UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended SeptemberJune 30, 20172022
Oror
[ ]_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
Commission File Number:0-12305
REPRO MEDKORU MEDICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
New York | 13-3044880 |
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(State or | (I.R.S. Employer Identification No.) |
|
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(Address of | (Zip Code) |
(845)469-2042
(Registrant’s telephone number, including area code)
February 28Repro Med Systems, Inc., 24 Carpenter Drive, ChesterNY, 10918
((Former name, former address and former fiscal year, if changed since last report))
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common stock, $0.01 par value | KRMD | The Nasdaq Stock Market |
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. [X] [X]Yes [ ] [_] No
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [X]Yes [X] [_] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer | |
Non-accelerated filer[ | Smaller reporting company | |
| Emerging growth company [ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ][_]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ][_] Yes [X] [X]No
As of NovemberAugust 3, 2017, 37,930,6202022, shares of common stock, $0.01$ par value per share, were outstanding, which excludes 2,737,231 shares of treasury stock.
REPRO MED
KORU MEDICAL SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2022
TABLE OF CONTENTS
PAGE | ||||
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PART I. FINANCIAL INFORMATION | ||||
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ITEM 1. | Financial Statements (Unaudited) | 3 | ||
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Balance Sheets as of | 3 | |||
2021 | 4 | |||
2021 | 5 | |||
6 | ||||
Notes to Financial Statements |
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ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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ITEM 3. |
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ITEM 4. |
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PART | ||||
ITEM |
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ITEM 5. | Other Information | 23 | ||
ITEM 6. |
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Signatures | 25 |
- 2 -
PART I –— FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
REPRO MEDKORU MEDICAL SYSTEMS, INC.
BALANCE SHEETS
(UNAUDITED)
|
| September 30, |
| February 28, |
| ||
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| 2017 |
| 2017 |
| ||
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| (Unaudited) |
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| ||
ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
| $ | 3,661,707 |
| $ | 3,313,265 |
|
Certificates of deposit |
|
| 262,314 |
|
| 262,314 |
|
Accounts receivable less allowance for doubtful accounts of $77,067 at September 30, 2017 and $18,046 at February 28, 2017 |
|
| 1,481,410 |
|
| 1,502,030 |
|
Inventory |
|
| 1,586,568 |
|
| 1,353,703 |
|
Tax Receivable |
|
| — |
|
| 172,457 |
|
Prepaid expenses |
|
| 225,088 |
|
| 175,955 |
|
TOTAL CURRENT ASSETS |
|
| 7,217,087 |
|
| 6,779,724 |
|
Property and equipment, net |
|
| 902,075 |
|
| 932,092 |
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Patents, net of accumulated amortization of $195,354 and $180,137 at September 30, 2017 and February 28, 2017, respectively |
|
| 440,565 |
|
| 426,943 |
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Other assets |
|
| 31,583 |
|
| 31,490 |
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TOTAL ASSETS |
| $ | 8,591,310 |
| $ | 8,170,249 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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CURRENT LIABILITIES |
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Deferred capital gain - current |
| $ | 22,481 |
| $ | 22,481 |
|
Accounts payable |
|
| 362,878 |
|
| 772,428 |
|
Accrued expenses |
|
| 502,249 |
|
| 417,357 |
|
Accrued payroll and related taxes |
|
| 123,716 |
|
| 177,018 |
|
Accrued tax liability |
|
| 142,883 |
|
| — |
|
TOTAL CURRENT LIABILITIES |
|
| 1,154,207 |
|
| 1,389,284 |
|
Deferred capital gain – long term |
|
| 9,382 |
|
| 22,496 |
|
Deferred tax liability |
|
| 91,039 |
|
| 82,422 |
|
TOTAL LIABILITIES |
|
| 1,254,628 |
|
| 1,494,202 |
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STOCKHOLDERS’ EQUITY |
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Common stock, $0.01 par value; 75,000,000 shares authorized, 40,667,851 and 40,558,429 shares issued, 37,930,620 and 37,821,198 shares outstanding at September 30, 2017 and February 28, 2017, respectively |
|
| 406,679 |
|
| 405,584 |
|
Additional paid-in capital |
|
| 4,162,679 |
|
| 4,129,726 |
|
Retained earnings |
|
| 3,111,528 |
|
| 2,484,941 |
|
|
|
| 7,680,886 |
|
| 7,020,251 |
|
Less: Treasury stock, 2,737,231 shares at September 30, 2017 and February 28, 2017 |
|
| (344,204 | ) |
| (344,204 | ) |
TOTAL STOCKHOLDERS’ EQUITY |
|
| 7,336,682 |
|
| 6,676,047 |
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
| $ | 8,591,310 |
| $ | 8,170,249 |
|
June 30, | December 31, | ||||||
2022 | 2021 | ||||||
ASSETS | |||||||
CURRENT ASSETS | |||||||
Cash and cash equivalents | $ | 18,265,552 | $ | 25,334,889 | |||
Accounts receivable less allowance for doubtful accounts of $24,471 for June 30, 2022, and December 31, 2021 | 4,084,762 | 3,592,886 | |||||
Inventory | 6,771,514 | 6,106,338 | |||||
Other Receivables | 680,796 | 718,220 | |||||
Prepaid expenses | 1,165,668 | 1,568,821 | |||||
TOTAL CURRENT ASSETS | 30,968,292 | 37,321,154 | |||||
Property and equipment, net | 2,823,090 | 1,106,445 | |||||
Intangible assets, net of accumulated amortization of $294,301 and $263,729 at June 30, 2022 and December 31, 2021, respectively | 791,781 | 808,813 | |||||
Operating lease right-of-use assets | 4,190,931 | 95,553 | |||||
Finance lease right -of-use, net accumulated depreciation of $5,918 at June 30, 2022 | 349,153 | — | |||||
Deferred income tax assets, net | 3,249,323 | 1,941,254 | |||||
Other assets | 88,772 | 19,812 | |||||
TOTAL ASSETS | $ | 42,461,342 | $ | 41,293,031 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
CURRENT LIABILITIES | |||||||
Accounts payable | $ | 2,389,862 | $ | 1,227,533 | |||
Accrued expenses | 1,974,196 | 2,709,704 | |||||
Note Payable | — | 508,583 | |||||
Other Liabilities | 240,501 | 90,000 | |||||
Accrued payroll and related taxes | 696,042 | 160,603 | |||||
Financing lease liability – current | 66,503 | — | |||||
Operating lease liability – current | 363,030 | 95,553 | |||||
TOTAL CURRENT LIABILITIES | 5,730,134 | 4,791,976 | |||||
Financing lease liability, net of current portion | 281,958 | — | |||||
Operating lease liability, net of current portion | 3,827,900 | — | |||||
TOTAL LIABILITIES | 9,839,992 | 4,791,976 | |||||
STOCKHOLDERS’ EQUITY | |||||||
Common stock, $ | par value, shares authorized, and shares issued and shares outstanding at June 30, 2022, and December 31, 2021, respectively484,076 | 480,441 | |||||
Additional paid-in capital | 42,349,760 | 40,774,245 | |||||
Treasury stock, | shares at June 30, 2022 and December 31, 2021, respectively, at cost(3,843,562 | ) | (3,843,562 | ) | |||
Retained deficit | (6,368,924 | ) | (910,069 | ) | |||
TOTAL STOCKHOLDERS’ EQUITY | 32,621,350 | 36,501,055 | |||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 42,461,342 | $ | 41,293,031 |
The accompanying notes are an integral part of these financial statementsstatements.
- 3 -
REPRO MEDTable of Contents
KORU MEDICAL SYSTEMS, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
(Unaudited)
|
| For the Three Months Ended |
| For the Seven Months Ended |
| Three Months Ended | Six Months Ended | |||||||||||||||||||
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| September 30, |
| September 30, |
| June 30, | June 30, | |||||||||||||||||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
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NET SALES |
| $ | 3,849,338 |
| $ | 3,221,502 |
| $ | 9,188,414 |
| $ | 7,293,695 |
| $ | 6,546,628 | $ | 5,528,174 | $ | 12,790,958 | $ | 10,959,125 | |||||
Cost of goods sold |
|
| 1,470,680 |
|
| 1,188,558 |
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| 3,539,662 |
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| 2,643,925 |
| 3,200,455 | 2,317,990 | 5,822,480 | 4,517,087 | |||||||||
Gross Profit |
|
| 2,378,658 |
|
| 2,032,944 |
|
| 5,648,752 |
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| 4,649,770 |
| 3,346,173 | 3,210,184 | 6,968,478 | 6,442,038 | |||||||||
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OPERATING EXPENSES |
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Selling, general and administrative |
|
| 1,893,911 |
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| 2,114,407 |
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| 4,536,954 |
|
| 4,887,608 |
| 5,530,022 | 4,085,945 | 11,021,235 | 9,078,774 | |||||||||
Research and development |
|
| 14,852 |
|
| 75,198 |
|
| 47,564 |
|
| 147,136 |
| 1,303,731 | 386,878 | 2,452,086 | 723,719 | |||||||||
Depreciation and amortization |
|
| 77,517 |
|
| 70,935 |
|
| 179,874 |
|
| 167,513 |
| 125,882 | 118,415 | 235,134 | 233,888 | |||||||||
Total Operating Expenses |
|
| 1,986,280 |
|
| 2,260,540 |
|
| 4,764,392 |
|
| 5,202,257 |
| 6,959,635 | 4,591,238 | 13,708,455 | 10,036,381 | |||||||||
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Net Operating Profit/(Loss) |
|
| 392,378 |
|
| (227,596 | ) |
| 884,360 |
|
| (552,487 | ) | |||||||||||||
Net Operating Loss | (3,613,462 | ) | (1,381,054 | ) | (6,739,977 | ) | (3,594,343 | ) | ||||||||||||||||||
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Non-Operating Income/(Expense) |
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Gain/(Loss) on currency exchange |
|
| 10,419 |
|
| (4,096 | ) |
| 65,079 |
|
| 8,237 |
| |||||||||||||
Interest and other income |
|
| 361 |
|
| 262 |
|
| 1,104 |
|
| 1,336 |
| |||||||||||||
(Loss)/Gain on currency exchange | (21,705 | ) | 1,239 | (28,840 | ) | (14,478 | ) | |||||||||||||||||||
Gain on disposal of fixed assets, net | — | — | — | 736 | ||||||||||||||||||||||
Interest income, net | 3,566 | 9,950 | 2,103 | 19,721 | ||||||||||||||||||||||
TOTAL OTHER INCOME/(EXPENSE) |
|
| 10,780 |
|
| (3,834 | ) |
| 66,183 |
|
| 9,573 |
| (18,139 | ) | 11,189 | (26,737 | ) | 5,979 | |||||||
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PROFIT/(LOSS) BEFORE TAXES |
|
| 403,158 |
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| (231,430 | ) |
| 950,543 |
|
| (542,914 | ) | |||||||||||||
LOSS BEFORE INCOME TAXES | (3,631,601 | ) | (1,369,865 | ) | (6,766,714 | ) | (3,588,364 | ) | ||||||||||||||||||
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Income Tax (Expense)Benefit |
|
| (137,404 | ) |
| 78,217 |
|
| (323,956 | ) |
| 183,819 |
| |||||||||||||
Income Tax Benefit | 710,260 | 245,316 | 1,307,859 | 1,187,677 | ||||||||||||||||||||||
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NET INCOME/(LOSS) |
| $ | 265,754 |
| $ | (153,213 | ) | $ | 626,587 |
| $ | (359,095 | ) | |||||||||||||
NET LOSS | $ | (2,921,341 | ) | $ | (1,124,549 | ) | $ | (5,458,855 | ) | $ | (2,400,687 | ) | ||||||||||||||
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NET INCOME/(LOSS) PER SHARE |
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NET LOSS PER SHARE | ||||||||||||||||||||||||||
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Basic |
| $ | 0.01 |
| $ | — |
| $ | 0.02 |
| $ | (0.01 | ) | $ | (0.07 | ) | $ | (0.03 | ) | $ | (0.12 | ) | $ | (0.05 | ) | |
Diluted |
| $ | 0.01 |
| $ | — |
| $ | 0.02 |
| $ | (0.01 | ) | $ | (0.07 | ) | $ | (0.03 | ) | $ | (0.12 | ) | $ | (0.05 | ) | |
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WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING |
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Basic |
|
| 37,898,357 |
|
| 37,779,427 |
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| 37,856,074 |
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| 37,885,432 |
| 44,921,870 | 44,489,853 | 44,795,625 | 44,226,936 | |||||||||
Diluted |
|
| 38,056,604 |
|
| 37,779,427 |
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| 38,014,321 |
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| 37,885,432 |
| 44,921,870 | 44,489,853 | 44,795,625 | 44,226,936 |
The accompanying notes are an integral part of these financial statementsstatements.
- 4 -
REPRO MEDTable of Contents
KORU MEDICAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended | |||||||
June 30, | |||||||
2022 | 2021 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES | |||||||
Net Loss | $ | (5,458,855 | ) | $ | (2,400,687 | ) | |
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||
Stock-based compensation expense | 1,579,151 | 1,339,356 | |||||
Depreciation and amortization | 235,134 | 233,888 | |||||
Deferred income taxes | (1,308,069 | ) | (1,201,956 | ) | |||
Gain on disposal of fixed assets | — | (736 | ) | ||||
Changes in operating assets and liabilities: | |||||||
Increase in accounts receivable | (454,452 | ) | (4,446 | ) | |||
Increase in inventory | (665,176 | ) | (732,978 | ) | |||
Decrease in prepaid expenses and other assets | 334,193 | 346,227 | |||||
Increase in other Liabilities | 150,501 | — | |||||
Increase in accounts payable | 1,162,329 | 380,733 | |||||
Increase in accrued payroll and related taxes | 535,438 | 103,196 | |||||
Decrease in accrued expenses | (735,508 | ) | (838,747 | ) | |||
NET CASH USED IN OPERATING ACTIVITIES | (4,625,314 | ) | (2,776,150 | ) | |||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||||
Purchases of property and equipment | (1,915,289 | ) | (152,223 | ) | |||
Proceeds from disposal of property and equipment | — | 9,065 | |||||
Purchases of intangible assets | (13,540 | ) | (23,978 | ) | |||
NET CASH USED IN INVESTING ACTIVITIES | (1,928,829 | ) | (167,136 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||||
Payments on indebtedness | (508,583 | ) | — | ||||
Proceeds from issuance of equity | — | 1,230,000 | |||||
Common stock issuance as settlement for litigation | — | 938,094 | |||||
Payments on finance lease liability | (6,611 | ) | (1,616 | ) | |||
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES | (515,194 | ) | 2,166,478 | ||||
NET DECREASE IN CASH AND CASH EQUIVALENTS | (7,069,337 | ) | (776,808 | ) | |||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 25,334,889 | 27,315,286 | |||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 18,265,552 | $ | 26,538,478 | |||
Supplemental Information | |||||||
Cash paid during the periods for: | |||||||
Interest | $ | 6,204 | $ | 47 | |||
Income Taxes | $ | — | $ | 850 | |||
Schedule of Non-Cash Operating, Investing and Financing Activities: | |||||||
Issuance of common stock as compensation | $ | 258,005 | $ | 153,446 | |||
Issuance of common stock as settlement for litigation | $ | — | $ | 938,094 |
|
| For the Seven Months Ended |
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|
| September 30, |
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| 2017 |
| 2016 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net Income (Loss) |
| $ | 626,587 |
| $ | (359,095 | ) |
Adjustments to reconcile net income (loss) to net cash provided by/(used in) operating activities: |
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Amortization of deferred compensation cost |
|
| — |
|
| 14,000 |
|
Stock based compensation expense |
|
| 53,407 |
|
| 126,006 |
|
Depreciation and amortization |
|
| 179,874 |
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| 167,513 |
|
Deferred capital gain - building lease |
|
| (13,113 | ) |
| (13,113 | ) |
Deferred taxes |
|
| 8,617 |
|
| (30,288 | ) |
Provision for returns and doubtful accounts |
|
| 58,941 |
|
| (14,102 | ) |
Changes in operating assets and liabilities: |
|
|
|
|
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Increase in accounts receivable |
|
| (38,321 | ) |
| (293,821 | ) |
Increase in inventory |
|
| (232,865 | ) |
| (71,011 | ) |
Decrease/(Increase) in prepaid expense and other assets |
|
| 123,231 |
|
| (78,602 | ) |
(Decrease)/Increase in accounts payable |
|
| (409,550 | ) |
| 357,384 |
|
Decrease in accrued payroll and related taxes |
|
| (53,302 | ) |
| (31,204 | ) |
Increase in accrued expense |
|
| 84,892 |
|
| 168,732 |
|
Increase/(Decrease) in accrued tax liability |
|
| 142,883 |
|
| (155,075 | ) |
NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES |
|
| 531,281 |
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| (212,676 | ) |
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CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
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Payments for property and equipment |
|
| (134,640 | ) |
| (123,689 | ) |
Payments for patents |
|
| (28,839 | ) |
| (106,355 | ) |
NET CASH USED IN INVESTING ACTIVITIES |
|
| (163,479 | ) |
| (230,044 | ) |
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CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
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|
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Payment for cancelled shares |
|
| (19,360 | ) |
| — |
|
Purchase of treasury stock |
|
| — |
|
| (120,577 | ) |
NET CASH USED IN FINANCING ACTIVITIES |
|
| (19,360 | ) |
| (120,577 | ) |
|
|
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|
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS |
|
| 348,442 |
|
| (563,297 | ) |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
| 3,313,265 |
|
| 4,201,949 |
|
CASH AND CASH EQUIVALENTS, END OF PERIOD |
| $ | 3,661,707 |
| $ | 3,638,652 |
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Supplemental Information |
|
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|
Cash paid during the periods for: |
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Interest |
| $ | — |
| $ | — |
|
Taxes |
| $ | — |
| $ | — |
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NON-CASH FINANCING AND INVESTING ACTIVITIES |
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Issuance of common stock as compensation |
| $ | 78,750 |
| $ | 43,468 |
|
The accompanying notes are an integral part of these financial statementsstatements.
- 5 -
REPRO MEDTable of Contents
KORU MEDICAL SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
Additional | Retained | Total | ||||||||||||||||
Common Stock | Paid-in | Earnings | Treasury | Stockholders’ | ||||||||||||||
Shares | Amount | Capital | (Deficit) | Stock | Equity | |||||||||||||
Three and Six Months Ended June 30, 2022 | ||||||||||||||||||
BALANCE, DECEMBER 31, 2021 | 48,044,162 | $ | 480,441 | $ | 40,774,245 | $ | (910,069 | ) | $ | (3,843,562 | ) | $ | 36,501,055 | |||||
Issuance of stock-based compensation | 47,500 | 475 | 142,025 | — | — | 142,500 | ||||||||||||
Compensation expense related to stock options | — | — | 524,670 | — | — | 524,670 | ||||||||||||
Compensation expense related to restricted stock awards | — | — | 170,386 | — | — | 170,386 | ||||||||||||
Issuance upon options exercised | 29,627 | 296 | (296 | ) | — | — | — | |||||||||||
Net loss | — | — | — | (2,537,514 | ) | — | (2,537,514 | ) | ||||||||||
BALANCE, MARCH 31, 2022 | 48,121,289 | $ | 481,212 | $ | 41,611,030 | $ | (3,447,583 | ) | $ | (3,843,562 | ) | $ | 34,801,097 | |||||
Issuance of stock-based compensation | 69,707 | 697 | 114,808 | — | — | 115,505 | ||||||||||||
Compensation expense related to stock options | — | — | 527,736 | — | — | 527,736 | ||||||||||||
Compensation expense related to restricted stock awards | 50,000 | 500 | 231,011 | — | — | 231,511 | ||||||||||||
Issuance upon options exercised | 166,623 | 1,667 | (134,825 | ) | — | — | (133,158 | ) | ||||||||||
Net loss | — | — | — | (2,921,341 | ) | — | (2,921,341 | ) | ||||||||||
BALANCE, JUNE 30, 2022 | 48,407,619 | $ | 484,076 | $ | 42,349,760 | $ | (6,368,924 | ) | $ | (3,843,562 | ) | $ | 32,621,350 |
Additional | Retained | Total | ||||||||||||||||
Common Stock | Paid-in | Earnings | Treasury | Stockholders’ | ||||||||||||||
Shares | Amount | Capital | (Deficit) | Stock | Equity | |||||||||||||
Three and Six Months Ended June 30, 2021 | ||||||||||||||||||
BALANCE, DECEMBER 31, 2020 | 46,680,119 | $ | 466,801 | $ | 35,880,986 | $ | 3,652,754 | $ | (3,843,562 | ) | $ | 36,156,979 | ||||||
Issuance of stock-based compensation | 10,124 | 101 | 56,149 | — | — | 56,250 | ||||||||||||
Compensation expense related to stock options | — | — | 677,934 | — | — | 677,934 | ||||||||||||
Litigation settlement share issuance | 95,238 | 952 | 937,142 | — | — | 938,094 | ||||||||||||
Issuance upon options exercised | 1,110,580 | 11,106 | 1,218,894 | — | — | 1,230,000 | ||||||||||||
Net loss | — | — | — | (1,276,138 | ) | — | (1,276,138 | ) | ||||||||||
BALANCE, MARCH 31, 2021 | 47,896,061 | $ | 478,960 | $ | 38,771,105 | $ | 2,376,616 | $ | (3,843,562 | ) | $ | 37,783,119 | ||||||
Issuance of stock-based compensation | 14,615 | 146 | 97,050 | — | — | 97,196 | ||||||||||||
Compensation expense related to stock options | — | — | 441,841 | — | — | 441,841 | ||||||||||||
Compensation expense related to restricted stock awards | — | — | 66,135 | — | — | 66,135 | ||||||||||||
Net loss | — | — | — | (1,124,549 | ) | — | (1,124,549 | ) | ||||||||||
BALANCE, JUNE 30, 2021 | 47,910,676 | $ | 479,106 | $ | 39,376,131 | $ | 1,252,067 | $ | (3,843,562 | ) | $ | 37,263,742 |
The accompanying notes are an integral part of these financial statements.
- 6 -
KORU MEDICAL SYSTEMS, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
NOTE 1 — NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
REPRO MEDKORU MEDICAL SYSTEMS, INC. (the “Company”, “RMS”,“Company,” “KORU Medical,” “we,” “us” or “we”“our”) designs, manufactures and markets proprietary portable and innovative medical devices primarily for the ambulatory infusion market and emergency medical applications as governed by the United States Food and Drug Administration (the “FDA”) quality and regulatory system and international standards for quality management systems.system management. The Company operates as one segment.
FISCAL YEAR END
On March 22, 2017, the Board of Directors approved a change in the Company’s fiscal year end from February 28 to December 31.
BASIS OF PRESENTATION
The accompanying unaudited financial statements as of September 30, 2017, have been prepared in accordance with generally accepted accounting principles and with instructions to SEC regulation S-X for interim financial statements.
In the opinion of the Company’s management, the financial statements contain all adjustments consisting of normal recurring accruals necessary to present fairly the Company’s financial position as of September 30, 2017, and the results of operations and cash flow for the three and seven month periods ended September 30, 2017, and 2016.
The results of operations for the three and seven months ended September 30, 2017, and 2016 are not necessarily indicative of the results to be expected for the full year. These interim financial statements should be read in conjunction with the financial statements and notes thereto of the Company and management’s discussion and analysis of financial condition and results of operations included in the Company’s Annual Reportannual report on Form 10-K for the year ended February 28, 2017,December 31, 2021 (“Annual Report”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with United States generally accepted accounting principles (“GAAP”) have been condensed or omitted from the accompanying financial statements. The accompanying year-end balance sheet was derived from the audited financial statements included in the Annual Report. The accompanying interim financial statements are unaudited and reflect all adjustments which are in the opinion of management necessary for a fair statement of the Company’s financial position, results of operations, and cash flows for the periods presented. All such adjustments are of a normal, recurring nature. The Company’s results of operations and cash flows for the interim periods are not necessarily indicative of the results of operations and cash flows that it may achieve in future periods.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all short-term investments with an original maturity of three months or less to be cash equivalents. The Company holds cash in excess of $250,000 at its depository, which exceeds the FDIC insurance limits and is, therefore, uninsured.
INVENTORY
Inventories of raw materials are stated at the lower of standard cost, which approximates average cost, or market value including allocable overhead. Work-in-process and finished goods are stated at the lower of standard cost or market value and include direct labor and allocable overhead.
PATENTS
Costs incurred in obtaining patents have been capitalized and are being amortized over the legal life of the patents.
INCOME TAXES
Deferred income taxes are provided using the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences.
The Company believes that it has no uncertain tax positions requiring disclosure or adjustment. Generally, tax years starting with 2019 are subject to examination by income tax authorities.
PROPERTY, EQUIPMENT, AND DEPRECIATION
Property and equipment is stated at cost and is depreciated using the straight-line method over the estimated useful lives of the respective assets.
- 7 -
The Company maintains a stock option plan under which it grants stock options to certain executives, key employees and consultants. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model. All options are charged against income at their fair value. The entire compensation expense of the award is recognized over the vesting period. Shares of stock granted for director fees are recorded at the fair value of the shares at the grant date.
The Company also maintains an omnibus equity incentive plan. To date the Company has only granted shares of stock for director fees under this plan and those shares of stock granted are recorded at the fair value of the shares at the grant date.
The Company issues restricted stock awards. Restricted stock awards are equity classified and measured at the fair market value of the underlying stock at the grant date. The fair value of restricted stock awards vesting at certain market capitalization thresholds were estimated on the date of grant using the Brownian Motion Monte Carlo lattice model. The fair value of restricted stock awards with time-based vesting were estimated on the date of grant at the current stock price. We recognize restricted stock expense using the straight-line attribution method over the requisite service period and account for forfeitures as filed withthey occur.
Schedule of loss income per common share
Schedule of net loss per common share
Three Months Ended | Six Months Ended |
| |||||||||||
June 30, | June 30, | ||||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||||
Net loss | $ | (2,921,341 | ) | $ | (1,124,549 | ) | $ | (5,458,855 | ) | $ | (2,400,687 | ) | |
Weighted Average Outstanding Shares: | |||||||||||||
Outstanding shares | 44,921,870 | 44,489,853 | 44,795,625 | 44,226,936 | |||||||||
Option shares includable | 0 | (a) | 0 | (a) | 0 | (a) | 0 | (a) | |||||
44,921,870 | 44,489,853 | 44,795,625 | 44,226,936 | ||||||||||
Net loss per share | |||||||||||||
Basic | $ | (0.07 | ) | $ | (0.03 | ) | $ | (0.12 | ) | $ | (0.05 | ) | |
Diluted | $ | (0.07 | ) | $ | (0.03 | ) | $ | (0.12 | ) | $ | (0.05 | ) |
__________
(a) | For the three months ended June 30, 2022, and 2021, option shares of and respectively, were not included as the impact is anti-dilutive. For the six months ended June 30, 2022, and 2021, option shares of and respectively, were not included as the impact is anti-dilutive.For the three months ended June 30, 2022 and 2021, restricted shares of and 0 respectively, were not included as the impact is anti-dilutive. For the six months ended June 30, 2022, and 2021, restricted shares of and respectively, were not included as the impact is anti-dilutive. |
USE OF ESTIMATES IN THE FINANCIAL STATEMENTS
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”)GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Important estimates include but are not limited to asset lives, valuation allowances, inventory valuation, and accruals.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS- 8 -
REVENUE RECOGNITION
Our revenues are derived from three business sources: (i) domestic core, (ii) international core, and (iii) novel therapies. Our core domestic and international revenues consist of sales of our syringe drivers, tubing and needles (“Product Revenue”) for the delivery of subcutaneous drugs that are FDA cleared for use with the KORU Medical infusion system, with the primary delivery for immunoglobulin to treat PIDD and CIDP. Novel therapies consist of Product Revenue for feasibility/clinical trials (pre-clinical studies, Phase I, Phase II, Phase III) of biopharmaceutical companies in the drug development process as well as non-recurring engineering services (“NRE”) revenues received from biopharmaceutical companies to ready or customize the FREEDOM System for clinical and commercial use.
For Product Revenues, we recognize revenues when shipment occurs, and at which point the customer obtains control and ownership of the goods. Shipping costs generally are billed to customers and are included in sales.
The Company generally does not accept return of goods shipped unless it is a Company error. The only credits provided to customers are for defective merchandise. The Company warrants the syringe driver from defects in materials and workmanship under normal use and the warranty does not include a performance obligation. The costs under the warranty are expensed as incurred.
Provisions for distributor pricing and annual customer growth rebates are variable consideration and are recorded as a reduction of revenue in the same period the related sales are recorded or when it is probable the annual growth target will be achieved. Rebates are provided to distributors for the difference in selling price to distributor and pricing specified to select customers.
Our novel therapies revenues can fluctuate and may not be consistent from period to period. Engineering work performed on our product may be specialized and tailored to the specific needs of each independent clinical trial and not uniform in nature. The clinical trial size and scope of protocols may also range greatly from customer to customer, and there is no expectation of repeat customers on a consistent basis compared to our normal course of business. We recognize NRE revenue under an input method, which recognizes revenue on the basis of our efforts or inputs (for example, resources consumed, labor hours expended, costs incurred, or time elapsed) to the satisfaction of a performance obligation relative to the total expected inputs to the satisfaction of that performance obligation (ie completion milestone). The input method that we use is based on costs incurred.
The following table summarizes net sales by geography for the three and six months ended June 30, 2022, and 2021:
Schedule of net sales by geography
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||||
Sales | |||||||||||||
Domestic | $ | 5,512,173 | $ | 4,645,770 | $ | 10,813,561 | $ | 9,092,559 | |||||
International | 1,034,455 | 882,404 | 1,977,397 | 1,866,566 | |||||||||
Total | $ | 6,546,628 | $ | 5,528,174 | $ | 12,790,958 | $ | 10,959,125 |
LEASES
In May 2017,February 2016, the FinancialFASB issued a standard related to leases to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by the Company for those leases classified as operating leases under current GAAP, while our accounting for capital leases remains substantially unchanged. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The standard became effective for us on January 1, 2019. The standard had a material impact on our balance sheets but did not have a material impact on our statements of operations. See “NOTE 6 — LEASES” for further detail.
ACCOUNTING PRONOUNCEMENTS RECENTLY ADOPTED
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-09—Compensation-Stock Compensation (Topic 718), which provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award.for Income Taxes. The amendments in this update affect any entity that changesASU simplify the terms or conditionsaccounting for income taxes by removing several exceptions including the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The amendments also improve consistent application of a share-based payment award.and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in this updateASU are effective for all entities for annual periods,fiscal years, and interim periods within those annual periods,fiscal years, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued2020. The Company adopted this standard on January 1, 2021, and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this update should be applied prospectively to an award modified on or after the adoption date. Based upon our initial evaluation, we do not expect the adoption of the standard to have a material effectit had no impact on our financial statements, disclosure requirements and methods of adoption.statement disclosures.
- 69 -
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In June 2016, the FASB issued ASU No. 2016-13—2016-13, Financial Instruments – Credit Losses (Topic 326);: Measurement of Credit Losses on Financial Instruments, which amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. This ASU affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in this update are effective for fiscal years beginning after December 15, 2019,2022, including interim periods within those fiscal years. The Company is assessing the impact of the adoption of the ASU on its financial statements, disclosure requirements and methods of adoption.
In May 2014,March 2020, the FASB issued ASU No. 2014-09—Revenue from Contracts with Customers. The ASU clarifies the principles2020-04, Reference Rate Reform (Topic 848), which provided elective amendments for recognizing revenueentities that have contracts, hedging relationships and develops a common revenue standard for U.S. GAAP and International Financial Reporting Standards (“IFRS”)other transactions that removes inconsistencies and weaknesses in revenue requirements, provides a more robust framework for addressing revenue issues, improves comparabilityreference LIBOR or another reference rate expected to be discontinued because of revenue recognition practices across entities, industries, jurisdictions and capital markets, provides more useful information to users of the financial statements through improved disclosure requirements and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer.reference rate reform. The amendments inmay be applied to impacted contracts and hedges prospectively through December 31, 2022. The Company is currently evaluating the impact this update are effective for the annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Full or modified retrospective adoption is required and early application is not permitted. On July 9, 2015, the FASB issued ASU No. 2015-14 Revenue from Contracts with Customers (Topic 606); Deferral of the Effective Date, which (a) delays the effective date of ASU 2014-09, Revenue from Contracts with Customers (Topic 606), by one year to annual periods beginning after December 15, 2017 and (b) allows early adoption of the ASU by all entities as of the original effective date for public entities. We currently anticipate adopting the new standard using the modified retrospective method beginning January 1, 2018. In March 2016, the FASB issued ASU No. 2016-08 Revenue from Contracts with Customers (Topic 606); Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which is intended to improve the operability and understandability of the implementation guidance will have on principal versus agent considerations and the effective date is the same as the requirements in ASU 2014-09. In April 2016, the FASB issued ASU No. 2016-10 Revenue from Contracts with Customers (Topic 606); Identifying Performance Obligations and Licensing, which is intended to clarify identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas and the effective date is the same as the requirements in ASU 2014-09. In May 2016, FASB issued ASU No. 2016-12—Revenue from Contracts with Customers (Topic 606); Narrow-Scope Improvements and Practical Expedients, which is intended to not change the core principle of the guidance in Topic 606, but rather affect only the narrow aspects of Topic 606 by reducing the potential for diversity in practice at initial application and by reducing the cost and complexity of applying Topic 606 both at transition and on an ongoing basis. The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by update 2014-09). In December 2016, the FASB issued ASU No. 2016-20 Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which represents changes to make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. This update is the final, combined version of Proposed Accounting Standards Updates 2016-240 and 2016-320 (both entitled Technical Corrections and Improvements), which have been deleted. We do not expect the adoption of the standard and related amendments to have a material effect on ourits financial condition or results of operations.statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The main difference between the current requirement under GAAP and this ASU is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases. This ASU requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases). Classification will be based on criteria that are largely similar to those applied in current lease accounting. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. This is effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. This ASU must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. We are currently assessing the potential impact of this ASU on our financial statements, disclosure requirements and methods of adoption.
- 7 -
The Company considers the applicability and impact of all recently issued accounting pronouncements. Recent accounting pronouncements not specifically identified in our disclosures are either not applicable to the Company or are not expected to have a material effect on our financial condition or results of operations.
STOCK-BASED COMPENSATIONFAIR VALUE MEASUREMENTS
Fair value is the exit price that would be received to sell an asset or paid to transfer a liability. Fair value is a market-based measurement that should be determined using assumptions that market participants would use in pricing an asset or liability. Valuation techniques used to measure fair value should maximize the use of observable inputs and minimize the use of unobservable inputs. To measure fair value, the Company uses the following fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable:
• | Level 1 – Quoted prices in active markets for identical assets or liabilities. |
• | Level 2 – Inputs other than Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data by correlation or other means. |
• | Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Value is determined using pricing models, discounted cash flow methodologies, or similar techniques and includes instruments for which the determination of fair value requires significant judgment or estimation. |
The carrying amounts of cash and cash equivalents, accounts receivable, prepaid expenses, accounts payable and accrued expenses are considered to be representative of their fair values because of the short-term nature of those instruments. There were no transfers between levels in the fair value hierarchy during the six months ended June 30, 2022.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company maintains a long-term incentive stock benefit plan under which it grants stock optionsreviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and restricted stock to certain directors and key employees.its eventual disposition are less than the carrying amount. The fair value of each option grant is estimatedimpairment loss, if recognized, would be based on the dateexcess of the grant using the Black-Scholes option-pricing model. All options are charged against income at their fair value. The entire compensation expense of the award is recognized over the vesting period. Shares of stock granted are recorded at the faircarrying value of the shares at the grant date,impaired asset over the vesting period.its respective fair value. No impairment losses have been recorded through June 30, 2022.
RECLASSIFICATION
Certain reclassifications have been made to conform prior period data to the current presentation. These reclassifications had no effect on reported net income.
- 10 -
NOTE 2 RELATED PARTY TRANSACTIONS
On December 20, 2013, we executed an agreement effective March 1, 2014, with a Company director, Dr. Mark Baker, to provide clinical research and support services related to new and enhanced applications for the FREEDOM60® Syringe Infusion System. Authorized by the Board of Directors, the agreement provided for payment of 420,000 shares of common stock valued at $0.20 per share over a three-year period. Amortization amounted to zero and $7,000 for the three months ended September 30, 2017 and 2016, respectively, and zero and $14,000 for the seven months ended September 30, 2017 and 2016, respectively.
On October 21, 2015, Cyril Narishkin was appointed to the Board of Directors and Interim Chief Operating Officer of the Company. Also effective October 21, 2015, we entered into a consulting agreement with Mr. Narishkin, to support our expanded management team and accelerate our growth opportunities under his role of Interim Chief Operating Officer. The agreement provided for payment of $16,000 per month for eight days per month, of which half was to be paid in cash and half was to be paid in shares of common stock. Effective January 1, 2016, the agreement provided for the same payment of $16,000 per month, of which seventy-five percent was to be paid in cash and twenty-five percent was to be paid in shares of common stock.
On June 24, 2016, Cyril Narishkin executed a termination and general release agreement, which terminated his previous consulting agreement, and resigned as an officer and director for personal reasons. Mr. Narishkin was compensated for services as a consultant through January 31, 2017 at a monthly rate of $16,000 per month for up to eight days of service a month upon request of the Company. Mr. Narishkin’s compensation was zero and $48,000 for the three months ended September 30, 2017 and 2016, respectively and zero and $166,000 for the seven months ended September 30, 2017 and 2016, respectively. In accordance with the agreement, the Company repurchased 96,542 shares of common stock of the Company owned by Mr. Narishkin at an aggregate purchase price of $43,393 in July 2016.
LEASED AIRCRAFT
The Company leases an aircraft from a company controlled by Andrew Sealfon, the Company’s President and Chief Executive Officer. The lease payments were $3,876 and $5,375 for the three months ended September 30, 2017 and 2016, respectively and $9,544 and $12,542 for the seven months ended September 30, 2017 and 2016, respectively. The original lease agreement has expired and the Company is currently on a month-to-month basis for rental payments.
BUILDING LEASE
Mr. Mark Pastreich, a director, is a principal in the entity that owns the building leased by Company. The Company is in year nineteen of a twenty-year lease. There have been no changes to lease terms since his directorship and none are expected through the life of the current lease. With a monthly lease amount of $11,042, the lease payments were $33,126 for each of the three months ended September 30, 2017 and 2016 and $77,294 for each of the seven months ended September 30, 2017 and 2016. The Company also paid property taxes for the three months ended September 30, 2017 and 2016 in the amount of $12,862 and $12,334, respectively, and $29,098 and $28,159 for the seven months ended September 30, 2017 and 2016, respectively.
We are currently negotiating a lease extension at our current facility as we continue to assess what our strategy for future expansion and growth requirements will be.
- 8 -
NOTE 3 — PROPERTY AND EQUIPMENT
Property and equipment consists of the following at:
|
| September 30, 2017 |
| February 28, 2017 |
| ||
|
|
|
|
|
|
|
|
Land |
| $ | 54,030 |
| $ | 54,030 |
|
Building |
|
| 171,094 |
|
| 171,094 |
|
Furniture, office equipment, and leasehold improvements |
|
| 1,054,971 |
|
| 1,022,942 |
|
Manufacturing equipment and tooling |
|
| 1,074,157 |
|
| 1,003,166 |
|
|
|
| 2,354,252 |
|
| 2,251,232 |
|
Less: accumulated depreciation |
|
| (1,452,177 | ) |
| (1,319,140 | ) |
Property and equipment, net |
| $ | 902,075 |
| $ | 932,092 |
|
Schedule of property and equipment
June 30, 2022 | December 31, 2021 | ||||||
Furniture and office equipment | $ | 867,559 | $ | 818,897 | |||
Construction in progress | 625,296 | — | |||||
Leasehold improvements | 1,590,417 | 556,907 | |||||
Manufacturing equipment and tooling | 2,237,772 | 2,042,675 | |||||
Total property and equipment | 5,321,044 | 3,418,479 | |||||
Less: accumulated depreciation and amortization | (2,497,954 | ) | (2,312,034 | ) | |||
Property and equipment, net | $ | 2,823,090 | $ | 1,106,445 |
Construction in progress and leasehold improvement increases of $0.6 million and $1.0 million, respectively are due to the new corporate headquarters and manufacturing facility buildout.
Depreciation expense was $104,560 and $100,564 for the three months ended June 30, 2022 and 2021, respectively, and $198,644 and $200,967 for the six months ended June 30, 2022 and 2021, respectively.
NOTE 4 3 — COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
Lawyers representing EMED Technologies Corp. (“EMED”) sent RMS a letter dated, May 1, 2013, which alleged that the RMS High-Flo Butterfly design infringed a patent controlled by EMED. RMS disputed this claimThe Company has been and believes that our design did not infringemay again become involved in legal proceedings, claims and that the EMED patent itself was not valid. Under advice of counsel, on September 20, 2013, the Company commencedlitigation arising in the United States District Court for the Eastern Districtordinary course of Californiabusiness. KORU Medical is not presently a Declaratory Judgment action against competitor, EMEDparty to establish the invalidity of one of EMED’s patents and non-infringement of the Company’s needle sets. EMED answered the complaint and asserted patent infringement and unfair business practice counterclaims.any litigation or other legal proceeding that is believed to be material to its financial condition.
The Company responded by asserting its own unfair business practice claims against EMED. Both parties have requested injunctive relief and monetary damages. Discovery is ongoing.
On June 16, 2015, the Court issued what it termed a “narrow” Preliminary Injunction against the Company from making certain statements regarding some of EMED’s products. On June 23, 2016, EMED filed a Motion seeking to have the Company held in contempt, claiming that certain language in the Company’s device labeling does not comply with the injunction. In response to a Show Cause Order, the Company advised the Court that the language in the Company’s labeling that EMED challenged is language that the FDA directed the Company to use in its labeling. The Court discharged the Show Cause Order, effectively rejecting EMED’s contempt argument.
On March 24, 2016, EMED filed a Motion seeking a second Preliminary Injunction prohibiting RMS from sellinghas three of its products in California. The Company opposed that Motion on April 19, 2016. The Order denying this second Preliminary Injunction was issued June 6, 2017.
On August 22, 2017, the Company filed a Motion seeking a Preliminary Injunction prohibiting EMED from making false statements and claims regarding the products of both companies. EMED filed a Response and Objections to Company’s motion on September 21, 2017, and Company filed a subsequent Reply on September 28, 2017. The Court issued a Minute Order on September 22, 2017 vacating a hearing set for October 5, 2017, and stating that if the Court determines oral hearings to be required, the parties will be notified. Presently, the parties are awaiting further action by the Court.
On June 25, 2015, EMED filed a claim of patent infringement for the second of its patents, also directed to the Company’s needle sets, in the United States District Court for the Eastern District of Texas. This second patent is related to the one concerning the Company’s declaratory judgment action. Given the close relationship between the two patents, the Company requested that the Texas suit be transferred to California. Also, based on a validity review of the patent in the U.S. Patent and Trademark Office (“USPTO”), discussed below, the Company requested the Texas suit be stayed. On May 12, 2016, the Court entered an order staying the case until after the Patent Trial and Appeal Board (“PTAB”) at the USPTO issued a final written decision regarding the validity of the patent. On January 12, 2017, the PTAB issued its final written decision invalidating the claims asserted by EMED in the Texas litigation. On January 26, 2017, the Company and EMED requested that the Texas case remain stayed pending EMED’s appeal of the PTAB’s final ruling to the Court of Appeals for the Federal Circuit (“CAFC”).
- 9 -
On September 11, 2015, the Company requested an ex parte reexamination of the patent in the first filed case, and on September 17, 2015 the Company requested an inter partes review (“IPR”) of the patent in the second filed case. On November 20, 2015, the USPTO instituted the ex parte reexamination request having found a substantial new question of patentability concerning EMED’s patent in the first filed case. All EMED claims have been rejected by the USPTO Examiner in a Final Office Action dated July 19, 2017. EMED filed a response to this Final Office Action on September 15, 2017 that is awaiting consideration by the Examiner. Thus, the ex parte reexamination is ongoing. A decision to institute the IPR for EMED’s patent in the second filed case was ordered by the USPTO on February 19, 2016 having determined a reasonable likelihood all claims of the patent may be found to be unpatentable. Oral argument for the IPR was held on November 22, 2016 and a final ruling issued on January 12, 2017. In its final ruling, the PTAB held the claim asserted by EMED against the Company in the second filed case was invalid. EMED appealed the PTAB’s final ruling, and EMED’s opening brief in the CAFC was filed on June 26, 2017. The Company’s response brief was filed on August 3, 2017. EMED filed a reply brief on August 17, 2017. Presently, the parties are awaiting further action by the CAFC.
Although the Company believes it has meritorious claims and defenses in these actions and proceedings, their outcomes cannot be predicted with any certainty. We believe that it is likely both patents will be determined invalid, however, if any of these actions against the Company are successful, they could have a material adverse effect on the Company’s business, results of operations, financial condition and cash flows.
NOTE 5 STOCKHOLDERS’ EQUITY
On September 30, 2015, RMS’s Board of Directors authorized the Company to make open market purchases of up to 2,000,000 shares of the Company’s outstanding Common Stock. The purchases are made through a broker designated by the Company, with price, timing and volume restrictions based on average daily trading volume, consistent with the rules of the Securities and Exchange Commission for such repurchases. As of September 30, 2017, the Company had repurchased 396,606 shares at an average price of $0.45. The management of the Company has decided to discontinue repurchasing its outstanding common stock under the program for an undetermined period of time to utilize cash for capital investments needed to expand the business.
NOTE 6 STOCK-BASED COMPENSATION
On September 30, 2015, the Board of Directors approvedequity incentive plans: the 2015 Stock Option Plan, (“theas amended (the “2015 Plan”) authorizing, the 2021 Omnibus Equity Incentive Plan (the “2021 Plan”), and the Non-Employee Director Compensation Plan. The Company to granthas also issued restricted stock optionas employment inducement awards to certain officers, employees and consultants under the Plan, subject to shareholder approval at the Annual Meeting of Shareholders held on September 6, 2016. The total number of shares of common stock of the Company, par value $0.01 per share (“Common Stock”), with respect to which awards may be granted pursuant to the Plan was not to exceed 2,000,000 shares.its Chief Executive Officer.
On June 29, 2016, the Board of Directors approved the amendment to the Plan increasing the total number of shares of Common Stock to be subject to awards granted under the Plan to 4,000,000 shares. On September 6, 2016, at the Annual Shareholder Meeting, the Company’s shareholders approved the Plan as amended.
As of SeptemberJune 30, 2017,2022, there were outstanding 1,163,000 options awardedto purchase shares of the Company’s common stock outstanding to certain executives, key employees and advisory board membersconsultants under the 2015 Plan, of which were issued during the three months ended June 30, 2022 and were issued during the six months ended June 30, 2022. Additional options may be issued under the 2015 Plan as outstanding options are forfeited, subject to a maximum available for issuance under the 2015 Plan.
On October 21, 2015,The 2021 Plan provides for the Boardgrant of Directorsup to incentive stock options, nonqualified stock options, stock awards, restricted stock awards, restricted stock units and/or stock appreciation rights to employees, consultants and directors. During the three and six months ended June 30, 2022, there were issued and shares of common stock, respectively, as director compensation and options to purchase shares of common stock as executive compensation under the 2021 Plan.
Effective January 1, 2021, each non-employee director of the Company approved non-employee director compensation(other than the Chairman of $25,000 eachthe Board) and Board advisor were eligible to receive of $ annually, . The Chairman of the Board is eligible to receive $ annually, . Effective May 18, 2021, each non-employee director of the Company (other than the Chairman of the Board) and Board advisor are eligible to receive of $ annually, . The Chairman of the Board is eligible to receive $ annually, . From May 18, 2021 to May 6, 2022, non-employee director compensation was paid pursuant to the 2021 Plan. Since May 6, 2022, non-employee director compensation has been paid pursuant to the Non-Employee Director Compensation Plan. All payments were and are pro-rated for partial service.
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2015 STOCK OPTION PLAN, as amended
Time Based Stock Options
The per share weighted average fair value of stock options granted during the sevensix months ended SeptemberJune 30, 20172022 and SeptemberJune 30, 20162021 was $0.26$2.10 and zero,$3.06, respectively. The fair value of each award is estimated on the grant date using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in the sevensix months ended SeptemberJune 30, 20172022 and SeptemberJune 30, 2016.2021. Historical information was the primary basis for the selection of the expected volatility, expected dividend yield and the expected lives of the options. The risk-free interest rate was selected based upon yields of the U.S. Treasury issues with a term equal to the expected life of the option being valued:valued. We have recognized tax benefits associated with stock-based compensation of $99,584 and $9,817 for the six months ended June 30, 2022 and 2021, respectively.
|
| September 30, |
| ||||
|
| 2017 |
| 2016 |
| ||
|
|
|
|
|
|
|
|
Dividend yield |
|
| 0.00% |
|
| — |
|
Expected Volatility |
|
| 70.1-72.2% |
|
| — |
|
Weighted-average volatility |
|
| — |
|
| — |
|
Expected dividends |
|
| — |
|
| — |
|
Expected term (in years) |
|
| 5 Years |
|
| — |
|
Risk-free rate |
|
| 2.30-2.36% |
|
| — |
|
June 30, | |||||||
2022 | 2021 | ||||||
Dividend yield | % | % | |||||
Expected Volatility | % - % | % - % | |||||
Weighted-average volatility | |||||||
Expected dividends | |||||||
Expected term (in years) | |||||||
Risk-free rate | % - % | % - % |
|
| Seven Months Ended September 30, |
| |||||||||
|
| 2017 |
| 2016 |
| |||||||
|
| Shares |
| Weighted |
| Shares |
| Weighted |
| |||
|
|
|
|
|
|
|
|
|
| |||
Outstanding at March 1 |
| 1,345,000 |
| $ | 0.39 |
|
| 1,060,000 |
| $ | 0.37 |
|
Granted |
| 68,000 |
| $ | 0.44 |
|
| — |
| $ | — |
|
Exercised |
| — |
| $ | — |
|
| — |
| $ | — |
|
Forfeited |
| 250,000 |
| $ | 0.36 |
|
| 155,000 |
| $ | 0.36 |
|
Outstanding at September 30 |
| 1,163,000 |
| $ | 0.40 |
|
| 905,000 |
| $ | 0.37 |
|
Options exercisable at September 30, |
| 573,000 |
| $ | 0.38 |
|
| — |
| $ | — |
|
Weighted average fair value of options granted during the period |
| — |
| $ | — |
|
| — |
| $ | — |
|
Stock-based compensation expense |
| — |
| $ | (25,343 | ) |
| — |
| $ | 86,876 |
|
Schedule of status of time based stock options
Six Months Ended June 30, | ||||||||||||
2022 | 2021 | |||||||||||
Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | |||||||||
Outstanding at January 1 | 3,672,500 | $ | 3.42 | 2,922,494 | $ | 2.46 | ||||||
Granted | 295,000 | $ | 2.70 | 1,250,000 | $ | 3.94 | ||||||
Exercised | 618,750 | $ | 1.57 | 1,000,000 | $ | 1.23 | ||||||
Forfeited | 411,250 | $ | 2.94 | 100,000 | $ | 3.94 | ||||||
Outstanding at June 30 | 2,937,500 | $ | 3.80 | 3,072,494 | $ | 3.41 | ||||||
Options exercisable at June 30 | 837,500 | $ | 3.47 | 871,244 | $ | 2.18 | ||||||
Weighted average fair value of options granted during the period | — | $ | 2.10 | — | $ | 3.06 | ||||||
Stock-based compensation expense | — | $ | 1,013,021 | — | $ | 1,528,522 |
Total stock-based compensation expense net of estimated forfeitures for stock option awards totaled $(25,343)was $1,013,021 and $86,876$1,528,522 for the sevensix months ended SeptemberJune 30, 20172022, and September2021, respectively. Cash received from option exercises for the six months ended June 30, 2016,2022, and 2021 was $ and $ , respectively.
The weighted-average grant-date fair value of options granted during the sevensix months ended SeptemberJune 30, 20172022, and September 30, 2016,2021 was $17,961$ and zero,$ , respectively. The total intrinsic value ofThere were options exercised during the sevensix months ended SeptemberJune 30, 20172022, and September during the six months ended June 30, 2016, was zero for both periods.2021.
Range of Exercise Price |
| Number |
| Weighted |
| Weighted |
| Number |
| Weighted |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.36 - $0.46 |
| 1,163,000 |
| 5 years |
| $ | 0.40 |
| 573,000 |
| $ | 0.38 |
|
Schedule of information pertaining to options outstanding
Range of Exercise Price | Number Outstanding | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price | ||||||||
$1.57-$9.49 | 2,937,500 | years | $ | 3.80 | 837,500 | $ | 3.47 |
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As of SeptemberJune 30, 2017,2022, there was $115,384$5,117,429 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 1746 months. The total fair value of shares vested as of June 30, 2022, and June 30, 2021, was $2,149,858 and $1,378,220, respectively.
Performance Based Stock Options
There were no performance based stock options granted during the sevensix months ended SeptemberJune 30, 20172022, and September2021.
Schedule of performance base stock options
Six Months Ended June 30, | |||||||||||
2022 | 2021 | ||||||||||
Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | ||||||||
Outstanding at January 1 | — | $ | — | 1,000,000 | $ | 1.70 | |||||
Granted | — | $ | — | — | $ | — | |||||
Exercised | — | $ | — | — | $ | — | |||||
Forfeited | — | $ | — | — | $ | — | |||||
Outstanding at June 30 | — | $ | — | 1,000,000 | $ | 1.70 | |||||
Options exercisable at June 30 | — | $ | — | — | $ | — | |||||
Weighted average fair value of options granted during the period | — | $ | — | — | $ | — | |||||
Stock-based compensation expense | — | $ | — | — | $ | (408,747 | ) |
Total performance stock-based compensation expense totaled zero and ($408,747) for the six months ended June 30, 2016,2022, and 2021, respectively. All performance based stock options were forfeited as of June 30, 2021, and there was $17,873no unrecognized compensation cost remaining.
2021 STOCK OPTION PLAN, as amended
Time Based Stock Options
The per share weighted average fair value of stock options granted during the six months ended June 30, 2022 and June 30, 2021 was $1.99 and $0 respectively. The fair value of each award is estimated on the grant date using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in the six months ended June 30, 2022 and June 30, 2021. Historical information was the primary basis for the selection of the expected volatility, expected dividend yield and the expected lives of the options. The risk-free interest rate was selected based upon yields of the U.S. Treasury issues with a term equal to the expected life of the option being valued. We have recognized tax benefits associated with stock-based compensation of $8,271 and $0 for the six months ended June 30, 2022 and 2021, respectively.
June 30, | |||||||
2022 | 2021 | ||||||
Dividend yield | % | % | |||||
Expected Volatility | % | % - % | |||||
Weighted-average volatility | |||||||
Expected dividends | |||||||
Expected term (in years) | 0 | ||||||
Risk-free rate | % | % - % |
- 13 -
Schedule of status of time based stock options
Six Months Ended June 30, | ||||||||||||
2022 | 2021 | |||||||||||
Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | |||||||||
Outstanding at January 1 | 0 | $ | 0 | — | $ | — | ||||||
Granted | 475,000 | $ | 2.67 | — | $ | — | ||||||
Exercised | 0 | $ | — | — | $ | — | ||||||
Forfeited | 0 | $ | — | — | $ | — | ||||||
Outstanding at June 30 | 475,000 | $ | 2.67 | — | $ | — | ||||||
Options exercisable at June 30 | 0 | $ | — | — | $ | — | ||||||
Weighted average fair value of options granted during the period | — | $ | 1.99 | — | $ | — | ||||||
Stock-based compensation expense | — | $ | 39,384 | — | $ | — |
Total stock-based compensation expense was $39,384 and $0 for the six months ended June 30, 2022, and 2021, respectively. There were no options exercised during the six months ended June 30, 2022 and June 30, 2021.
The weighted-average grant-date fair value of options granted during the six months ended June 30, 2022, and 2021 was $0.95 million and $0 million, respectively. There were zero options exercised during the six months ended June 30, 2022, and zero during the six months ended June 30, 2021.
Schedule of information pertaining to options outstanding
Range of Exercise Price | Number Outstanding | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price | ||||||||
$2.67 | 475,000 | years | $ | 2.67 | 0 | $ | 0 |
As of June 30, 2022, there was $905,831 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2021 Plan. That cost is expected to be recognized over a weighted-average period of 48 months. The total fair value of shares vested as of June 30, 2022, and June 30, 2021, was zero and zero, respectively.
RESTRICTED STOCK AWARDS
The following table summarizes the activities for our restricted stock awards for the six months ended June 30, 2022, and 2021.
Schedule of activities for restricted stock awards
Six Months Ended June 30, | |||||||||||
2022 | 2021 | ||||||||||
Shares | Weighted Average Grant-Date Fair Value | Shares | Weighted Average Grant-Date Fair Value | ||||||||
Unvested at January 1 | — | $ | — | — | $ | — | |||||
Granted | 1,000,000 | $ | 3.01 | 1,000,000 | $ | 3.01 | |||||
Vested | 50,000 | $ | 3.31 | — | $ | — | |||||
Forfeited/canceled | — | $ | — | — | $ | — | |||||
Unvested at June 30 | 950,000 | $ | 2.99 | 1,000,000 | $ | 3.01 |
- 1114 -
As of June 30, 2022, and 2021, there was $71,563 and $13,888 for the six months ended June 30, 2022 and 2021, respectively.
and $ of unrecognized compensation cost related to unvested employee restricted shares. This amount is expected to be recognized over a weighted-average period of months. We have recognized tax benefits associated with restricted stock award compensation of $NOTE 5 — DEBT OBLIGATIONS
On June 29, 2022, the Company entered into a Loan Modification Extension Agreement (the “Modification Agreement”) with Keybank National Association (“Lender”) to modify its revolving line of credit with Lender in the amount of $3,500,000 (the “Loan”) that was originally made available on April 14, 2020 and renewed on June 24, 2021. Among other things, the Modification Agreement: (i) extends the maturity date of the Loan from June 1, 2022 to June 1, 2023; (ii) changes the interest rate applicable to the Loan from Prime – 1.50% to Prime + 0%; (iii) releases the Company from its obligations under a certain security agreement dated June 24, 2021 pursuant to which the Company had previously granted the Lender a first priority security interest in all equipment, inventory, accounts, instruments, chattel paper and general intangibles of the Company (the “Security Agreement”); and (iv) replaces the Security Agreement with a new pledge security agreement dated June 29, 2022 by and between the Company and Lender (the “Pledge Agreement”), which Pledge Agreement grants Lender a first priority security interest in certain of the Company’s bank accounts as collateral security for the Loan. The Company had no amount outstanding against the line of credit as of June 30, 2022.
On July 26, 2021, the Company entered into a commercial insurance premium finance and security agreement with AON Premium Finance, LLC in the aggregate principal amount of $0.9 million bearing an annual percentage rate of 4.17%, to finance its insurance premiums. Monthly payments were due on the first of each month beginning August 1, 2021 through June 1, 2022. The Company is in the process of renewing the commercial insurance to begin August 1, 2022 through June 1, 2023.
NOTE 6 — LEASES
We have finance and operating leases for our corporate office and certain office and computer equipment. Our two operating leases have remaining lease terms of ten years and 6 months, respectively. Our finance lease, which was entered into in June 2022 has a remaining lease term of 5 years.
The components of lease expense were as follows:
Schedule of components of lease expense
Three Months Ended | Six Months Ended | ||||||||||||
June 30, | June 30, | ||||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||||
Operating lease cost | $ | 161,140 | $ | 37,369 | $ | 239,582 | $ | 75,290 | |||||
Short-term lease cost | 28,579 | 33,548 | 78,288 | 68,437 | |||||||||
Total lease cost | $ | 189,719 | $ | 70,917 | $ | 317,870 | $ | 143,727 | |||||
Finance lease cost: | |||||||||||||
Amortization of right-of-use assets | $ | 5,918 | $ | 794 | $ | 5,918 | $ | 1,589 | |||||
Interest on lease liabilities | 0 | 19 | 0 | 47 | |||||||||
Total finance lease cost | $ | 5,918 | $ | 813 | $ | 5,918 | $ | 1,636 |
Supplemental cash flow information related to leases was as follows:
Schedule of cash flow information related to leases
Six Months Ended | |||||||
June 30, | |||||||
2022 | 2021 | ||||||
Cash paid for amounts included in the measurement of lease liabilities: | |||||||
Operating cash flows from operating leases | $ | 181,544 | $ | 70,363 | |||
Financing cash flows from finance leases | 6,611 | 1,616 |
- 15 -
Supplemental balance sheet information related to leases was as follows:
Schedule of balance sheet information related to leases
June 30, 2022 | December 31, 2021 | ||||||
Operating Leases | |||||||
Operating lease right-of-use assets | $ | 4,190,931 | $ | 95,553 | |||
Operating lease current liabilities | 363,030 | 95,553 | |||||
Operating lease long term liabilities | 3,827,900 | — | |||||
Total operating lease liabilities | $ | 4,190,930 | $ | 95,553 | |||
Finance Leases | |||||||
Property and equipment, at cost | $ | 355,071 | $ | 12,725 | |||
Accumulated depreciation | 5,918 | (12,725 | ) | ||||
Property and equipment, net | $ | 349,153 | $ | — | |||
Finance lease current liabilities | 66,503 | — | |||||
Finance lease long term liabilities | 281,958 | — | |||||
Total finance lease liabilities | $ | 348,461 | $ | — |
June 30, 2022 | December 31, 2021 | ||||
Weighted Average Remaining Lease Term | |||||
Operating leases | 10.2 Years | 0.6 Years | |||
Finance leases | 5 Years | 0 Years | |||
Weighted Average Discount Rate | |||||
Operating leases | 4.04% | 4.75% | |||
Finance leases | 4.25% | 4.75% |
Maturities of lease liabilities are as follows:
Schedule of maturities of lease liabilities
Year Ending December 31, | Operating Leases | Finance Leases | |||||
2022 (excluding the six months ended June 30, 2022) | 273,928 | 39,664 | |||||
2023 | 499,503 | 79,329 | |||||
2024 | 499,503 | 79,329 | |||||
2025 | 499,503 | 79,329 | |||||
2026 | 499,503 | 79,329 | |||||
Thereafter | 2,830,518 | 33,052 | |||||
Total undiscounted lease payments | 5,102,458 | 390,032 | |||||
Less: imputed interest | (911,528 | ) | (41,571 | ) | |||
Total lease liabilities | $ | 4,190,930 | $ | 348,461 |
- 16 -
PART I –— ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.OPERATIONS
This Quarterly Report on Form 10-Q contains, and our officers and representatives may from time to time make, certain “forward-looking” statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) and information relating to us that are based on the beliefs of the management, as well as assumptions made and information currently available. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control.
Our actual results may vary materially from the forward-looking statements made in this report due to important factors such as uncertainties associated with COVID-19, inflation, war and other geopolitical conflicts, customer ordering patterns, availability and costs of raw materials and labor and our ability to recover such costs, our ability to convert inventory to a source of cash, future operating results, unpredictability related togrowth of new patient starts, Food and Drug Administration and foreign authority regulations and the outcome of regulatory audits, introduction of competitive products, limited liquidity,acceptance of and demand for new and existing products, ability to penetrate new markets, success in enforcing and obtaining patents, reimbursement related risks, government regulation of the home health care industry, success of theour research and development effort, expanding the market of FREEDOM60®demand in the SCIg market, availability of sufficient capital to continue operations,if or when needed, dependence on key personnel, and the outcomeimpact of litigationrecent accounting pronouncements, as well as those risks and regulatory investigation.uncertainties described in Part II.— Item IA. “Risk Factors” in this report and from time to time in our past and future reports filed with the Securities and Exchange Commission, including in our Annual Report on Form 10-K for the year ended December 31, 2021 in addition to others. When used in this report, the words “estimate,” “project,” “believe,” “may,” “will,” “anticipate,” “intend,” “expect” and similar expressions are intended to identify forward-looking statements.statements, which include, without limitation, statements regarding transition to our secondary manufacturing source, clearing second quarter 2022 backorders, non-recurrence of the impact from inventory accounting, move of our manufacturing facility, need for additional financing, and 2022 expenses and capital expenditures. Such statements reflect current views with respect to future events based on currently available information and are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. These statements involve risks and uncertainties with respect to the ability to raise capital if or when needed to develop and market new products, acceptance of and demand for new and existing products, ability to penetrate new markets, our success in enforcing and obtaining patents, obtaining required Government approvals, attracting and maintaining key personnel and succeeding in litigation claims that could cause the actual results to differ materially. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. The Company does not undertake any obligation to release publicly any revision to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Throughout this report, “RMS,” the “Company,” “KORU Medical,” “we,” “us” andor “our” referrefers to Repro MedKORU Medical Systems, Inc.
OVERVIEW
On March 22, 2017,The Company designs, manufactures and markets proprietary portable and innovative medical devices primarily for the Boardambulatory infusion market as governed by the United States Food and Drug Administration (the “FDA”) quality and regulatory system and international standards for quality system management.
Our revenues derive from three business sources: (i) domestic core, (ii) international core, and (iii) novel therapies. Our domestic core and international core revenues consist of Directors approved a changesales of our products for the delivery of subcutaneous drugs that are FDA cleared for use with the KORU Medical infusion system, with the primary use being for the delivery for immunoglobulin to treat PIDD and CIDP. Novel therapies consist of product revenues from our infusion system (syringe drivers, tubing and needles) for feasibility/clinical trials (pre-clinical studies, Phase I, Phase II, Phase III) of biopharmaceutical companies in the Company’s fiscal yeardrug development process as well as non-recurring engineering services revenues (“NRE”) received from biopharmaceutical companies to ready or customize the FREEDOM System for clinical and commercial use.
We have experienced and continue to experience supply chain issues and inflationary impacts on raw materials and labor resulting from the COVID-19 pandemic. We cannot predict whether current trends will continue and what impact they may have on our business, our customers or our financial results.
The Company continued its implementation of finished goods manufacturing of our needle and tubing sets to Command Medical Products, a third party contract manufacturing organization, which began in 2021 and expects to complete the implementation before the end from February 28of first quarter 2023. This move is intended to December 31.create a dual source of manufacturing and improve costs.
The Company entered into a lease commencing March 1, 2022 for a new corporate headquarters and manufacturing facility located in Mahwah, NJ. During the three monthsquarter ended SeptemberJune 30, 2017, our total2022, the Company completed the first phase of the move, the headquarters and office staff to the new location, and expects to complete the move of manufacturing before the end of the year.
- 17 -
The Company ended the 2022 second fiscal quarter with $6.5 million in net sales, were up 19.5%a 18.4% increase, compared with $5.5 million in the same period last year withdriven by growth in all three of our business sources.
Gross profit, stated as a percentage of net sales, for the majority ofthree months ended June 30, 2022, was 51.1%, a decline from 58.1% in the increase comingprior year period.
Operating expenses for the three months ended June 30, 2022, were $7.0 million, up from higher volume from our domestic customers. Our gross margin percentage, 61.8%, was not as high as$4.6 million for the same period last year, 63.1%, mostly due to higher production costs related to scrap during quality inspections as we continue to work to implement a nondestructive testing protocol, which we expect to have implemented before the end of the calendar year. Ourdriven primarily by research and development, and for selling, general and administrative costs were 10.4% lower for the three months ended September 30, 2017 compared with the same period last year mostly duenew hires to a significant reduction in legal fees for the quarter related to our litigationsupport commercialization, business development, quality, and regulatory efforts.capabilities.
Our net sales for the seven months ended September 30, 2017 increased 26.0%, versus the same period last year. Part of the increase was the result of backorders of $0.4 million at February 28, 2017 which were filled during the three month period ended June 30, 2017. Excluding these backorders, net sales grew 18.0% driven by growth both domestically and internationally, which included a larger pump order from a national customer in the period and a large return of product related to a market withdrawal last year. Our selling, general and administrative costs were 7.2% lower for the seven months ended September 30, 2017 compared with the same period last year. We saw a significant reduction in legal fees related to our litigation and regulatory efforts. However, we cannot predict whether this trend will continue, nor can we predict the outcome of the litigation or regulatory process. We also had reductions in sales and marketing spend driven by reduced consulting fees that were incurred last year related to our website redesign, public relations, sales training and lead generation efforts and the timing of spend for current year marketing initiatives. Offsetting these savings were increased salary and related benefit costs in our regulatory department due to headcount to support our regulatory compliance requirements and the addition of our Chief Operating Officer.
We continue to expand internationally, generating our first sales in Asia and Africa in the 2017 quarter. The FDA issued a new 510(k) clearance for our Integrated Catch-Up Freedom Syringe Driver System, the first ever fully integrated 510(k) cleared system by the FDA, confirming the science behind the performance of using the dedicated RMS system. It is also the only mechanical infusion system cleared for both subcutaneous drugs (SCIg) and intravenous (antibiotics), clearing the path for customers to invest in one system to meet all their needs. The FDA renewed our Certificate to Foreign Government which is used to communicate to foreign governments that the FDA certified that RMS meets good manufacturing practices and quality system regulations. We received registrations in new countries, launched our new flow controller in Europe and started several clinical trials with drug companies. Furthermore, we have launched a new marketing campaign, redesigned our packaging and entered the social media world to help extend our brand awareness. We plan to continue to focus on global sales growth, cost control and new product development. We have requested an extension on the lease for our facility as we continue to assess what our strategy for future expansion and growth requirements will be.
- 12 -
RESULTS OF OPERATIONS
Three months ended SeptemberJune 30, 20172022, compared to SeptemberJune 30, 20162021
Net Sales
The following table summarizes our net sales for the three months ended SeptemberJune 30, 20172022, and 2016:2021:
|
| Three Months Ended September 30, |
| Change from Prior Year |
| % of Sales |
| |||||||||
|
| 2017 |
| 2016 |
| $ |
| % |
| 2017 |
| 2016 |
| |||
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
| $ | 3,209,345 |
| $ | 2,597,905 |
| $ | 611,440 |
| 23.5% |
| 83.4% |
| 80.6% |
|
International |
|
| 639,993 |
|
| 623,597 |
|
| 16,396 |
| 2.6% |
| 16.6% |
| 19.4% |
|
Total |
| $ | 3,849,338 |
| $ | 3,221,502 |
| $ | 627,836 |
| 19.5% |
|
|
|
|
|
Three Months Ended June 30, | Change from Prior Year | % of Net Sales | ||||||||||||||
2022 | 2021 | $ | % | 2022 | 2021 | |||||||||||
Net Sales | ||||||||||||||||
Domestic Core | $ | 4,996,791 | $ | 4,597,797 | $ | 398,994 | 8.7% | 76.3% | 83.2% | |||||||
International Core | 951,485 | 859,694 | 91,791 | 10.7% | 14.5% | 15.5% | ||||||||||
Novel Therapies | 598,352 | 70,683 | 527,669 | 746.6% | 9.2% | 1.3% | ||||||||||
Total | $ | 6,546,628 | $ | 5,528,174 | $ | 1,018,454 | 18.4% |
Total net sales increased $0.6$1.0 million, or 19.5%18.4%, for the three months ended SeptemberJune 30, 20172022, as compared with the same period last year. Thisyear, driven primarily by higher novel therapies sales for a milestone completion on an NRE innovation development agreement for a large pharmaceutical customer, clinical product sales for an expanded pipeline and increases in average selling prices for our products. Our domestic core business grew by 8.7%, and was impacted by supply chain issues and labor shortages which created backorders estimated to be $0.3 million that are not included in the reported net sales number. The increase in domestic core demand inclusive of backorders was attributed to volume growth was driven mostly by increasedSCIg market growth and label expansions. We define backorders as any non-cancellable open order not shipped before promised delivery date net of rebates, discounts, and other fees. Backorders are expected to be cleared in the third quarter of 2022. International net sales were $1.0 million for the three months ended June 30, 2022, up 10.7% compared with the same period last year due to volume from domestic sales. We continue to concentrate the majority of our effortsgrowth in our infusion product lines, specifically towards new applications in both domestic and international markets. During the quarter we generated our first sales in Asia and Africa, and we continue to pursue registrations in new countries. We also continue to expand our sales efforts into the antibiotic market.several European markets driven by key tender wins.
Gross Profit
Our gross profit for the three months ended SeptemberJune 30, 20172022 and 20162021 is as follows:
|
| Three Months Ended September 30, |
| Change from Prior Year |
| Three Months Ended June 30, | Change from Prior Year | ||||||||||||||||||
|
| 2017 |
| 2016 |
| $ |
| % |
| 2022 | 2021 | $ | % | ||||||||||||
Gross Profit |
| $ | 2,378,658 |
| $ | 2,032,944 |
| $ | 345,714 |
| 17.0% |
| $ | 3,346,173 | $ | 3,210,184 | $ | 135,989 | 4.2% | ||||||
Stated as a Percentage of Net Sales |
|
| 61.8% |
|
| 63.1% |
|
|
|
|
|
| 51.1% | 58.1% |
Gross profit increased $0.3$0.14 million or 17.0%4.2% in the three months ended SeptemberJune 30, 2017,2022, compared to the same period in 2016.2021. This increase in the 2022 second quarter was mostly driven by the increase in net sales of $0.6 million.$1.0 million as described above. Gross profit as a percent of sales decreased to 51.1% compared to 58.1% from the second quarter of 2021. The decline in the gross profit percent was primarily caused by the accelerated amortization of manufacturing variances in the quarter, due to lower levels of finished goods inventory. This accounting treatment contributed 3.8 percentage points to the reduction and we believe is a non-recurring event. In addition, the gross profit percent was impacted by manufacturing variances due to supply chain issues in the first quarter of 2022, amortized in the current period. Further contributing was lower gross profit from NRE revenues. Partially offsetting thisthese unfavorable impacts to the gross profit percent was a nominal impact from an increase were higher production costs related to scrap during quality inspections as we work to implement a nondestructive testing protocol, which we expect to have implemented before the end of the calendar year. Additionally, we still incurred slightly higher payroll costs as we built up inventory.in average selling prices.
Selling, general and administrative and Research and development
Our selling, general and administrative and research and development costs for the three months ended June 30, 2022 and 2021 are as follows:
- 18 -
Three Months Ended June 30, | Change from Prior Year | |||||||||||
2022 | 2021 | $ | % | |||||||||
Selling, general and administrative | $ | 5,530,022 | $ | 4,085,945 | $ | 1,444,077 | 35.3% | |||||
Research and development | 1,303,731 | 386,878 | 916,853 | 237% | ||||||||
$ | 6,833,753 | $ | 4,472,823 | $ | 2,360,930 | 52.8% | ||||||
Stated as a Percentage of Net Sales | 104.4% | 80.9% |
Selling, general and administrative expenses increased $1.4 million, or 35.3%, during the three months ended June 30, 2022 compared to the same period last year, primarily due to $1.2 million in compensation and benefits associated with new hires, $0.15 million in stock compensation, and $0.3 million in recruitment fees, partially offset by lower restructuring costs of $0.2 million.
Research and development expenses increased $0.9 million during the three months ended June 30, 2022 compared with the same period last year, primarily due to $0.3 million in compensation and benefits, and $0.5 million in higher consulting fees to support product development for novel therapies.
Depreciation and amortization
Depreciation and amortization expense increased by 6.3 % to $125,882 in the three months ended June 30, 2022 compared with $118,415 in the three months ended June 30, 2021. We continue to invest in capital assets, mostly related to leasehold improvements, manufacturing, and computer equipment.
Net Loss
Three Months Ended June 30, | Change from Prior Year | |||||||||||
2022 | 2021 | $ | % | |||||||||
Net Loss | $ | (2,921,341 | ) | $ | (1,124,549 | ) | $ | (1,796,792 | ) | 159.8% | ||
Stated as a Percentage of Net Sales | (44.6% | ) | (20.3% | ) |
Our net loss increased $1.8 million in the three months ended June 30, 2022 compared with the same period last year mostly driven by higher operating expenses due to higher selling, general and administrative and research and development expenses. A tax benefit of $0.7 million resulting from the loss was also recorded during the period.
Six months ended June 30, 2022 compared to June 30, 2021
Net Sales
The following table summarizes our net sales for the six months ended June 30, 2022 and 2021:
Six Months Ended June 30, | Change from Prior Year | % of Net Sales | ||||||||||||||
2022 | 2021 | $ | % | 2022 | 2021 | |||||||||||
Net Sales | ||||||||||||||||
Domestic Core | $ | 9,990,327 | $ | 9,010,214 | $ | 980,113 | 10.9% | 78.1% | 82.2% | |||||||
International Core | 1,846,427 | 1,838,600 | 7,827 | 0.4% | 14.4% | 16.8% | ||||||||||
Novel Therapies | 954,204 | 110,311 | 843,893 | 765.0% | 7.5% | 1.0% | ||||||||||
Total | $ | 12,790,958 | $ | 10,959,125 | $ | 1,831,833 | 16.7% |
Total net sales increased $1.8 million or 16.7% for the six months ended June 30, 2022, as compared to the prior year period, driven primarily by higher domestic core net sales of $1.0 million driven by increases in price and volume of pumps and consumables. Further contributing were higher novel therapies sales of $0.8 million compared with last year due to payment upon completion of two interim NRE milestones this year and clinical product sales for an expanded pipeline. Domestic core net sales were impacted by supply chain issues and labor shortages which created backorders estimated to be $0.3 million that are not included in reported net sales. We define backorders as any non-cancellable open order not shipped before promised delivery date net of rebates, discounts, and other fees. Backorders are expected to be cleared in the third quarter of 2022. International core net sales were $1.8 million in the 2022 first six months, relatively flat from the same period last year.
- 19 -
Gross Profit
Our gross profit for the six months ended June 30, 2022 and 2021 is as follows:
Six Months Ended June 30, | Change from Prior Year | |||||||||||
2022 | 2021 | $ | % | |||||||||
Gross Profit | $ | 6,968,478 | $ | 6,442,038 | $ | 526,440 | 8.2% | |||||
Stated as a Percentage of Net Sales | 54.5% | 58.8% |
Gross profit increased $0.53 million or 8.2% in the six months ended June 30, 2022, compared to the same period last year. This increase in the first half of 2022 was mostly driven by the increase in net sales of $1.8 million as described above. Gross profit, stated as a percentage of net sales, was impacted by unfavorable manufacturing variances due to supply chain issues, labor shortages, and higher NRE revenue at lower margins recorded in the first half of 2022, partially offset by increased average selling prices.
Selling, general and administrative and Research and development
Our selling, general and administrative expenses and research and development costs for the threesix months ended SeptemberJune 30, 20172022 and 20162021 are as follows:
|
| Three Months Ended September 30, |
| Change from Prior Year |
| Six Months Ended June 30, | Change from Prior Year | |||||||||||||||||
|
| 2017 |
| 2016 |
| $ |
| % |
| 2022 | 2021 | $ | % | |||||||||||
Selling, general and administrative |
| $ | 1,893,911 |
| $ | 2,114,407 |
| $ | (220,496 | ) | (10.4 | ) | $ | 11,021,235 | $ | 9,078,774 | $ | 1,942,461 | 21.4% | |||||
Research and development |
|
| 14,852 |
|
| 75,198 |
|
| (60,346 | ) | (80.2 | ) | 2,452,086 | 723,719 | 1,728,367 | 238.8% | ||||||||
|
| $ | 1,908,763 |
| $ | 2,189,605 |
| $ | (280,842 | ) | (12.8 | ) | $ | 13,473,321 | $ | 9,802,493 | $ | 3,670,828 | 37.4% | |||||
Stated as a Percentage of Net Sales |
|
| 49.6% |
|
| 68.0% |
|
|
|
|
|
| 105.3% | 89.4% |
Selling, general and administrative expenses decreased $0.2increased $1.94 million, or 10.4%21.4%, during the threesix months ended SeptemberJune 30, 20172022 compared to the same period last year. The decrease was the result of a significant reductionyear, primarily due to $2 million in legalcompensation and benefits related mostly to new hires in Sales, Quality and Regulatory to support our strategic growth initiatives, $0.5 million in recruitment fees, of $0.3$0.2 million in stock compensation, $0.2 million in liability insurance, $0.2 million in travel related to our litigationcosts, and regulatory efforts. We cannot predict whether this trend will continue, nor can we predict the outcome of the litigation. We also had reduced expenses in sales and marketing of $0.1 million mostly due to lower salary and relatedin consulting costs, due to attrition in Europe, lower overall marketing spend due to timing, all partially offset by recruiting feeslower restructuring costs of $1.2 million.
Research and development expenses increased $1.73 million during the six months ended June 30, 2022 compared with the same period last year primarily due to $0.5 million in Europe. Further offsetting the savings were increased costs ofcompensation and benefits, $0.1 million in our regulatory department due to headcountrecruitment fees, and $1.0 million in higher consulting fees to support our regulatory compliance requirements and the addition of our Chief Operating Officer, as well as an increase in bad debt expense of $65,000 related to an international customer. Research andproduct development expense decreased 80.2% due to attrition. We are committed to our research and development activities and are actively searching to replace the open positions.for novel therapies.
- 13 -
Depreciation and amortization
Depreciation and amortization expense increased by 9.3% up0.5% to $77,517$235,134 the six months ended June 30, 2022 compared with $233,888 in the threesix months ended SeptemberJune 30, 2017 compared with $70,9352021. We continue to invest in the three months ended September 30, 2016 as a result of continued investment incapital assets, mostly related to leasehold improvements, manufacturing and computer equipment, testing equipment, patent applications and maintenance of existing patents.equipment.
Net Income/(Loss)Loss
Six Months Ended June 30, | Change from Prior Year | |||||||||||||||||||||
|
| Three Months Ended September 30, |
| Change from Prior Year |
| 2022 | 2021 | $ | % | |||||||||||||
|
| 2017 |
| 2016 |
| $ |
| |||||||||||||||
Net Income/(Loss) |
| $ | 265,754 |
| $ | (153,213 | ) | $ | 418,967 |
| ||||||||||||
Net Loss | $ | (5,458,855 | ) | $ | (2,400,687 | ) | $ | (3,058,168 | ) | 127.4% | ||||||||||||
Stated as a Percentage of Net Sales |
|
| 6.9% |
|
| (4.8% | ) |
|
|
| (42.7% | ) | (21.9% | ) |
Our net incomeloss for the threesix months ended SeptemberJune 30, 20172022 was $0.3$5.5 million compared to a net loss of $0.2$2.4 million for the threesix months ended SeptemberJune 30, 2016. This $0.4 million change was mostly a result of the increase in net sales and the reduced2021, driven by higher selling, general and administrative expenses as described above. Additionally, the Company recognized a $10,419 foreign exchange gain for the period.
Seven months ended September 30, 2017 compared to September 30, 2016
Net Sales
The following table summarizes our net sales for the seven months ended September 30, 2017 and 2016:
|
| Seven Months Ended September 30, |
| Change from Prior Year |
| % of Sales |
| |||||||||
|
| 2017 |
| 2016 |
| $ |
| % |
| 2017 |
| 2016 |
| |||
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
| $ | 7,463,949 |
| $ | 5,885,669 |
| $ | 1,578,280 |
| 26.8% |
| 81.2% |
| 80.7% |
|
International |
|
| 1,724,465 |
|
| 1,408,026 |
|
| 316,439 |
| 22.5% |
| 18.8% |
| 19.3% |
|
Total |
| $ | 9,188,414 |
| $ | 7,293,695 |
| $ | 1,894,719 |
| 26.0% |
|
|
|
|
|
Total net sales increased $1.9 million or 26.0% for the seven months ended September 30, 2017 compared with the same period last year and was driven by both domestic and international sales. Part of the increase was the result of backorders of $0.4 million at February 28, 2017 which were filled during the three month period ended June 30, 2017. Excluding these backorders, net sales grew 18.0%. The launch of a new drug generated increased needle sales as customers built inventory, a larger pump order was received from a national customer in the period and last year included a large return of product related to a market withdrawal. We continue to concentrate the majority of our efforts in our infusion product lines, specifically towards new applications in both domestic and international markets. We generated our first sales in Asia and Africa during the period, and we continue to pursue registrations in new countries. We also continue to expand our sales efforts into the antibiotic market.
Gross Profit
Our gross profit for the seven months ended September 30, 2017 and 2016 is as follows:
|
| Seven Months Ended September 30, |
| Change from Prior Year |
| |||||||
|
| 2017 |
| 2016 |
| $ |
| % |
| |||
Gross Profit |
| $ | 5,648,752 |
| $ | 4,649,770 |
| $ | 998,982 |
| 21.5% |
|
Stated as a Percentage of Net Sales |
|
| 61.5% |
|
| 63.8% |
|
|
|
|
|
|
Gross profit increased $1.0 million or 21.5% in the seven months ended September 30, 2017, compared to the same period in 2016. This increase was driven by the increase in net sales of $1.9 million. Partially offsetting this increase were higher production costs related to scrap during quality inspections as we work to implement a nondestructive testing protocol, higher sterilization costs due to more frequent cycles required to meet demand and backlog and increased shipping costs due to a backlog. We also had higher production salary and related benefits costs from overtime and the addition of a second shift to meet increased demand.
- 14 -
Selling, general and administrative and Research and development
Our selling, general and administrative expenses and research and development costs for the seven months ended September 30, 2017 and 2016 are as follows:expenses.
|
| Seven Months Ended September 30, |
| Change from Prior Year |
| |||||||
|
| 2017 |
| 2016 |
| $ |
| % |
| |||
Selling, general and administrative |
| $ | 4,536,954 |
| $ | 4,887,608 |
| $ | (350,654 | ) | (7.2% | ) |
Research and development |
|
| 47,564 |
|
| 147,136 |
|
| (99,572 | ) | (67.7% | ) |
|
| $ | 4,584,518 |
| $ | 5,034,744 |
| $ | (450,226 | ) | (8.9% | ) |
Stated as a Percentage of Net Sales |
|
| 49.9% |
|
| 69.0% |
|
|
|
|
|
|
Selling, general and administrative expenses decreased $0.4 million, or 7.2%, during the seven months ended September 30, 2017 compared to the same period last year. The decrease was the result- 20 -
Depreciation and amortization
Depreciation and amortization expense increased by 7.4% up to $179,874 in the seven months ended September 30, 2017 compared with $167,513 in the seven months ended September 30, 2016 as a result of continued investment in computer equipment, testing equipment, patent applications and maintenance of existing patents.
Net Income/(Loss)
|
| Seven Months Ended September 30, |
| Change from Prior Year |
| |||||
|
| 2017 |
| 2016 |
| $ |
| |||
Net Income/(Loss) |
| $ | 626,587 |
| $ | (359,095 | ) | $ | 985,682 |
|
Stated as a Percentage of Net Sales |
|
| 6.8% |
|
| (4.9% | ) |
|
|
|
Our net income for the seven months ended September 30, 2017 was $0.6 million compared to a net loss of $0.4 million for the seven months ended September 30, 2016.. This $1.0 million change was mostly a result of the increase in net sales and the reduced selling, general and administrative expenses as described above. Additionally, the Company recognized $65,079 in foreign exchange gain for the period.
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of liquidity is our cash on hand of $3.7$18.3 million as of SeptemberJune 30, 2017, and cash flows from operations.2022. Our principal source of operating cash inflows is from sales of our products and NRE services to customers. Our principal cash outflows relate to the purchase and production of inventory and related costs, and selling, general and administrative expenses. Our cash outflows during the six months ended June 30, 2022 include expenses related to our facility move, which we do not expect to recur in future periods. We expect that equipment financing, the Employee Retention Credit (“ERC”), leasehold improvement credits, and inventory reduction by the end of fiscal year 2022 will reduce the current rate of our cash outflows.
To develop new products, support future growth, achieve operating efficiencies, and maintain product quality, we are continuing to invest in manufacturing technologies, facilities and equipment, and research and development. We estimate expenses to be between $27.0 million and $28.0 million in 2022. We expect our 2022 capital expendituresinvestments for manufacturing and patent costs.leasehold improvements for our new facility to be in aggregate between $1.5 million and $2.0 million, net of pre-approved financing arrangements totaling approximately $0.9 million, which are expected to be fully executed in the third quarter of 2022.
Our inventory position was $6.8 million at June 30, 2022, which reflects an excess of work in process inventory when compared to prior periods that could not be converted to finished goods as a result of supply chain issues and labor shortages. We expect to reduce this excess inventory and convert it to a source of cash by the end of 2022. We further expect to reduce our inventory position when the transition to our secondary manufacturing source is completed, which we expect by March 31, 2023.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act contains a provision known as the Employee Retention Credit (“ERC”), a refundable payroll tax credit for qualified wages paid to retained full-time employees between March 13, 2020, and December 31, 2020. The Consolidations Appropriations Act (CAA), signed into law on December 27, 2020, significantly modified and expanded the provisions of the ERC to include wages paid in 2021. For 2021, the ERC provides employers a refundable federal tax credit equal to 70% of the first $10,000 of qualified wages and benefits paid to retained employees between January 1, 2021, and December 31, 2021. Credits may be claimed immediately by reducing payroll taxes sent to the Internal Revenue Service. To the extent that the credit exceeds employment withholdings, the employer may request a refund of prior taxes paid. The Company determined that it qualified for this credit and anticipated utilizing benefits under this act to aid its liquidity position and as a result recorded a receivable of $0.7 million as of December 31, 2021. As of June 30, 2022, the credit has not been received.
We believeexpect that as of September 30, 2017,our cash on hand and cash expected to be generatedflows from future operating activitiesoperations will be sufficient to fundmeet our operations, including further research and development and capital expenditures forrequirements at least through the next 12 months. We believe the FREEDOM System continues to find a solid following in the SCIg market, and this market is expected to continue to increase both domestically and internationally. In addition, we expect many of the SCIg providers, and others, will see benefit in using the FREEDOM System for additional uses such as antibiotics, chemotherapeutics, and pain medications.
We continue to be in litigation with a competitor, EMED Technologies Corp. (“EMED”) and have incurred a significant amount of legal fees in connection with that process. Although the Company believes it has meritorious claims and defenses in the actions and proceedings, their outcomes cannot be predicted with any certainty. If any of these actions against the Company are successful, they could have a material adverse effectContinued execution on the Company’s business, results of operations, financial condition and cash flows.
- 15 -
On September 30, 2015, RMS’s Board of Directors authorizedour longer-term strategic plan may require the Company to make opentake on additional debt or raise capital through issuance of equity, or a combination of both in the periods post 12/31/2023. Our future capital requirements may vary from those currently planned and will depend on many factors, including our rate of sales growth, the timing and extent of spending on various strategic initiatives, our international expansion, the timing of new product introductions, market purchasesacceptance of upour solutions, and overall economic conditions including inflation and the potential impact of global supply imbalances and COVID-19 on the global financial markets. To the extent that current and anticipated future sources of liquidity are insufficient to 2,000,000 shares of the Company’s outstanding Common Stock. The purchases are made through a broker designated byfund our future business activities and requirements, we may be required to seek additional equity or debt financing sooner. There can be no assurance the Company with price, timing and volume restrictions based on average daily trading volume, consistent withwill be able to obtain the rules offinancing or raise the Securities and Exchange Commission for such repurchases. As of September 30, 2017, the Company had repurchased 396,606 shares at an average price of $0.45. The management of the Company has decidedcapital required to discontinue repurchasingfund its outstanding Common Stock for an undetermined period of time to utilize cash for capital investments needed to expand the business.operations or planned expansion.
Cash Flows
The following table summarizes our cash flows:
|
| Seven Months Ended |
| Seven Months Ended |
| ||
Net cash provided by/(used in) operating activities |
| $ | 531,281 |
| $ | (212,676 | ) |
Net cash used in investing activities |
| $ | (163,479 | ) | $ | (230,044 | ) |
Net cash used in financing activities |
| $ | (19,360 | ) | $ | (120,577 | ) |
Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | ||||||
Net cash used in operating activities | $ | (4,625,314 | ) | $ | (2,776,150 | ) | |
Net cash used in investing activities | $ | (1,928,829 | ) | $ | (167,136 | ) | |
Net cash (used in)/provided by financing activities | $ | (515,194 | ) | $ | 2,166,478 |
Operating Activities
Net cash provided by operating activities of $0.5 million for the seven months ended September 30, 2017 was primarily attributable to net income of $0.6 million, non-cash charges of $0.2 million for depreciation and amortization of long lived tangible and intangible assets, a decrease in tax receivable of $0.1 million, and an increase in tax liability of $0.1 million. Offsetting these were an increase in inventory of $0.2 million as we built up finished goods inventory after our backorder position at February 28, 2017 and the reduction of accounts payable of $0.4 million which was the result of the payment of legal fees accrued at February 28, 2017.
Net cash used in operating activities of $0.2$4.6 million for the sevensix months ended SeptemberJune 30, 20162022 was primarily attributabledue to the operatingnet loss of $0.4$5.5 million, working capital changes which included an increase in inventory of $0.7 million, an increase in accounts receivable of $0.3$0.5 million, and a decrease in accrued expenses of $0.7 million, offset by an increase in accounts payable of $1.2 million, an increase in prepaid expenseaccrued payroll of $0.1$0.5 million, mostly due to an income tax receivable of $0.1 million due to the loss in the period and thea decrease in prepaids of $0.3 million related to insurance payments. Further contributing were deferred tax liabilityassets of $0.2 million. Partially offsetting$1.3 million increased for book to tax differences related to stock option expense. Offsetting these were primarily non-cash charges for stock-based compensation of $0.2$1.6 million, forand depreciation and amortization of long lived tangible$0.2 million.
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Net cash used in operating activities of $2.8 million for the six months ended June 30, 2021 was primarily due to the net loss of $2.4 million, working capital changes which included an increase in inventory of $0.7 million related to the transition of manufacturing to our secondary source, and intangible assets,a decrease in accrued expenses of $0.8 million most of which was non-cash activity related to the issuance of common stock based compensation expensein settlement of $0.1 million andlitigation, offset by an increase in accounts payable of $0.4 million mostly dueand a decrease in prepaids of $0.3 million related to raw material purchasesinsurance payments. Further contributing were deferred tax assets of $1.2 million increased for book to tax differences related to stock option expense. Offsetting these were primarily non-cash charges for stock-based compensation of $1.3 million, and legal fees.depreciation and amortization of $0.2 million.
Investing Activities
Our netNet cash used in investing activities of $1.9 million for the six months ending June 30, 2022, was for capital expenditures for manufacturing and office equipment for our corporate office and manufacturing facilities move.
Net cash used in investing activities of $0.2 million for the sevensix months ended Septemberending June 30, 20172021, was for capital expenditures for manufacturing and September 30, 2016 was primarily attributable to our continued investment in capital assets mostly related to production and for new patent applications and maintenance of existing patents.office equipment.
Financing Activities
Our net cashThe $0.5 million used in financing activities was $19,360 and $120,577 for the sevensix months ended SeptemberJune 30, 20172022, is from payments on our indebtedness for a note payable for insurance premium financing.
The $2.2 million provided by financing activities for the six months ended June 30, 2021, is from options exercised and September 30, 2016, respectively, and were a result of the repurchase of shares of the Company’s common stock.
FDA
RMS had an inspection by the FDA in June 2015, which included, among other items, a review of customer complaints, quality controls, quality assurance and documentation. The FDA inspection was then expanded as a consequence of an extensive “trade complaint” filed on behalf of a competitor which resulted innon-cash activity related to the issuance of an FDA FORM 483. Eight months later, on February 29, 2016 we received a Warning Letter. Since that time the Company has successfully addressed all quality and regulatory issues citedcommon stock in settlement of litigation.
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
Refer to “NOTE 1 — NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” in the Warning Letter and the FDA FORM 483. On October 2, 2017, the FDA conducted another inspection as a last step in closing the Warning Letter. We anticipate the Warning Letter to be closed in the near future.
On April 19, 2017, the FDA renewed our Certificate to Foreign Governmentaccompanying financial statements, which is used to communicate to foreign governments that the FDA confirmed and certified that RMS meets U.S. FDA good manufacturing practices and quality system regulations.incorporated herein by reference.
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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-09—Compensation-Stock Compensation (Topic 718), which provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments in this update affect any entity that changes the terms or conditions of a share-based payment award. The amendments in this update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this update should be applied prospectively to an award modified on or after the adoption date. Based upon our initial evaluation, we do not expect the adoption of the standard to have a material effect on our financial statements, disclosure requirements and methods of adoption.
In June 2016, FASB issued ASU No. 2016-13—Financial Instruments – Credit Losses (Topic 326); Measurement of Credit Losses on Financial Instruments, which amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. This ASU affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is assessing the impact of the adoption of the ASU on its financial statements, disclosure requirements and methods of adoption.
In May 2014, the FASB issued ASU No. 2014-09—Revenue from Contracts with Customers. The ASU clarifies the principles for recognizing revenue and develops a common revenue standard for U.S. GAAP and International Financial Reporting Standards (“IFRS”) that removes inconsistencies and weaknesses in revenue requirements, provides a more robust framework for addressing revenue issues, improves comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets, provides more useful information to users of the financial statements through improved disclosure requirements and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. The amendments in this update are effective for the annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Full or modified retrospective adoption is required and early application is not permitted. On July 9, 2015, the FASB issued ASU No. 2015-14 Revenue from Contracts with Customers (Topic 606); Deferral of the Effective Date, which (a) delays the effective date of ASU 2014-09, Revenue from Contracts with Customers (Topic 606), by one year to annual periods beginning after December 15, 2017 and (b) allows early adoption of the ASU by all entities as of the original effective date for public entities. We currently anticipate adopting the new standard using the modified retrospective method beginning January 1, 2018. In March 2016, the FASB issued ASU No. 2016-08 Revenue from Contracts with Customers (Topic 606); Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations and the effective date is the same as the requirements in ASU 2014-09. In April 2016, the FASB issued ASU No. 2016-10 Revenue from Contracts with Customers (Topic 606); Identifying Performance Obligations and Licensing, which is intended to clarify identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas and the effective date is the same as the requirements in ASU 2014-09. In May 2016, FASB issued ASU No. 2016-12—Revenue from Contracts with Customers (Topic 606); Narrow-Scope Improvements and Practical Expedients, which is intended to not change the core principle of the guidance in Topic 606, but rather affect only the narrow aspects of Topic 606 by reducing the potential for diversity in practice at initial application and by reducing the cost and complexity of applying Topic 606 both at transition and on an ongoing basis. The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by update 2014-09). In December 2016, the FASB issued ASU No. 2016-20 Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which represents changes to make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. This update is the final, combined version of Proposed Accounting Standards Updates 2016-240 and 2016-320 (both entitled Technical Corrections and Improvements), which have been deleted. We do not expect the adoption of the standard and related amendments to have a material effect on our financial condition or results of operations.
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In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The main difference between the current requirement under GAAP and this ASU is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases. This ASU requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases). Classification will be based on criteria that are largely similar to those applied in current lease accounting. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. This is effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. This ASU must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. We are currently assessing the potential impact of this ASU on our financial statements, disclosure requirements and methods of adoption.
The Company considers the applicability and impact of all recently issued accounting pronouncements. Recent accounting pronouncements not specifically identified in our disclosures are either not applicable to the Company or are not expected to have a material effect on our financial condition or results of operations.
PART I – ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.RISK
Not Applicable.applicable.
PART I – ITEM 4. CONTROLS AND PROCEDURES.PROCEDURES
The Company’s management, including the Company’s Principal Executive Officer and Principal Financial Officer, havehas evaluated the effectiveness of the Company’s disclosure controls and procedures as such is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluations, the Principal Executive Officer and Principal Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) is accumulated and communicated to the Company’s management, including its Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There have been no changes in the Company’s internal control over financial reporting during the quarterthree months ended SeptemberJune 30, 2017,2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
PART II – ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.1A. RISK FACTORS
Our operations and financial results are subject to various risks and uncertainties, including those described in “PART 1, ITEM 1A. RISK FACTORS” in our Annual Report on Form 10-K for the year ended December 31, 2021 and below in this Quarterly Report on Form 10-Q, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common stock.
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Rising inflation may materially impact our financial operations or results of operations.
Inflation has increased in the first half of 2022 and is expected to continue to increase for the near future. Inflationary factors, such as increases in the cost of our raw materials, manufacturing, interest rates, labor and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, we expect to experience effects beginning in the second half of 2022, which could have a material impact on our financial condition or results of operations.
ITEM 5. OTHER INFORMATION
On October 21, 2015,August 1, 2022, the Company amended and restated its annual cash bonus incentive plan for executives that was adopted in 2020, the Management Incentive Compensation Plan, to serve as an annual cash bonus incentive plan applicable to all full-time, salaried employees and such other employees designated by the Chief Executive Officer, now known as the Annual Incentive Compensation Plan.
On August 1, 2022, the Company’s Board of Directors eliminated the position of Chief Operating Officer and, therefore, removed Manuel Marques as an officer of the Company. Also on August 1, 2022, the Company approved non-employee director compensation of $25,000 each annually,gave Mr. Marques notice pursuant to be paid quarterly half in cash and half in common stock, beginning September 1, 2015. The number of shares to be issued each quarter is calculated based upon the closing price of the common stock on the last day of each fiscal quarter as reported by the OTCQX. The Company issued 53,196 and 97,314 shares of common stock to its non-employee directors during the three and seven month period ended September 30, 2017, respectively.
The Company issued 42,553 and 56,108 shares of common stock to Dr. Fred Ma, its Chief Medical Officer, under the terms of his employment agreement duringthat his employment with the three and seven month period endedCompany would terminate, as a result of the position elimination, effective September 30, 2017, respectively.2022 post an orderly transition.
On September 30, 2015, RMS’sAugust 2, 2022, the Company appointed Christopher Pazdan, previously Vice President of Quality Assurance and Regulatory Affairs, to the newly created position of Senior Vice President, Operations. Mr. Pazdan will continue accountability for Quality Assurance and Regulatory Affairs, in addition to his new responsibility for Operations. In connection with such appointment, Mr. Pazdan entered into an amended employment agreement to increase his annual bonus potential from 35% to 40% of his base salary and, subject to approval of the Compensation Committee of the Company’s Board of Directors authorized the Company(the “Committee”), will receive options to make open market purchases of up to 2,000,000purchase 100,000 shares of the Company’s outstanding Common Stock.common stock at an exercise price on the date of issuance (which will be the 1st or 15th day of the month following the Committee’s approval). The purchases are made through a broker designatedoptions will be subject to vesting conditions based on certain performance criteria to be determined by the Company, with price, timingCommittee.
Mr. Pazdan has served as the Company’s Vice President of Quality Assurance and volume restrictions based on average daily trading volume, consistent withRegulatory Affairs since September 2021. From February 2019 to the rules of the Securities and Exchange Commission for such repurchases. As of September 30, 2017,time he joined the Company, had repurchased 396,606 sharesMr. Pazdan served first as Vice President, QA/RA and then Vice President, Quality Assurance at an average priceHillrom, a global medical technology company. Prior to that time, from January 2017 to May 2018, he served as Sr. Director, Corporate QA/RA at Hillrom. From May 2018 to February 2019, Mr. Pazdan held the position of $0.45. There were no repurchasesDirector, Operations Quality at Abbott Laboratories. Mr. Pazdan previously worked at Becton Dickinson, Wockhardt and Rexam Pharma. Mr. Pazdan received his bachelor’s degree in engineering from the University of common stock by the Company during the quarter ended September 30, 2017. The management of the Company has decided to discontinue repurchasing its outstanding Common Stock for an undetermined period of time to utilize cash for capital investments needed to expand the business. There is no expiration date to the repurchase plan.Illinois at Urbana-Champaign.
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All of the securities issued by the Company as described in this Item were issued in reliance on the exemption from registration under Section 4(2) under the Securities Act of 1933, as amended.
PART II – ITEM 6. EXHIBITS.
* In accordance with Regulation S-T, the Interactive Data Files in Exhibit 101 to the Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed”.
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SIGNATURESTable of Contents
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.
KORU MEDICAL SYSTEMS, INC. | |
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August 3, 2022 | /s/ Linda Tharby |
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(Principal Executive Officer) | |
| /s/ |
(Principal Financial Officer) |
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