                  Received regulatory approval with the
issuance of a European CE Mark in April 2009, U.S. FDA approval in September 2009
and the Health Canada medical device license in October 2009 permitting
the sale of our new products, IMRISNV and IMRIScardio.


 


·                  At the end of 2009, we had sold 35
systems with sales in the United States, Canada, Asia Pacific and Europe.  Of particular note in the year:


 


·                  Brigham and Women’s Hospital, which is
home to the US National Center for Image Guided Therapy was the first to
purchase an IMRISNV/IMRIScardio solution.


 


·                  Yale-New Haven Hospital, the primary
teaching hospital for the Yale School of Medicine purchased IMRISNV.


 


·                  We sold our first IMRISNV system in Canada to Health Sciences Center Winnipeg.


 


·                  The first IMRISneuro sale in Europe was
made to CEA-LITI for CLINATEC® in Grenoble, France.


 


·                  A renewed and expanded OEM agreement
between IMRIS and Siemens Healthcare for the supply of MR scanners and
angiography systems as component parts for IMRIS’s image guided therapy suites
was completed in the fourth quarter of 2009.


 


·                  We realigned our organizational structure
in the fourth quarter of 2009 to meet the growing global demand for IMRIS
solutions.


 






(1) EBITDA is
defined as earnings before interest income (expense), foreign exchange gain
(loss) income taxes and amortization.


 


3

















 


SUMMARY
OF SELECTED FINANCIAL INFORMATION


 


The following table sets
forth selected financial information for the dates and periods indicated.


 


Statement of Operations


(In
CDN dollars)


(Unaudited)


 


	
   

  	
   

  	
  Year
  ended

  	
   

  
	
   

  	
   

  	
  December 31

  	
   

  
	
   

  	
   

  	
  2009

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Sales

  	
   

  	
  $

  	
  44,417,518

  	
   

  	
  $

  	
  22,952,486

  	
   

  	
  $

  	
  17,445,058

  	
   

  
	
  Cost
  of sales

  	
   

  	
  24,748,219

  	
   

  	
  18,344,182

  	
   

  	
  15,180,438

  	
   

  
	
  Gross
  profit

  	
   

  	
  19,669,299

  	
   

  	
  4,608,304

  	
   

  	
  2,264,620

  	
   

  
	
  As
  a percentage of sales

  	
   

  	
  44.3

  	
  %

  	
  20.1

  	
  %

  	
  13.0

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Operating
  expenses

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Administration

  	
   

  	
  6,706,411

  	
   

  	
  6,807,248

  	
   

  	
  5,300,845

  	
   

  
	
  Sales
  and marketing

  	
   

  	
  8,039,705

  	
   

  	
  6,450,458

  	
   

  	
  3,497,318

  	
   

  
	
  Customer
  support and operations

  	
   

  	
  4,950,479

  	
   

  	
  3,930,270

  	
   

  	
  3,899,824

  	
   

  
	
  Research
  and development

  	
   

  	
  4,923,818

  	
   

  	
  4,705,505

  	
   

  	
  3,334,511

  	
   

  
	
  Amortization

  	
   

  	
  2,161,959

  	
   

  	
  1,457,035

  	
   

  	
  940,632

  	
   

  
	
   

  	
   

  	
  26,782,372

  	
   

  	
  23,350,516

  	
   

  	
  16,973,130

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Operating
  income (loss) before the following

  	
   

  	
  (7,113,073

  	
  )

  	
  (18,742,212

  	
  )

  	
  (14,708,510

  	
  )

  
	
  Foreign
  exchange (loss) gain

  	
   

  	
  (2,025,355

  	
  )

  	
  1,118,553

  	
   

  	
  (84,228

  	
  )

  
	
  Interest
  (expense) income

  	
   

  	
  (26,705

  	
  )

  	
  660,767

  	
   

  	
  222,545

  	
   

  
	
  Net
  income (loss) for the period

  	
   

  	
  $

  	
  (9,165,133

  	
  )

  	
  $

  	
  (16,962,892

  	
  )

  	
  $

  	
  (14,570,193

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Basic
  and fully diluted loss per share

  	
   

  	
  $

  	
  (0.33

  	
  )

  	
  $

  	
  (0.62

  	
  )

  	
  $

  	
  (0.76

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Balance Sheet Data

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash
  and cash equivalents

  	
   

  	
  26,273,633

  	
   

  	
  18,597,333

  	
   

  	
  30,803,989

  	
   

  
	
  Total
  assets

  	
   

  	
  65,583,833

  	
   

  	
  39,848,770

  	
   

  	
  48,649,231

  	
   

  
	
  Customer
  deposits

  	
   

  	
  21,050,029

  	
   

  	
  12,647,883

  	
   

  	
  7,135,834

  	
   

  
	
  Long-term
  debt

  	
   

  	
  ––

  	
   

  	
  ––

  	
   

  	
  8,624

  	
   

  
	
  Total
  liabilities

  	
   

  	
  33,722,555

  	
   

  	
  18,884,493

  	
   

  	
  11,381,390

  	
   

  
	
  Shareholders’
  equity

  	
   

  	
  31,861,278

  	
   

  	
  20,964,277

  	
   

  	
  37,267,841

  	
   

  



 


The financial results for
the three most recent years reflect the progression of an early stage Company
with a limited operating history. 
Factors that have caused our results to vary are described below.


 


·                  The general trend has been for strong
growth in sales over the years as the Company has achieved increased market
acceptance.  As a result of the limited
number of systems sold and installed to date and the high dollar value
associated with each sale, our revenues recorded from quarter to quarter have
varied depending on the number and stage of active projects in any given
quarter.


 


·                  Gross profit has improved significantly
with increased sales volumes and higher pricing.  Our initial pricing strategy was market
penetration based.  As product
recognition and adoption occurred we increased our pricing to reflect the
underlying value of IMRIS systems.  This
change has resulted in improved gross profit as a percentage of sales
particularly comparing the 2008 results with those achieved in 2009.


 


·                  Net losses have generally decreased from
2007 to 2009.  We achieved our first
quarter of net income in Q4 2009.  The
improvements over time reflect the increases in gross profit described above,
controlled increases in operating expenses to meet growth in the business and
foreign exchange gains and losses.


 


4

















 


·                  Most of our sales to date have been denominated in
currencies other than the Canadian dollar which can give rise to foreign
exchange gains or losses depending on the change in value of the Canadian
dollar versus other currencies in each quarter. 
In 2007, the Canadian dollar weakened against the US dollar.  For most of 2008, the relative value of the
Canadian dollar versus the US dollar resulted in the recording of foreign
exchange gains.  In the last three
quarters of 2009, we incurred foreign exchange losses primarily as a result of
changes in the relative values of these two currencies.


 


·                  On November 2, 2009 we completed an
equity financing with the issuance of 3,215,000 common shares and an additional
482,250 common shares granted as an overallotment option, resulting in net
proceeds of $19.3 million.  With
completion of the financing, our total number of shares outstanding increased
compared with prior years.


 


Results
of Operations


 


Sales


 


Sales increased to $44.4
million from $23 million in the prior year, an increase of 93.5%.  Revenue growth for the year ended December 31,
2009 is the result of increased systems deliveries in 2009 and a significant
increase in the average revenue per system in the 2009 period due to favourable
product mix, including delivery of our first IMRISNV system.


 


Sales for the year ended December 31,
2009 included $42.7 million of revenues associated with new system deliveries
and $1.7 million of revenues associated with extended maintenance
contracts.  This compares to  $22.2 million of new system sales and
$0.8 million in extended maintenance contracts for the same period in the prior
year.


 


Gross
Profit


 


Gross profit for the year ended December 31, 2009
increased by approximately $15.1 million to $19.7 million, as compared to the
prior year.  Gross profit as a percentage
of sales increased from 20.1% to 44.3% for the year ending December 31,
2009.  The growth in gross profit is the
result of a change in the pricing strategy reflecting the increasing customer
acceptance of our technology.  We have
also seen improved margins as a result of our efforts to reduce the direct
costs of our systems.


 


Operating
Expenses


 


Operating expenses for
the year were $26.8 million an increase of approximately $3.4 million or 15%
from $23.4 million in the prior year, The increase is primarily a result of
increased costs in sales and marketing and customer support and operations.  Sales and marketing increased in the year
mainly due to the launch of the IMRISNV  and IMRIScardio systems as well as higher wages and
benefits associated with increased staff levels to support future sales
growth.  Customer support and operations
increased in the year primarily as a result of increased staff to support the
increased system delivery volume.  Year
to date amortization expense was significantly higher as a result of additional
research and development equipment being placed into use and being amortized
over its useful life.


 


At the departmental
level, administrative expenses decreased to $6.7 million from $6.8 million in
the prior year or a 1% decrease. 
Although year to date amounts did not change in total in comparison to
prior year, the department did experience an increase in travel expenses and a
small increase in wages and benefits offset by a decrease in professional fees
and consulting fees.


 


Sales and marketing
expenses for the year increased to $8.0 million from $6.5 million in the prior
year for a 25% increase.  The year to
date increases are mainly due to launch costs for the IMRISNV  and IMRIScardio systems and higher staffing levels and
related costs to support future sales growth.


 


5

















 


Customer support and
operations expense for 2009, increased to $5.0 million from $3.9 million in the
prior year or a 26% increase.  The year
to date increase is mainly attributed to an increase in wages and benefits associated
with additional staff to support the higher system volume delivered in the
year.  The department also had a small
increase in 2009 for professional fees associated with obtaining regulatory
approvals for our products.


 


Research and development
expenses for the year increased to $4.9 million from $4.7 million in the prior
year, or a 5% increase.  The year to date
increase is primarily due to an increase in staff levels for the full year and
additional costs relating to filing new patent applications.


 


Amortization expense for
2009 was $2.2 million compared to $1.5 million in the prior year, a 48%
increase.  The year to date increase in
amortization expense resulted from the commencement of amortization on capital
additions to our research and development test facility.


 


The company had a foreign
exchange loss $2.0 million compared to a foreign exchange gain of $1.1 million
the prior year.  The foreign exchange
loss year resulted from the decrease in value of the US dollar relative to the
Canadian dollar.  The majority of the
Company’s sales are denominated in US dollars; as such we held US dollar
denominated net assets during the period which were negatively impacted as the
US dollar weakened against the Canadian dollar.


 


Interest income (expense)
decreased by approximately $0.7 million as compared to the prior year.  This was due to extremely low yields on
short-term money market instruments, lower average cash balances and interest
expense relating to a provincial sales tax reassessment.


 


Operating
Loss and Net Loss for the Year


 


The Company’s operating
loss for 2009 was $7.1 million compared to $18.7 million in the prior year, a
62% improvement.  The year over year
improvements are due primarily to increased sales volume and higher gross
profit margins offset in part by additional operating expenses to fund the
growth in the business.


 


Our net loss for the year
ended December 31, 2009 was $9.2 
million, a decrease of $7.8 million compared to the loss of $17.0
million in 2008,, an improvement of 46%. 
The improvement was mainly due higher sales volume and improved gross
margins offset in part by higher foreign exchange losses and lower interest
income.


 


EBITDA


 


In the fourth quarter of
2009 we delivered our first quarter of positive EBITDA at $1.4 million compared
with negative $4.3 million in the fourth quarter of 2008.  For year ended December 31, 2009, EBITDA
was negative $5.0 million compared with negative $17.3 million in 2008.  The improvements in EBITDA in both the fourth
quarter and full year 2009 were primarily due to increased sales volumes and
higher gross profit margins, net of higher cash operating expenses used to fund
growth in the business.  We have begun
reporting EBITDA because we believe investors use it as another measure of our
operating performance.


 


6














 


SUMMARY
OF QUARTERLY RESULTS


 


The
following table is a summary of our financial results for the past eight
quarters.


 


	
  (In CDN
  dollars)

  	
   

  	
  Q4

  	
   

  	
  Q3

  	
   

  	
  Q2

  	
   

  	
  Q1

  	
   

  	
  Q4

  	
   

  	
  Q3

  	
   

  	
  Q2

  	
   

  	
  Q1

  	
   

  
	
  (Unaudited)

  	
   

  	
  2009

  	
   

  	
  2009

  	
   

  	
  2009

  	
   

  	
  2009

  	
   

  	
  2008

  	
   

  	
  2008

  	
   

  	
  2008

  	
   

  	
  2008

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Sales

  	
   

  	
  19,921,667

  	
   

  	
  9,863,709

  	
   

  	
  $

  	
  9,827,863

  	
   

  	
  $

  	
  4,804,279

  	
   

  	
  $

  	
  5,733,845

  	
   

  	
  $

  	
  4,869,433

  	
   

  	
  $

  	
  8,191,072

  	
   

  	
  $

  	
  4,158,136

  	
   

  
	
  Cost of sales

  	
   

  	
  10,991,504

  	
   

  	
  5,401,780

  	
   

  	
  5,398,467

  	
   

  	
  2,956,468

  	
   

  	
  4,312,698

  	
   

  	
  3,541,973

  	
   

  	
  6,733,398

  	
   

  	
  3,756,113

  	
   

  
	
  Gross Profit

  	
   

  	
  8,930,163

  	
   

  	
  4,461,929

  	
   

  	
  4,429,396

  	
   

  	
  1,847,811

  	
   

  	
  1,421,147

  	
   

  	
  1,327,460

  	
   

  	
  1,457,674

  	
   

  	
  402,023

  	
   

  
	
  As a
  percentage of sales

  	
   

  	
  44.8

  	
  %

  	
  45.2

  	
  %

  	
  45.1

  	
  %

  	
  38.5

  	
  %

  	
  24.8

  	
  %

  	
  27.3

  	
  %

  	
  17.8

  	
  %

  	
  9.7

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Operating
  expenses

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Administration

  	
   

  	
  1,814,853

  	
   

  	
  1,642,702

  	
   

  	
  1,774,512

  	
   

  	
  1,474,344

  	
   

  	
  1,718,663

  	
   

  	
  1,733,936

  	
   

  	
  1,613,014

  	
   

  	
  1,741,635

  	
   

  
	
  Sales and
  marketing

  	
   

  	
  2,770,288

  	
   

  	
  1,601,483

  	
   

  	
  1,963,812

  	
   

  	
  1,704,122

  	
   

  	
  1,741,730

  	
   

  	
  1,747,905

  	
   

  	
  1,638,278

  	
   

  	
  1,322,545

  	
   

  
	
  Customer
  support and operations

  	
   

  	
  1,507,042

  	
   

  	
  1,161,209

  	
   

  	
  1,216,876

  	
   

  	
  1,065,352

  	
   

  	
  955,378

  	
   

  	
  1,021,536

  	
   

  	
  1,041,746

  	
   

  	
  911,610

  	
   

  
	
  Research and
  development

  	
   

  	
  1,430,109

  	
   

  	
  1,133,412

  	
   

  	
  1,282,928

  	
   

  	
  1,077,369

  	
   

  	
  1,271,654

  	
   

  	
  1,419,993

  	
   

  	
  1,110,014

  	
   

  	
  903,844

  	
   

  
	
  Amortization

  	
   

  	
  596,724

  	
   

  	
  539,392

  	
   

  	
  527,106

  	
   

  	
  498,737

  	
   

  	
  503,793

  	
   

  	
  432,931

  	
   

  	
  269,613

  	
   

  	
  250,698

  	
   

  
	
   

  	
   

  	
  8,119,016

  	
   

  	
  6,078,198

  	
   

  	
  6,765,234

  	
   

  	
  5,819,924

  	
   

  	
  6,191,218

  	
   

  	
  6,356,301

  	
   

  	
  5,672,665

  	
   

  	
  5,130,332

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Operating
  profit (loss) before the following

  	
   

  	
  811,147

  	
   

  	
  (1,616,269

  	
  )

  	
  (2,335,838

  	
  )

  	
  (3,972,113

  	
  )

  	
  (4,770,071

  	
  )

  	
  (5,028,841

  	
  )

  	
  (4,214,991

  	
  )

  	
  (4,728,309

  	
  )

  
	
  Foreign
  exchange (loss) gain

  	
   

  	
  (367,747

  	
  )

  	
  (1,033,741

  	
  )

  	
  (960,663

  	
  )

  	
  336,796

  	
   

  	
  880,516

  	
   

  	
  230,763

  	
   

  	
  (45,218

  	
  )

  	
  52,492

  	
   

  
	
  Interest
  income (expense)

  	
   

  	
  (25,633

  	
  )

  	
  (6,096

  	
  )

  	
  754

  	
   

  	
  4,270

  	
   

  	
  74,463

  	
   

  	
  118,060

  	
   

  	
  196,939

  	
   

  	
  271,305

  	
   

  
	
  Net income
  (loss) for the quarter

  	
   

  	
  $

  	
  417,767

  	
   

  	
  $

  	
  (2,656,106

  	
  )

  	
  $

  	
  (3,295,747

  	
  )

  	
  $

  	
  (3,631,047

  	
  )

  	
  $

  	
  (3,815,092

  	
  )

  	
  $

  	
  (4,680,018

  	
  )

  	
  $

  	
  (4,063,270

  	
  )

  	
  $

  	
  (4,404,512

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Earning (loss)
  per share

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Basic

  	
   

  	
  $

  	
  0.02

  	
   

  	
  $

  	
  (0.10

  	
  )

  	
  $

  	
  (0.12

  	
  )

  	
  $

  	
  (0.13

  	
  )

  	
  $

  	
  (0.14

  	
  )

  	
  $

  	
  (0.17

  	
  )

  	
  $

  	
  (0.15

  	
  )

  	
  $

  	
  (0.16

  	
  )

  
	
  Diluted

  	
   

  	
  $

  	
  0.01

  	
   

  	
  (0.10

  	
  )

  	
  (0.12

  	
  )

  	
  (0.13

  	
  )

  	
  (0.14

  	
  )

  	
  (0.17

  	
  )

  	
  (0.15

  	
  )

  	
  (0.16

  	
  )

  



 


The financial results for
the eight most recent quarters reflect the progression of an early stage
Company with a limited operating history. 
Factors that have caused our quarterly results to vary are generally
consistent with the factors described in the 3 year in the Summary of Selected
Financial Information section above.


 


ORDER
BACKLOG(2)


 


During the year, we received record order bookings of
$73.1 million, contributing to order backlog of $89.4 million at December 31,
2009.  The change in the Company’s order
backlog was impacted by delivering record revenues of $44.4 million and a $7.1
million reduction in the value of the backlog due to the appreciation of the
Canadian dollar versus the US dollar. 
The annual orders are composed of 10 new customer orders and three
upgrades of existing orders.  This
includes our first order from Europe, which represents a significant new market
for the company.  We continue to convert
past order backlog to recognized revenue and we are reasonably confident that
we will convert our present order backlog to recognized revenue going forward.


 


To date, we have sold 35
systems, 19 of which are installed and 16 of which are in the delivery
phase.  Of the 35 systems sold, 25 are in
the United States, 5 are in Canada, 4 systems are in Asia Pacific and 1 system
has been sold in Europe.


 






(2) Oder backlog is
defined as the unrecognized portion of the revenues anticipated to be recorded
from confirmed system orders, including the next twelve months of revenues to
be derived from executed service contracts.


 


7

















 


ACQUISITION
OF NEUROARM SURGICAL LTD.


 


On February 4, 2010,
the Company announced that it has entered into a definitive agreement to
acquire NeuroArm Surgical Limited (“NASL”), a privately held company based in
Calgary, Alberta, and its magnetic resonance-compatible neurosurgical
robot.  IMRIS has also entered into a
memorandum of understanding with MacDonald Dettwiler and Associates Limited (“MDA”)
to create the next generation of the technology.


 


IMRIS will issue 1.6
million common shares from treasury, as consideration for the acquisition of
NASL, including the technology, patents and associated intellectual property.


 


The closing conditions of
the transaction were completed on February 5, 2010.


 


OUTLOOK


 


When our Company was
formed in 2005, our initial focus was on gaining market acceptance for
IMRISneuro and ensuring the successful delivery of each customer installation
as we developed our core competencies across all facets of the
organization.  Today, IMRISneuro has
become the solution of choice and is installed in leading neuroscience centers
around the world.  We have broadened our
market opportunity with the recent introduction of IMRISNV and IMRIScardio and continue to leverage our
technology platforms and core competencies in support of bringing new
application—specific solutions to market. 
All of which we have achieved while carefully controlling costs in
support of achieving positive earnings as quickly as possible — a milestone we
reached in the fourth quarter of 2009.


 


2010 Corporate Priorities


 


Our corporate priorities
for 2010 reflect a disciplined approach to advancing our business in support of
delivering continuing strong growth and value-creation.  Our 2010 corporate plans include:


 


Focus on Major Market
Opportunities — IMRIS
systems have been purchased by medical facilities in regions around the world
including the United States, Canada, India, China, Australia and France.  In 2010 we plan to focus our sales and
marketing resources on North America, Europe and China.  We have aligned our organization structure
and resources to reflect this approach and established regional organizations
in each of these markets to move decision-making as close as possible to the
customer.  We believe by expanding our
presence in Europe and China and focusing most of our efforts on these two
markets and on North America, that there is significant opportunity to capitalize
on.  Other geographic markets will
continue to be addressed as emerging market opportunities.


 


Build Capacity and Capability —   We have a strong track record of meeting our
installation schedules and ensuring customer satisfaction.  In 2010 we plan to build additional capacity
and capability across the Company to ensure we meet our customer commitments
and financial objectives.  In 2009 our
revenues for system deliveries increased 94% and given our 2009 year end
backlog, we expect a significant increase in backlog conversion again this year.  To meet this anticipated growth, we are
planning to expand our sales and customer support resources to ensure we manage
the expected ongoing growth in our business effectively.


 


Strengthen our Product Portfolio — Since first coming to market, we have expanded
our product portfolio to include IMRISNV and IMRIScardio.  Our recently
announced acquisition of NASL and its MRI compatible neurosurgical robot system
builds on the Company’s vision to deepen the offering of its image guided
solutions.  The Company’s collaboration
with MacDonald Dettwiler, a world leader in robotics, to create the next
generation of the technology, provides the Company with a number of potential
applications for medical practitioners. 
In 2010 our efforts will be concentrated on research and development
programs that further enhance the value of our three products.  We will also continue to advance the
development of our longer term initiatives for radiation and interventional
therapies including new the robotics systems.


 


Control Costs and Operate
Profitably — We
are committed to continuing to invest prudently in our business to capture the
growth potential we believe exists for IMRIS’s image guided therapy
solutions.  In 2010 we will work to
harden product lines and control costs in support of overall growth in
profitability.


 


8

















 


2010 Financial Outlook


 


We are expecting a strong
year of growth in 2010 as we advance our business plan and execute on our
corporate priorities.  Order flow is
expected to build on the positive trends in 2009 as market demand for IMRIS
systems continues to expand.  Net of
increased operating expenses to support expansion of the business, we expect to
generate a growing operating income profile through the year.


 


Given our growth in
backlog in 2009, we expect to continue to convert our backlog into revenues at
a higher rate than historical trends.  As
we move through the year, our focus will be on advancing customer installations
in support of converting orders into recognized revenues.  Our ability to complete installations is
highly dependent on the readiness of customer sites which are often part of a
larger hospital construction project.  As
a result, we can experience delays in our delivery schedule which are beyond
our control resulting in an unbalanced quarterly revenue profile.  While we do not control our customers’
broader construction schedules, through our active involvement in managing each
customer program we continue to work to minimize the potential for delays and
shorten the delivery cycle of those elements that are within the Company’s
control.


 


Gross profit as a
percentage of sales increased in 2009 to 44% as a result of pricing increases
we implemented together with efforts to reduce direct costs of our
systems.  In 2010, we expect full year
gross profit as a percentage of sales to be comparable to 2009 levels.  Some quarterly variability is expected
including reduced margins in the first quarter of the year due to an
installation of our first IMRISNV/IMRIScardio system.  While some
erosion on margin may occur related to exposure to a weakening U.S dollar, we
believe this can be offset as part of our focus on incrementally reducing
component costs through various cost reduction and sustaining engineering
programs in 2010.


 


Operating expenses for
2010 are expected to increase modestly over 2009 levels as we add more capacity
in anticipation of an increase in system deliveries and deliver on planned
objectives.  The primary driver of capacity
will be an additional investment in the sales and marketing area to expand our
global presence and additional support in the customer solutions and delivery
area of the business to manage our growth. 
In addition, we will continue to invest in research and development
programs to add depth to our product offerings, including an investment to
further develop the surgical robotics technology acquired from NASL.


 


We have significant
balance sheet strength with cash and receivables totaling $40 million at December 31,
2009. This together with anticipated positive cash flow from operations  in 2010 as well as cash from customer
deposits on future orders is expected to provide sufficient liquidity to fund
our operations and planned projects through the year.


 


LIQUIDITY
AND CAPITAL RESOURCES


 


Our principal capital
needs are for funding scientific research and development programs, supporting
our sales and marketing activities and funding capital expenditures and working
capital.  The Company has financed its
cash requirements primarily through issuances of securities and customer
deposits from new orders.


 


We had cash or cash
equivalents of $26.3 million as at December 31, 2009, an increase of $20.2
million from September 30, 2009 and an increase of $7.7 million from December 31,
2008.  The increase from December 31,
2008 primarily resulted from the issuance of shares for $19.3 million offset by
the cash operating loss of $6.3 million, an increase in working capital of $1.7
million and capital spending of $3.6 million.


 


9

















 


The following table sets
forth the summary statement of cash flows for the periods indicated:


 


Statements
of Cash Flows


(In
CDN dollars)


(Unaudited)


 


	
   

  	
   

  	
  Year
  ended

  December 31

  	
   

  
	
   

  	
   

  	
  2009

  	
   

  	
  2008

  	
   

  	
  Change

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash
  flows:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Used
  in Operating Activities

  	
   

  	
  $

  	
  (8,035,775

  	
  )

  	
  $

  	
  (6,458,088

  	
  )

  	
  $

  	
  (1,577,687

  	
  )

  
	
  From
  (used in) Financing Activities

  	
   

  	
  19,327,467

  	
   

  	
  (216,166

  	
  )

  	
  19,543,633

  	
   

  
	
  Used
  in Investing Activities

  	
   

  	
  (3,615,392

  	
  )

  	
  (5,532,402

  	
  )

  	
  1,917,010

  	
   

  
	
  Net
  increase (decrease)

  	
   

  	
  7,676,300

  	
   

  	
  (12,206,656

  	
  )

  	
  19,882,956

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash
  and cash equivalents, opening

  	
   

  	
  18,597,333

  	
   

  	
  30,803,989

  	
   

  	
   

  	
   

  
	
  Cash
  and cash equivalents, closing

  	
   

  	
  $

  	
  26,273,633

  	
   

  	
  $

  	
  18,597,333

  	
   

  	
  $

  	
  7,676,300

  	
   

  



 


Operating
Activities


 


The cash used from
operating activities for the current year was $8.0 million.  The cash used in 2009 was comprised of the
operating loss (excluding non-cash related items) of approximately $6.3 million
and $1.7 million increase in working capital. 
This increase in working capital is made up of an increase in
receivables ($14.5 million), an increase in inventory ($1.0 million) and an
increase in prepaid expenses ($1.0 million) offset by a decrease in accounts
payables and accruals ($6.4) and an increase in customer deposits ($8.4
million).


 


Financing
Activities


 


The cash generated in
financing activities for the current year was $19.3 million.  The Company closed on November 2, 2009,
a bought deal financing with a syndicate of underwriters to issue 3,215,000
common shares of IMRIS at $5.60 per common share for gross proceeds of
approximately $18 million.  In addition,
IMRIS granted the underwriters an option, exercisable in whole or in part for a
period of up to 30 days following the offering closing date, to increase the
offering by up to 482,250 common shares at a price of $5.60 per common
share.  This option was exercised on November 2,
2009, increasing the aggregate size of the offering to approximately $20.7
million.  The Company incurred
approximately $1.4 million in costs associated with the offering.


 


Proceeds of the offering
will be used for working capital and general corporate purposes.


 


Investing
Activities


 


The cash used in investing activities for the year
ended December 31, 2009 was approximately $3.6 million.  All of the investing activities are for
capital equipment purchases.  During the
current year, capital purchases included; research and development  equipment ($2.2 million), a new enterprise
resource planning (ERP) software system ($0.4 million), a new trade show booth
($0.5 million) and miscellaneous office and computer equipment ($0.5 million).


 


Capital expenditures for 2010 are expected to be in
the range of $1.0 to $1.5 million for computer hardware and software and office
equipment to support our increased staff levels.


 


Liquidity
and Capital Resources Summary


 


Our cash and cash
equivalents as at December 31, 2009 totaled $26.3 million.  This cash position and our expectation that
we will generate positive cash flow from operations including the customer
deposits on future orders, is expected to provide sufficient liquidity to meet
the anticipated needs of ongoing operations and existing projects including the
funding of current research and development programs and budgeted capital asset
expenditures.


 


10

















 


Contractual
Obligations


 


Lease
Commitments


 


The Company has lease commitments in respect of
operating leases as set out below:


 


	
  2010

  	
   

  	
  $

  	
  500,440

  	
   

  
	
  2011

  	
   

  	
  256,516

  	
   

  
	
  2012

  	
   

  	
  59,255

  	
   

  
	
  Total

  	
   

  	
  $

  	
  816,211

  	
   

  



 


OUTSTANDING
SHARE DATA


 


The
following table sets forth our outstanding share data as at the dates given:


 


	
   

  	
   

  	
  Authorized

  	
   

  	
  February 26, 2010

  	
   

  	
  December 31, 2008

  	
   

  
	
  Common shares

  	
   

  	
  unlimited

  	
   

  	
  $92,121,047  (32,682,377 common shares)

  	
   

  	
  $65,992,820  (27,352,513 common shares)

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Preferred shares

  	
   

  	
  unlimited

  	
   

  	
  Nil

  	
   

  	
  Nil

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Contributed
  surplus

  	
   

  	
   

  	
   

  	
  $1,946,100

  	
   

  	
  $1,228,193

  	
   

  



 


As at February 26,
2010 a total of 4,015,240 stock options were outstanding under the Company’s
stock option plan.


 


Non-GAAP
Financial Measures


 


In this MD&A, we use the
non-GAAP measure “EBITDA”.  We define
EBITDA as the earnings before interest income (expense), foreign exchange gain
(loss), income taxes, and amortization. 
We have begun reporting EBITDA because we believe investors use it as
another measure of our operating performance. 
EBITDA does not have a standardized meaning as prescribed by Canadian
generally accepted accounting principles and it is not necessarily comparable
to similarly titled measures used by other companies.


 


A reconciliation to the
most comparable GAAP measures is as follows:


 


	
   

  	
   

  	
  Three months ended

  	
   

  	
  Twelve months ended

  	
   

  
	
   

  	
   

  	
  December 31,

  2009

  	
   

  	
  December 31,

  2008

  	
   

  	
  December 31,

  2009

  	
   

  	
  December 31,

  2008

  	
   

  
	
  Operating income
  (loss)

  	
   

  	
  $

  	
  811,147

  	
   

  	
  $

  	
  (4,770,071

  	
  )

  	
  $

  	
  (7,113,073

  	
  )

  	
  $

  	
  (18,742,212

  	
  )

  
	
  Amortization

  	
   

  	
  596,724

  	
   

  	
  503,793

  	
   

  	
  2,161,959

  	
   

  	
  1,457,035

  	
   

  
	
  EBITDA

  	
   

  	
  $

  	
  1,407,871

  	
   

  	
  $

  	
  (4,266,278

  	
  )

  	
  $

  	
  (4,951,114

  	
  )

  	
  $

  	
  (17,285,177

  	
  )

  



 


11

















 


FINANCIAL
INSTRUMENTS


 


Our financial instruments consist of cash and cash
equivalents, accounts receivables, unbilled receivables, and accounts payable
and accrued liabilities.


 


We are subject to credit risk with respect to our
accounts receivable and unbilled receivables to the extent debtors do not meet
their obligations and we are subject to foreign exchange risk with respect to
financial instruments denominated in a currency other than the Canadian dollar.


 


Our short-term investments at December 31, 2009
were $18.3 million and were invested in interest bearing saving accounts and
short term bank deposits.  Of this total,
$0.2 million was denominated in US dollars.


 


Our accounts receivable at December 31, 2009 were
$13.7 million, of which $12.6 million is considered current (less than 60 days
old).  Accounts receivable include $12.9
million that are denominated in US dollars.


 


RELATED PARTY TRANSACTION


 


The Company leases air travel time from 5343381
Manitoba Ltd., a company which is wholly owned by Centara Corporation, a
corporation controlled by our Chairman. 
The amount charged to travel expenses with respect to transactions
conducted on an estimated third party comparable cost basis with this related
party during the year ended December 31, 2009 was $740,940 (2008 -
$382,832).


 


As at December 31, 2009, the balance payable to
this related party was $Nil versus $41,580 as at December 31, 2008.


 


CRITICAL
ACCOUNTING POLICIES AND ESTIMATES


 


The preparation of financial
statements in accordance with GAAP requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
year.  Among the accounting estimates
described in the notes to the financial statements, we consider the accounting
estimates used in the determination of recognized revenues, the value of
goodwill and the valuation of stock options to be critical.  Our results as determined by actual events
could differ materially from the previously mentioned estimates.


 


Revenue recognition


 


We recognize
revenues for our system sales on a percentage-of-completion basis as the system
is installed.  The
percentage-of-completion is determined by the ratio of actual costs incurred to
date to the estimated cost of completion for the project.  In the event that the actual costs of
completion differ from the estimated cost we have used in determining the
percentage-of-completion, recognized revenues may be over or under-estimated
until all costs have been incurred and the project is complete.  Funds received from our customers in advance
of meeting the criteria for recognition of revenues are recorded as customer
deposits until the revenue is recognized. 
Revenues recognized in advance of the criteria for invoicing to our
customer are recorded as unbilled receivables. 
Accordingly, the reported amounts shown on the balance sheet under
customer deposits or unbilled receivables may be over or understated.


 


Interest income is
recognized as earned.


 


Value
of goodwill


 


We recorded goodwill on
the purchase of the assets of a predecessor company.  The value of goodwill is tested for
impairment annually or more frequently if an event or circumstance occurs which
we feel may result in an impairment of the value of goodwill.


 


12














 


Stock based compensation plan


 


From time to time we
issue stock options to employees, directors, officers or consultants.  We have adopted the recommendations of Section 3870
of the Canadian Institute of Chartered Accountants’ Handbook, “Stock Based
Compensation and Other Stock Based Payments”. 
Options granted to employees are valued at the grant date using the
Black-Scholes option pricing model which requires management to make
assumptions as to volatility, exercise date and option life.  The value of the options is expensed over the
vesting period of the options, generally a period of four years.  Options granted to non-employees are valued
at the grant date using the Black-Scholes option pricing model.  The options are expensed at the time the
goods are received or services performed, or over the vesting period.


 


CHANGES
IN ACCOUNTING POLICIES


 


Goodwill,
Intangible Assets and Financial Statement Concept;


 


In February 2008, the CICA
issued Section 3064 Goodwill and Intangible Assets, replacing Section 3062
Goodwill and Other Intangible Assets and Section 3450 Research and
Development Costs.  The new Section establishes
standards on the recognition, measurement, presentation and disclosure for
goodwill and intangible assets subsequent to their initial recognition.  The standard requires retroactive application
to prior period financial statements. 
The adoption of the standard has had no material impact on our financial
position or results of operations.


 


Financial Instruments — Fair
Value and Liquidity Risk Disclosure


 


The Company adopted amendments to
CICA 3862, Financial Instruments — Disclosures for the year ended December 31,
2009, which require all financial instruments measured at fair value to be
classified into one of three levels that distinguish fair value measurements by
the significance of the inputs used for valuation.  Fair value is determined based on the price
that would be received for an asset or paid to transfer a liability in the most
advantageous market, utilizing a hierarchy of three different valuation
techniques, based on the lowest level input that is significant to the fair
value measurement in its entirety.


 


Level
1 - Unadjusted quoted prices in active markets for identical assets or
liabilities;


 


Level
2 - Observable inputs other than Level 1 quoted prices for similar assets or
liabilities in active markets; quoted prices for identical or similar assets or
liabilities in markets that are not active; or inputs other than quoted prices
that are observable or corroborated by observable market data; and


 


Level
3 - Unobservable inputs that are supported by little or no market
activity.  Valuation techniques are
primarily model-based.


 


As at December 31, 2009, no
on-balance sheet financial instruments were required to be classified in this manner.


 


FUTURE ACCOUNTING STANDARDS


 


International
Financial Reporting Standards (IFRS)


 


In February 2008,
the CICA confirmed that Canadian reporting issuers will be required to report
under IFRS effective January 1, 2011, including comparative figures for
the prior year.  In April 2008, the
CICA released an exposure draft of the coming standards.  We have developed a high level IFRS
implementation plan, and a detailed assessment of the impact of the accounting
standard differences to the financial statements has been completed.  This assessment has provided insight as to
the most significant areas of difference applicable to us, including property
and equipment, as well as the more extensive presentation and disclosure
requirements under IFRS.  We expect to
make changes to certain processes in 2010 to ensure transactions are recorded
in accordance with IFRS for comparative reporting purposes on the required
implementation date.


 


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We continue to monitor standards development as issued
by the International Accounting Standards Board and the AcSB, as well as
regulatory developments as issued by the Canadian Securities Administrators
(CSA), which may affect the timing, nature or disclosure of our adoption of
IFRS.


 


The transition from current Canadian GAAP to IFRS is a
significant undertaking that may materially affect our reported financial
position and results of operations.  As
we are still in the development phase and have not yet selected our accounting policy
choices and IFRS 1 exemptions, we are unable to quantify the impact of IFRS on
our financial statements.  The areas of
significance identified above are based on available information and our
expectations as of the date of this MD&A and thus, are subject to change
for new facts and circumstances.


 


Business
Combinations


 


Section 1582 further
aligns Canadian GAAP with U.S. GAAP and IFRS, and changes the accounting for
business combinations in a number of areas. 
It establishes principles and requirements governing how an acquiring
company recognizes and measures in its consolidated financial statements
identifiable assets acquired, liabilities assumed, any non-controlling interest
in the acquiree, and goodwill acquired. 
The Section also establishes disclosure requirements.  The impact to the Corporation will be limited
to any future acquisitions beginning in fiscal 2011.


 


Consolidated
Financial Statements and Non-Controlling Interests


 


Sections 1601 and 1602
further align Canadian GAAP with U.S. GAAP and IFRS. Sections 1601 and 1602
change the accounting and reporting of ownership interests in subsidiaries held
by parties other than the parent. 
Non-controlling interests are to be presented in the consolidated statement
of financial position within equity but separate from the parent’s equity.  The amount of consolidated net income
attributable to the parent and to the non-controlling interest is to be clearly
identified and presented on the face of the consolidated statements of income.
In addition, these pronouncements establish standards for a change in a parent’s
ownership interest in a subsidiary and the valuation of retained
non-controlling equity investments when a subsidiary is deconsolidated. They
also establish reporting requirements for providing sufficient disclosures that
clearly identify and distinguish between the interests of the parent and the
interests of the non-controlling owners. 
The Corporation does not believe there will be any impact on its consolidated
financial statements upon the adoption of these pronouncements in fiscal 2011,
unless the Corporation’s circumstances change.


 


Multiple
Deliverable Revenue Arrangements


 


In December 2009,
the CICA issued EIC Abstract 175, Multiple Deliverable Revenue Arrangements.
The EIC deals with arrangements that have multiple deliverables and provides
guidance which is to be applied to determine how an arrangement consideration
should be measured, whether the arrangement should be divided into separate
units of accounting, and how the arrangement consideration should be allocated
among the separate units of accounting. 
This EIC is effective for years beginning January 1, 2011, with
early adoption permitted.  The Company is
currently assessing the future impact of this EIC on its financial statements
and has not yet determined the timing and method of its adoption.


 


DISCLOSURE AND INTERNAL CONTROLS


 


Disclosure controls and procedures are those controls
and other procedures that are designed to provide reasonable assurance that
information required to be disclosed under securities legislation in annual
filings, interim filings or other reports is recorded, processed, summarized
and reported within the time periods specified by the legislation.  They include, without limitation, controls
and procedures designed to ensure the information required to be disclosed in
these reports is accumulated and communicated to the Company’s management,
including the Chief Executive Officer (CEO) and Executive Vice President and
Chief Financial Officer (CFO) to allow timely decisions regarding required
disclosure.


 


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The system of disclosure controls and procedures is
designed to provide reasonable assurance, not absolute assurance, that all
control issues and instances of fraud will be detected.  The CEO and CFO are responsible for
establishing and maintaining IMRIS’s disclosure controls and procedures.  An evaluation of the design and operation of
the Company’s disclosure controls and procedures as of the date of this report
was conducted under the supervision of the CEO and CFO.  The evaluation concluded that the controls
and procedures were effective in providing such reasonable assurance.


 


Internal controls over financial reporting are
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements according to Canadian
GAAP.  An evaluation of the design and
effectiveness of IMRIS’s internal controls was conducted under the supervision
of the CEO and CFO.  The evaluation
concluded that there were no significant weaknesses in the design or
effectiveness of IMRIS’s internal controls over financial reporting.


 


During the quarter ended December 31, 2009, we
implemented a new enterprise resource planning (ERP) software system as noted
in the Investing Activities section of this MD&A.  The system went live on November 2,
2009, replacing the legacy ERP software system. 
The system implementation included core processing in production,
inventory purchasing and accounting. 
Although there has been a change in the ERP system, the conversion has
not resulted in a change that will materially affect our internal controls over
financial reporting.


 


No material changes have been made to the Company’s
internal controls during 2009.


 


RISKS
AND UNCERTAINTIES


 


The
operating results, business prospects and financial position of the Company are
subject to a number of risks and uncertainties. 
Risks relating
to our business include: our long sales cycle, high unit price and limited
quarterly installations; our limited operating history and accumulated deficit;
our lack of product diversity; our dependence on our suppliers; the development
of IMRIScardio and IMRISNV; our reliance on key personnel; the lack
of supporting clinical data; market competition and technological advances;
patent protection and trade secrets; intellectual property litigation; our
ability to shift from research and development to commercialization; our
ability to manage growth; foreign exchange fluctuations; additional financing
requirements; and regulatory matters.  If any of the events
described as risks or uncertainties actually occurs, our business, prospects,
financial condition and operating results would likely suffer, possibly
materially.  We have discussed several of
the more significant risks and uncertainties which may affect the business
below, however for a more comprehensive list of the risks and uncertainties
affecting the business, readers are advised to refer to our most recent Annual
Information Form, available at www.sedar.com.


 


Long
sales cycle, high unit price and limited installations


 


The long sales
cycle, as well as the high unit price of the IMRIS systems, among other
factors, may contribute to substantial fluctuations in our quarterly operating
results.  Because of the high unit price
of IMRIS systems and the fact that we have completed the installation of only
19 units over the Company’s history, each installation currently represents a
significant component of our revenue for a particular quarter.  If we lose a single customer order or if
customers defer installation of an IMRIS system for even a short period of
time, recognition of a significant amount of revenue may be lost or deferred to
a subsequent period.  Given that our
operating costs are relatively fixed, our inability to recognize revenue in a
particular quarter may adversely affect our profitability in that quarter.  We expect that revenues from a limited number
of new customers will account for a large percentage of total revenues in
future quarters.  Our ability to attract
new customers will depend on a variety of factors, including the capability,
safety, efficacy, ease of use, price, quality and reliability of our products
and effective sales, support, training and service.  In addition, if we are unable
to fulfill our current purchase orders and other commitments on a timely basis
or at all, market acceptance of our products could be adversely affected and
hospitals may instead purchase our competitors’ products.  The loss or delay of individual orders or
failure to add new customers could have a significant impact on future revenues
and operating results.


 


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Limited operating history and accumulated deficit


 


We have a limited
operating history from which investors can evaluate our business and
prospects.  We have a large accumulated deficit and we may
not maintain profitability.  We have
incurred substantial losses since inception and despite achieving profitability
in the fourth quarter of 2009; we may incur additional operating losses in the
near term.  If the time required to
generate significant revenues and achieve profitability on an annualized basis
is longer than anticipated, we may not be able to continue our operations
without additional capital.  Our
prospects must be considered in light of the risks and uncertainties
encountered by an early-stage company in the continuously-evolving surgical
imaging market.  If we cannot
successfully address these risks, our business and financial condition would
suffer.


 


Lack of product diversity


 


Currently, our
commercially available products are the IMRISneuro, IMRIScardio and IMRISNV
systems.  Although we expect sales of our
new IMRIScardio and IMRISNV systems to increase with market acceptance of these
systems, we currently generate substantially all of our revenue from sales of
the IMRISneuro system and multiyear service plans for the IMRISneuro
system.  If we are unable to sustain or grow
sales of the IMRISneuro system or grow sales of IMRIScardio and IMRISNV, we may
not generate sufficient revenue to support our business.  Accordingly, we are currently dependent on
our ability to market and sell the IMRISneuro system.  Any factor materially and/or adversely
affecting our ability to market and sell the IMRISneuro system or pricing and
demand for the IMRISneuro system may have a material and adverse effect on our
financial condition and results of operations.


 


Foreign exchange fluctuations


 


As a global provider of integrated imaging solutions,
most of our sales are denominated in currencies other than the Canadian
dollar.  We currently generate a
significant portion of our sales in US dollars but many of our expenses are
denominated in Canadian dollars.  To
date, we have not used forward exchange contracts to hedge exposures
denominated in US dollars or any other derivative instrument for trading,
hedging or speculative purposes.  As
such, we are exposed to fluctuations in the exchange rate between the US dollar
and the Canadian dollar as a result of the translation into Canadian dollars of
our balance sheet and income statement items denominated in US dollars.


 


Regulatory matters


 


Products intended for diagnostic and therapeutic use
for humans are governed by a wide array of regulatory authorities in various
jurisdictions.  For most of these
products in most jurisdictions, applicable statutes and regulations require
testing and government review and approval prior to marketing the product.  This procedure can take a number of years and
involves the expenditure of substantial resources.  Any failure or delay by us to obtain
regulatory approvals or clearances could adversely affect the marketing of any
products developed by us and our ability to receive product revenue.  There is no assurance that any of our planned
products will be approved by any regulatory authority on a timely basis, or at
all.  Also, in the event that a
regulatory authority revokes any approvals granted in respect of our products,
or a recall of our products is required in the event of material deficiencies
or defects, our business, financial condition and results of operations could
be adversely affected.


 


Dependence on suppliers


 


We depend on
Siemens to supply the MR scanner and angiography systems for our IMRIS
systems.  Our current agreement with
Siemens was entered into as of November 2009 for a five-year term with
automatic renewal provisions thereafter, subject to six months’ advance written
notice of termination by either party. 
The agreement may be terminated earlier in the event of default or in
the event of insolvency or equivalent proceedings against either party or in
the event of a change of control or similar sale transaction affecting IMRIS
where the buyer or controlling shareholder is a direct competitor to
Siemens.  If for any reason we could not
obtain MR scanners and angiography systems from Siemens, there is no certainty
that we could find another vendor willing to supply this equipment for the
IMRIS systems and a change would require a redesign of the IMRIS systems, which
could take a year or more to implement. 
We are dependant on Siemens to provide support and maintenance services
to our customers under contract to IMRIS; if Siemens’ services became
unavailable, any resulting service issues could disrupt our customer
relationships and cause damage to our reputation.


 


16

















 


We purchase
certain other components of our system from outside vendors, including
radio-frequency shielding systems, certain hardware components for our surgical
information management system and operating room booms and lights.  For the majority of our system components, we
do not have long-term supply contracts with the suppliers; however, we attempt
to establish dual sourcing for most of these other components of our system and
we believe that we would be able to establish alternative sources for these
components, subject to any regulatory qualifications, as may be required.  It is possible that a disruption of the
supply of these components could result in increased costs and delays in
deliveries of IMRIS systems, which could adversely affect our reputation and
results of operations.  Additionally, any
transition to alternate manufacturers or suppliers would likely result in operational
problems and increased expenses and could delay the shipment of, or limit our
ability to provide our products.


 


Competition
and technological advances


 


The surgical
imaging industry is subject to intense and increasing competition and rapidly
evolving technologies.  Many government,
academic and business entities are investing substantial resources in research
and development of treatments and new products that may render surgical imaging
obsolete, including radiation treatment, new drug treatments and gene
therapy.  Successful developments that
result in new approaches for treatments could reduce the attractiveness of our
products or render them obsolete.  MRI
competes with other surgical imaging technologies such as CT, fluoroscopy and
ultrasound for market share in the overall surgical imaging market.


 


The market for
neurosurgical MR imaging is highly competitive, with a number of companies
providing competing surgical MRI systems. 
Many of these competitors are large medical system suppliers which have
considerably greater resources at their disposal to advance the development of
their MRI systems.  These competitors or
other companies may at any time develop new or improved surgical imaging
solutions.  Alternatively, these
competitors may choose to increase their respective market share by changing
their pricing model or by lowering the price of their surgical imaging
solutions or ancillary supplies.  If we
are unable to address these competitor tactics by either continuing to enhance
and improve our current product(s) or we are unable to maintain or
increase our selling price in the face of competition, there can be no
assurance that the Company will be able to maintain its desired market share or
achieve its financial objectives.


 


Additional
Information


 


Additional
information about IMRIS can be found on the SEDAR website at www.sedar.com.


 


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