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 September 30, 20192020
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 MED SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
New York | 13-3044880 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
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|
24 Carpenter Road, Chester, New York | 10918 |
(Address of Principal Executive Offices) | (Zip Code) |
(845) 469-2042
(Registrant’s telephone number, including area code)
N/ANot Applicable
(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 | Name of each exchange on which registered |
| 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] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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). Yes [X] NoYes [ ] 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 [X] |
|
| 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] No
As of November 6, 2019, 39,501,87012, 2020, 43,942,888 shares of common stock, $0.01 par value per share, were outstanding, which excludes 2,737,231 shares of treasury stock.
REPRO MED SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020
TABLE OF CONTENTS
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PART | ||
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ITEM 1. | Financial Statements (Unaudited) |
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| Balance Sheets as of September 30, | 3 |
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| Statements of Operations | 4 |
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| Statements of Cash Flows | 5 |
Statements of Stockholders’ Equity for the three and nine months ended September 30, 2020 and 2019 | 6-7 | |
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| 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. | Quantitative and Qualitative Disclosures About Market Risk |
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ITEM 4. | Controls and Procedures |
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PART | ||
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ITEM 1. | Legal Proceedings |
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ITEM 1A. | Risk Factors |
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ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
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ITEM 6. | Exhibits |
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Signatures | 27 |
- 2 -
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
REPRO MED SYSTEMS, INC.
BALANCE SHEETS
(Unaudited)
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| September 30, |
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| 2019 |
| December 31, |
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| September 30, |
| December 31, |
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| (Unaudited) |
| 2018 |
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| 2020 |
| 2019 |
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ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
| $ | 5,129,028 |
| $ | 3,738,803 |
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| $ | 32,433,811 |
| $ | 5,870,929 |
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Certificates of deposit |
| — |
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| 1,517,927 |
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Accounts receivable less allowance for doubtful accounts of $36,609 at September 30, 2019 and $37,500 at December 31, 2018 |
| 3,546,634 |
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| 1,425,854 |
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Accounts receivable less allowance for doubtful accounts of $24,676 and $32,645 at September 30, 2020 and December 31, 2019, respectively |
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| 3,736,596 |
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| 3,234,521 |
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Inventory |
| 2,738,682 |
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| 2,103,879 |
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| 5,633,139 |
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| 2,388,477 |
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Prepaid expenses |
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| 453,151 |
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| 246,591 |
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| 844,496 |
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| 387,396 |
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TOTAL CURRENT ASSETS |
| 11,867,495 |
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| 9,033,054 |
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| 42,648,042 |
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| 11,881,323 |
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Property and equipment, net |
| 636,928 |
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| 858,781 |
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| 1,260,675 |
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| 611,846 |
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Patents, net of accumulated amortization of $273,846 and $239,581 at September 30, 2019 and December 31, 2018, respectively |
| 786,164 |
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| 632,156 |
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Patents, net of accumulated amortization of $335,686 and $288,967 at September 30, 2020 and December 31, 2019, respectively |
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| 884,635 |
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| 807,135 |
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Right of use assets, net |
| 406,954 |
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| — |
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| 271,679 |
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| 373,734 |
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Deferred tax asset |
| — |
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| 1,466 |
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| 349,609 |
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| 188,241 |
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Other assets |
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| 19,582 |
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| 19,582 |
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| 19,812 |
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| 19,582 |
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TOTAL ASSETS |
| $ | 13,717,123 |
| $ | 10,545,039 |
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| $ | 45,434,452 |
| $ | 13,881,861 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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CURRENT LIABILITIES |
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Deferred capital gain - current |
| $ | — |
| $ | 3,763 |
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Accounts payable |
| 874,977 |
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| 453,498 |
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| 1,363,070 |
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| 572,656 |
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Accrued expenses |
| 1,178,702 |
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| 688,649 |
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| 3,051,582 |
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| 1,296,612 |
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Accrued payroll and related taxes |
| 111,359 |
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| 421,714 |
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| 440,144 |
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| 190,265 |
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Accrued tax liability |
| — |
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| 16,608 |
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| 363,158 |
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| 204,572 |
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Finance lease liability - current |
| 3,242 |
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| — |
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Operating lease liability - current |
| 135,275 |
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| — |
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Finance lease liability – current |
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| 3,026 |
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| 5,296 |
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Operating lease liability – current |
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| 140,450 |
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| 136,888 |
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TOTAL CURRENT LIABILITIES |
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| 2,303,555 |
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| 1,584,232 |
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| 5,361,430 |
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| 2,406,289 |
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Deferred tax liability |
| 133,097 |
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| — |
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Finance lease liability, net of current portion |
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| 414 |
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| 2,646 |
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Operating lease liability, net of current portion |
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| 271,679 |
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| — |
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| 131,229 |
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| 236,846 |
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TOTAL LIABILITIES |
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| 2,708,331 |
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| 1,584,232 |
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| 5,493,073 |
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| 2,645,781 |
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Commitments and contingencies (Refer to Note 3) |
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STOCKHOLDERS’ EQUITY |
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Common stock, $0.01 par value; 75,000,000 shares authorized, 42,228,658 and 40,932,911 shares issued, 39,491,427 and 38,195,680 shares outstanding at September 30, 2019 and December 31, 2018, respectively |
| 422,286 |
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| 409,329 |
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Common stock, $0.01 par value; 75,000,000 shares authorized, 46,671,807 and 42,239,788 shares issued, 43,934,576 and 39,502,557 shares outstanding at September 30, 2020 and December 31, 2019, respectively |
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| 466,718 |
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| 422,398 |
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Additional paid-in capital |
| 5,985,636 |
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| 4,595,214 |
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| 35,331,483 |
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| 6,293,069 |
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Treasury stock, 2,737,231 shares at September 30, 2020 and December 31, 2019, respectively, at cost |
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| (344,204 | ) |
| (344,204 | ) | |||||||
Retained earnings |
| 4,945,074 |
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| 4,300,468 |
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| 4,487,382 |
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| 4,864,817 |
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| 11,352,996 |
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| 9,305,011 |
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Less: Treasury stock, 2,737,231 shares at September 30, 2019 and December 31, 2018, respectively, at cost |
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| (344,204 | ) |
| (344,204 | ) | |||||||
TOTAL STOCKHOLDERS’ EQUITY |
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| 11,008,792 |
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| 8,960,807 |
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| 39,941,379 |
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| 11,236,080 |
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
| $ | 13,717,123 |
| $ | 10,545,039 |
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| $ | 45,434,452 |
| $ | 13,881,861 |
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TheSee accompanying notes are an integral part of these financial statementsNotes to Financial Statements.
- 3 -
REPRO MED SYSTEMS, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
(Unaudited)
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| For the |
| For the |
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| Three Months Ended |
| Nine Months Ended |
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| September 30, |
| September 30, |
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| September 30, |
| September 30, |
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| 2019 |
| 2018 |
| 2019 |
| 2018 |
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| 2020 |
| 2019 |
| 2020 |
| 2019 |
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NET SALES |
| $ | 6,617,397 |
| $ | 4,547,187 |
| $ | 16,940,487 |
| $ | 13,082,737 |
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| $ | 6,080,315 |
| $ | 6,617,397 |
| $ | 20,119,228 |
| $ | 16,940,487 |
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Cost of goods sold |
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| 2,234,489 |
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| 1,655,619 |
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| 6,033,961 |
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| 4,985,761 |
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| 2,139,592 |
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| 2,234,489 |
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| 7,480,415 |
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| 6,033,961 |
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Gross Profit |
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| 4,382,908 |
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| 2,891,568 |
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| 10,906,526 |
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| 8,096,976 |
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| 3,940,723 |
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| 4,382,908 |
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| 12,638,813 |
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| 10,906,526 |
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OPERATING EXPENSES |
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Selling, general and administrative |
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| 2,441,381 |
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| 1,917,127 |
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| 6,976,684 |
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| 5,513,727 |
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| 3,075,169 |
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| 2,441,381 |
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| 9,039,980 |
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| 6,976,684 |
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Litigation |
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| 864,009 |
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| 286,487 |
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| 2,481,471 |
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| 592,787 |
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| 675 |
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| 864,009 |
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| 2,446,747 |
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| 2,481,471 |
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Research and development |
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| 170,260 |
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| 126,923 |
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| 450,454 |
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| 160,735 |
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| 390,416 |
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| 170,260 |
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| 944,637 |
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| 450,454 |
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Depreciation and amortization |
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| 82,774 |
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| 78,345 |
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| 252,594 |
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| 228,900 |
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| 115,637 |
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| 82,774 |
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| 297,801 |
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| 252,594 |
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Total Operating Expenses |
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| 3,558,424 |
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| 2,408,882 |
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| 10,161,203 |
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| 6,496,149 |
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| 3,581,897 |
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| 3,558,424 |
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| 12,729,165 |
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| 10,161,203 |
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Net Operating Profit |
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| 824,484 |
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| 482,686 |
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| 745,323 |
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| 1,600,827 |
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Net Operating Profit/(Loss) |
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| 358,826 |
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| 824,484 |
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| (90,352 | ) |
| 745,323 |
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Non-Operating Income/(Expense) |
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Loss on currency exchange |
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| (9,358 | ) |
| (5,842 | ) |
| (20,283 | ) |
| (16,256 | ) | |||||||||||||
Gain on disposal of fixed asset, net |
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| — |
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| 6,000 |
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| 49,740 |
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| 6,000 |
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Interest, net and other income, net |
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| 23,368 |
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| 6,972 |
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| 59,091 |
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| 13,088 |
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TOTAL OTHER INCOME |
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| 14,010 |
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| 7,130 |
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| 88,548 |
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| 2,832 |
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Gain/(Loss) on currency exchange |
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| 1,927 |
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| (9,358 | ) |
| (11,164 | ) |
| (20,283 | ) | |||||||||||||
Gain on disposal of fixed assets, net |
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| 22,113 |
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| — |
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| 16,591 |
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| 49,740 |
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Interest income, net |
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| 9,662 |
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| 23,368 |
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| 23,690 |
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| 59,091 |
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TOTAL OTHER INCOME/(EXPENSE) |
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| 33,702 |
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| 14,010 |
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| 29,117 |
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| 88,548 |
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INCOME BEFORE TAXES |
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| 838,494 |
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| 489,816 |
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| 833,871 |
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| 1,603,659 |
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INCOME/(LOSS) BEFORE INCOME TAXES |
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| 392,528 |
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| 838,494 |
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| (61,235 | ) |
| 833,871 |
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Income Tax Expense |
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| (186,681 | ) |
| (103,263 | ) |
| (189,265 | ) |
| (337,956 | ) |
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| (143,353 | ) |
| (186,681 | ) |
| (316,200 | ) |
| (189,265 | ) |
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NET INCOME |
| $ | 651,813 |
| $ | 386,553 |
| $ | 644,606 |
| $ | 1,265,703 |
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NET INCOME/(LOSS) |
| $ | 249,175 |
| $ | 651,813 |
| $ | (377,435 | ) | $ | 644,606 |
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NET INCOME PER SHARE |
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NET INCOME/(LOSS) PER SHARE |
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Basic |
| $ | 0.02 |
| $ | 0.01 |
| $ | 0.02 |
| $ | 0.03 |
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| $ | 0.01 |
| $ | 0.02 |
| $ | (0.01 | ) | $ | 0.02 |
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Diluted |
| $ | 0.02 |
| $ | 0.01 |
| $ | 0.02 |
| $ | 0.03 |
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| $ | 0.01 |
| $ | 0.02 |
| $ | (0.01 | ) | $ | 0.02 |
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WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING |
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Basic |
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| 39,022,298 |
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| 38,194,682 |
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| 38,534,021 |
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| 38,104,393 |
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| 43,914,542 |
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| 39,022,298 |
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| 41,326,815 |
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| 38,534,021 |
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Diluted |
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| 39,298,408 |
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| 38,985,684 |
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| 38,734,083 |
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| 38,875,737 |
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| 44,119,511 |
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| 39,298,408 |
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| 41,326,815 |
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| 38,734,083 |
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TheSee accompanying notes are an integral part of these financial statementsNotes to Financial Statements.
- 4 -
REPRO MED SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)(Unaudited)
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| For the Nine Months Ended |
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|
| September 30, |
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| 2019 |
| 2018 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net Income |
| $ | 644,606 |
| $ | 1,265,703 |
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Adjustments to reconcile net income to net cash (used in)/provided by operating activities: |
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Stock based compensation expense |
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| 897,300 |
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| 154,925 |
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Depreciation and amortization |
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| 252,594 |
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| 228,900 |
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Deferred capital gain - building lease |
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| (3,763 | ) |
| (16,860 | ) |
Deferred taxes |
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| 134,563 |
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| 10,834 |
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Gain on disposal of fixed asset |
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| (49,740 | ) |
| (6,000 | ) |
Changes in operating assets and liabilities: |
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(Increase)/Decrease in accounts receivable |
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| (2,120,780 | ) |
| 351,319 |
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Increase in inventory |
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| (634,803 | ) |
| (290,722 | ) |
Increase in prepaid expense and other assets |
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| (206,560 | ) |
| (177,346 | ) |
Increase in accounts payable |
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| 421,479 |
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| 137,521 |
|
Decrease in accrued payroll and related taxes |
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| (310,355 | ) |
| (213,700 | ) |
Increase/(Decrease) in accrued expense |
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| 490,053 |
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| (30,823 | ) |
Decrease in accrued tax liability |
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| (16,608 | ) |
| (60,852 | ) |
NET CASH (USED IN)/PROVIDED BY OPERATING ACTIVITIES |
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| (502,014 | ) |
| 1,352,899 |
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|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
Payments for capital expenditures |
|
| (158,193 | ) |
| (188,006 | ) |
Purchase of certificate of deposit |
|
| — |
|
| (1,500,000 | ) |
Payments for patents |
|
| (188,274 | ) |
| (137,858 | ) |
Proceeds on disposal of fixed asset |
|
| 217,821 |
|
| 6,000 |
|
Proceeds from certificates of deposit |
|
| 1,517,927 |
|
| 92,266 |
|
NET CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES |
|
| 1,389,281 |
|
| (1,727,598 | ) |
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
Stock issuances |
|
| 508,900 |
|
| 51,250 |
|
Payment for cancelled shares |
|
| (2,820 | ) |
| (1,755 | ) |
Finance lease |
|
| (3,122 | ) |
| — |
|
NET CASH PROVIDED BY FINANCING ACTIVITIES |
|
| 502,958 |
|
| 49,495 |
|
|
|
|
|
|
|
|
|
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS |
|
| 1,390,225 |
|
| (325,204 | ) |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
| 3,738,803 |
|
| 3,974,536 |
|
CASH AND CASH EQUIVALENTS, END OF PERIOD |
| $ | 5,129,028 |
| $ | 3,649,332 |
|
|
|
|
|
|
|
|
|
Supplemental Information |
|
|
|
|
|
|
|
Cash paid during the periods for: |
|
|
|
|
|
|
|
Interest |
| $ | 280 |
| $ | — |
|
Taxes |
| $ | 103,465 |
| $ | 378,000 |
|
|
|
|
|
|
|
|
|
NON-CASH FINANCING AND INVESTING ACTIVITIES |
|
|
|
|
|
|
|
Issuance of common stock as compensation |
| $ | 256,525 |
| $ | 103,333 |
|
|
| Nine Months Ended |
| ||||
|
| September 30, |
| ||||
|
| 2020 |
| 2019 |
| ||
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
Net (Loss)/Income |
| $ | (377,435 | ) | $ | 644,606 |
|
Adjustments to reconcile net (loss)/income to net cash provided by/(used in) operating activities: |
|
|
|
|
|
|
|
Stock-based compensation expense |
|
| 1,191,146 |
|
| 897,300 |
|
Stock-based litigation settlement expense |
|
| 1,285,102 |
|
| — |
|
Depreciation and amortization |
|
| 297,801 |
|
| 252,594 |
|
Deferred capital gain - building lease |
|
| — |
|
| (3,763 | ) |
Deferred taxes |
|
| (161,368 | ) |
| 134,563 |
|
Gain on disposal of fixed assets |
|
| (16,591 | ) |
| (49,740 | ) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
Increase in accounts receivable |
|
| (502,075 | ) |
| (2,120,780 | ) |
Increase in inventory |
|
| (3,244,662 | ) |
| (634,803 | ) |
Increase in prepaid expenses and other assets |
|
| (457,330 | ) |
| (206,560 | ) |
Increase in accounts payable |
|
| 790,414 |
|
| 421,479 |
|
Increase/(Decrease) in accrued payroll and related taxes |
|
| 249,879 |
|
| (310,355 | ) |
Increase in accrued expenses |
|
| 1,754,970 |
|
| 490,053 |
|
Increase/(Decrease) in accrued tax liability |
|
| 158,586 |
|
| (16,608 | ) |
NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES |
|
| 968,437 |
|
| (502,014 | ) |
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
Purchases of property and equipment |
|
| (908,323 | ) |
| (158,193 | ) |
Purchases of patents |
|
| (124,216 | ) |
| (188,274 | ) |
Proceeds from disposal of property and equipment |
|
| 25,000 |
|
| 217,821 |
|
Proceeds from certificate of deposit |
|
| — |
|
| 1,517,927 |
|
NET CASH (USED IN)/PROVIDED BY INVESTING ACTIVITIES |
|
| (1,007,539 | ) |
| 1,389,281 |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
Proceeds from issuance of equity |
|
| 26,606,486 |
|
| 508,900 |
|
Payments for cancelled shares |
|
| — |
|
| (2,820 | ) |
Borrowings from indebtedness |
|
| 4,976,508 |
|
| — |
|
Payments on indebtedness |
|
| (4,976,508 | ) |
| — |
|
Payments on finance lease liability |
|
| (4,502 | ) |
| (3,122 | ) |
NET CASH PROVIDED BY FINANCING ACTIVITIES |
|
| 26,601,984 |
|
| 502,958 |
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS |
|
| 26,562,882 |
|
| 1,390,225 |
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
| 5,870,929 |
|
| 3,738,803 |
|
CASH AND CASH EQUIVALENTS, END OF PERIOD |
| $ | 32,433,811 |
| $ | 5,129,028 |
|
|
|
|
|
|
|
|
|
Supplemental Information |
|
|
|
|
|
|
|
Cash paid during the periods for: |
|
|
|
|
|
|
|
Interest |
| $ | 27,698 |
| $ | 280 |
|
Income taxes |
| $ | 318,983 |
| $ | 103,465 |
|
TheSee accompanying notes are an integral part of these financial statementsNotes to Financial Statements.
- 5 -
REPRO MED SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
|
|
|
| Additional |
|
|
|
|
| Total |
| |||||||
|
| Common Stock |
| Paid-in |
| Retained |
| Treasury |
| Stockholders’ |
| |||||||
|
| Shares |
| Amount |
| Capital |
| Earnings |
| Stock |
| Equity |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three and Nine Months Ended September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 31, 2019 |
| 42,239,788 |
| $ | 422,398 |
| $ | 6,293,069 |
| $ | 4,864,817 |
| $ | (344,204 | ) | $ | 11,236,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock-based compensation |
| 9,189 |
|
| 92 |
|
| 59,910 |
|
| — |
|
| — |
|
| 60,002 |
|
Compensation expense related to stock options |
| — |
|
| — |
|
| 300,966 |
|
| — |
|
| — |
|
| 300,966 |
|
Cancellation of common stock |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Issuance upon options exercised |
| 175,000 |
|
| 1,750 |
|
| 83,750 |
|
| — |
|
| — |
|
| 85,500 |
|
Net income |
| — |
|
| — |
|
| — |
|
| 449,428 |
|
| — |
|
| 449,428 |
|
BALANCE, MARCH 31, 2020 |
| 42,423,977 |
| $ | 424,240 |
| $ | 6,737,695 |
| $ | 5,314,245 |
| $ | (344,204 | ) | $ | 12,131,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock-based compensation |
| 7,999 |
|
| 80 |
|
| 59,922 |
|
| — |
|
| — |
|
| 60,002 |
|
Compensation expense related to stock options |
| — |
|
| — |
|
| 363,851 |
|
| — |
|
| — |
|
| 363,851 |
|
Litigation settlement options |
| — |
|
| — |
|
| 347,008 |
|
| — |
|
| — |
|
| 347,008 |
|
Litigation settlement share issuance |
| 95,238 |
|
| 952 |
|
| 937,142 |
|
| — |
|
| — |
|
| 938,094 |
|
Issuance upon options exercised |
| 519,156 |
|
| 5,192 |
|
| 5,189 |
|
| — |
|
| — |
|
| 10,381 |
|
Capital raise |
| 3,593,750 |
|
| 35,937 |
|
| 26,436,043 |
|
| — |
|
| — |
|
| 26,471,980 |
|
Net loss |
| — |
|
| — |
|
| — |
|
| (1,076,038 | ) |
| — |
|
| (1,076,038 | ) |
BALANCE, JUNE 30, 2020 |
| 46,640,120 |
| $ | 466,401 |
| $ | 34,886,850 |
| $ | 4,238,207 |
| $ | (344,204 | ) | $ | 39,247,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock-based compensation |
| 6,681 |
|
| 67 |
|
| 59,935 |
|
| — |
|
| — |
|
| 60,002 |
|
Compensation expense related to stock options |
| — |
|
| — |
|
| 346,323 |
|
| — |
|
| — |
|
| 346,323 |
|
Issuance upon options exercised |
| 25,006 |
|
| 250 |
|
| (250 | ) |
| — |
|
| — |
|
| — |
|
Capital raise |
| — |
|
| — |
|
| 38,625 |
|
| — |
|
| — |
|
| 38,625 |
|
Net income |
| — |
|
| — |
|
| — |
|
| 249,175 |
|
| — |
|
| 249,175 |
|
BALANCE, SEPTEMBER 30, 2020 |
| 46,671,807 |
| $ | 466,718 |
| $ | 35,331,483 |
| $ | 4,487,382 |
| $ | (344,204 | ) | $ | 39,941,379 |
|
See accompanying Notes to Financial Statements.
- 6 -
REPRO MED SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
|
|
|
| Additional |
|
|
|
|
| Total |
| |||||||
|
| Common Stock |
| Paid-in |
| Retained |
| Treasury |
| Stockholders’ |
| |||||||
|
| Shares |
| Amount |
| Capital |
| Earnings |
| Stock |
| Equity |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three and Nine Months Ended September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 31, 2018 |
| 40,932,911 |
| $ | 409,329 |
| $ | 4,595,214 |
| $ | 4,300,468 |
| $ | (344,204 | ) | $ | 8,960,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock-based compensation |
| 8,914 |
|
| 89 |
|
| 176,161 |
|
| — |
|
| — |
|
| 176,250 |
|
Compensation expense related to stock options |
| — |
|
| — |
|
| 121,875 |
|
| — |
|
| — |
|
| 121,875 |
|
Repurchase of shares |
| (2,000 | ) |
| (20 | ) |
| (2,800 | ) |
| — |
|
| — |
|
| (2,820 | ) |
Net loss |
| — |
|
| — |
|
| — |
|
| (85,390 | ) |
| — |
|
| (85,390 | ) |
BALANCE, MARCH 31, 2019 |
| 40,939,825 |
| $ | 409,398 |
| $ | 4,890,450 |
| $ | 4,215,078 |
| $ | (344,204 | ) | $ | 9,170,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock-based compensation |
| 116,386 |
|
| 1,164 |
|
| 35,484 |
|
| — |
|
| — |
|
| 36,648 |
|
Compensation expense related to stock options |
| — |
|
| — |
|
| 194,765 |
|
| — |
|
| — |
|
| 194,765 |
|
Issuance upon options exercised |
| 65,000 |
|
| 650 |
|
| 24,050 |
|
| — |
|
| — |
|
| 24,700 |
|
Net income |
| — |
|
| — |
|
| — |
|
| 78,183 |
|
| — |
|
| 78,183 |
|
BALANCE, JUNE 30, 2019 |
| 41,121,211 |
| $ | 411,212 |
| $ | 5,144,749 |
| $ | 4,293,261 |
| $ | (344,204 | ) | $ | 9,505,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock-based compensation |
| 12,447 |
|
| 124 |
|
| 43,502 |
|
| — |
|
| — |
|
| 43,626 |
|
Compensation expense related to stock options |
| — |
|
| — |
|
| 324,135 |
|
| — |
|
| — |
|
| 324,135 |
|
Issuance upon warrants exercised |
| 1,000,000 |
|
| 10,000 |
|
| 440,000 |
|
| — |
|
| — |
|
| 450,000 |
|
Issuance upon options exercised |
| 95,000 |
|
| 950 |
|
| 33,250 |
|
| — |
|
| — |
|
| 34,200 |
|
Net income |
| — |
|
| — |
|
| — |
|
| 651,813 |
|
| — |
|
| 651,813 |
|
BALANCE, SEPTEMBER 30, 2019 |
| 42,228,658 |
| $ | 422,286 |
| $ | 5,985,636 |
| $ | 4,945,074 |
| $ | (344,204 | ) | $ | 11,008,792 |
|
See accompanying Notes to Financial Statements.
- 7 -
REPRO MED SYSTEMS, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 — NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
REPRO MED SYSTEMS, INC. (the “Company”,“Company,” “KORU Medical”Medical,” “we,” “us” or “we”“our”) designs, manufactures and markets proprietary portable and innovative medical devices primarily for the ambulatory 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. The Company operates as one segment.
FISCAL YEAR END
The Company’s fiscal year end is December 31.
BASIS OF PRESENTATION
The accompanying unaudited financial statements as of September 30, 2019, 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, 2019, and the results of operations and cash flow for the three and nine month periods ended September 30, 2019, and 2018.
The results of operations for the nine months ended September 30, 2019 and 2018 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 Company’s annual report on Form 10-K for the year ended December 31, 2019 (“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 notes theretoreflect all adjustments which are in the opinion of management necessary for a fair statement of the Company and management’s discussion and analysis ofCompany’s financial condition andposition, results of operations, included in the Company’s Annual Reportand cash flows for the twelve months ended December 31, 2018, as filed withperiods presented. All such adjustments are of a normal, recurring nature. The Company’s results of operations and cash flows for the Securitiesinterim periods are not necessarily indicative of the results of operations and Exchange Commission on Form 10-K.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.
CERTIFICATESCERTIFICATE OF DEPOSIT
The certificate of deposit was recorded at cost plus accrued interest. The certificate of deposit earned interest at a rate of 1.73% and matured in May 2019, at which time the funds were moved into a money market account earning interest at 2.25%. Effective September 24, 2019, the money market account interest rate dropped to 1.85%.2019.
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.
- 6 -
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 20162017 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.
- 8 -
STOCK-BASED COMPENSATION
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.
NET INCOME PER COMMON SHARE
Basic earnings per share are computed on the weighted average of common shares outstanding during each year. Diluted earnings per share include only an increase in the weighted average shares by the common shares issuable upon exercise of employee and consultant stock options. See “NOTE 4 — STOCK-BASED COMPENSATION” for further detail.
|
| Three Months Ended |
| |||||
|
| September 30, 2020 |
|
| September 30, 2019 |
| ||
|
|
|
|
|
|
| ||
Net income |
| $ | 249,175 |
|
| $ | 651,813 |
|
|
|
|
|
|
|
|
|
|
Weighted Average Outstanding Shares: |
|
|
|
|
|
|
|
|
Outstanding shares |
|
| 43,914,542 |
|
|
| 39,022,298 |
|
Option shares includable |
|
| 204,969 |
|
|
| 276,110 |
|
|
|
| 44,119,511 |
|
|
| 39,298,408 |
|
|
|
|
|
|
|
|
|
|
Net income per share |
|
|
|
|
|
|
|
|
Basic |
| $ | 0.01 |
|
| $ | 0.02 |
|
Diluted |
| $ | 0.01 |
|
| $ | 0.02 |
|
|
| Nine Months Ended |
| |||||
|
| September 30, 2020 |
|
| September 30, 2019 |
| ||
|
|
|
|
|
|
| ||
Net (loss)/income |
| $ | (377,435 | ) |
| $ | 644,606 |
|
|
|
|
|
|
|
|
|
|
Weighted Average Outstanding Shares: |
|
|
|
|
|
|
|
|
Outstanding shares |
|
| 41,326,815 |
|
|
| 38,534,021 |
|
Option shares includable |
|
| — | (a) |
|
| 200,062 |
|
|
|
| 41,326,815 |
|
|
| 38,734,083 |
|
|
|
|
|
|
|
|
|
|
Net income per share |
|
|
|
|
|
|
|
|
Basic |
| $ | (0.01 | ) |
| $ | 0.02 |
|
Diluted |
| $ | (0.01 | ) |
| $ | 0.02 |
|
__________
(a) Option shares of 203,121 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.
REVENUE RECOGNITION
The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09—2014-09, Revenue from Contracts with Customers, which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. We adopted this ASU effective January 1, 2018 on a full retrospective basis. Adoption of this standard did not result in significant changes to our accounting policies, business processes, systems or controls, or have a material impact on our financial position, results of operations and cash flows or related disclosures. As such, prior period financial statements were not recast.
- 9 -
The Company’s revenues result from the sale of assembled products. 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 volumegrowth rebates are variable consideration and are recorded as a reduction of revenue in the same period the related sales are recorded or when it’sit 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.
The following table summarizes net sales by geography for the three and nine months ended September 30, 2020 and 2019:
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
| $ | 5,372,536 |
| $ | 5,856,203 |
| $ | 17,459,212 |
| $ | 14,308,994 |
|
International |
|
| 707,779 |
|
| 761,194 |
|
| 2,660,016 |
|
| 2,631,493 |
|
Total |
| $ | 6,080,315 |
| $ | 6,617,397 |
| $ | 20,119,228 |
| $ | 16,940,487 |
|
LEASES
In February 2016, the FASB issued a new 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 U.S. 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 income statements.statements of operations. See NOTE 7 LEASES.“NOTE 6 — LEASES” for further detail.
ACCOUNTING PRONOUNCEMENTS RECENTLY ADOPTED
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure for Fair Value Measurement. The amendments in this ASU modify the disclosure requirements on fair value measurements in Topic 820 based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of this ASU. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. The Company adopted this standard on January 1, 2020 and it had no impact on our financial statement disclosures.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption of the amendments in this ASU is permitted, including adoption in any interim period, for all entities. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company adopted this new accounting guidance on January 1, 2020, on a prospective basis. The implementation of this standard did not have a material impact on the Company’s operating results, cash flows, financial condition or related disclosures.
- 710 -
RECENTLY ISSUED 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, 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 August 2018,December 2019, the FASB issued ASU No. 2018-13 Fair Value Measurement2019-12, Income Taxes (Topic 820)740): Disclosure Framework – Changes toSimplifying the DisclosureAccounting for Fair Value Measurement.Income Taxes. The amendments in this ASU modifysimplify the disclosure requirements on fair value measurements in Topic 820 based on the concepts in the Concepts Statement,accounting for income taxes by removing several exceptions including the considerationexception 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 costs and benefits.simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of this ASU. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date.2020. The Company is assessing the impact of the adoption of the ASU on its financial statements, disclosure requirements and methods of adoption.
In August 2018,March 2020, the FASB issued ASU No. 2018-15 Intangibles – Goodwill2020-04, Reference Rate Reform, which provided elective amendments for entities that have contracts, hedging relationships and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption of the amendments in this ASU is permitted, including adoption in any interim period, for all entities. The amendments in this ASU shouldmay be applied either retrospectively orto impacted contracts and hedges prospectively to all implementation costs incurred after the date of adoption.through December 31, 2022. The Company is assessingcurrently evaluating the impact of the adoption of the ASUthis guidance will have on its financial statements, disclosure requirements and methods of adoption.statements.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTSMEASUREMENTS
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 reported in the balance sheet forof cash trade receivables,and cash equivalents, accounts receivable, prepaid expenses, accounts payable and accrued expenses approximateare 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 based onhierarchy during the short-term maturity of these instruments.nine months ended September 30, 2020.
ACCOUNTING FOR- 11 -
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment at least annuallywhenever events or whenever thechanges in circumstances and situations change such that there is an indicationindicate that the carrying amountsamount of the assets may not be fully recoverable. AsAn impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than the carrying amount. The impairment loss, if recognized, would be based on the excess of the carrying value of the impaired asset over its respective fair value. No impairment losses have been recorded through September 30, 2019, the Company does not believe that any of its assets are impaired.2020.
RECLASSIFICATION
Certain reclassifications have been made to conform prior period data to the current presentation. These reclassifications had no effect on reported net income.
- 8 -
NOTE 2 RELATED PARTY TRANSACTIONS
LEASED AIRCRAFT
From 1992 to 2018, we leased an aircraft from AMI Aviation, Inc., of which our former President and Chief Executive Officer, Andrew Sealfon, was a majority shareholder. The lease payments were zero and $1,292 for the three months ended September 30, 2019 and 2018, respectively and zero and $9,045 for the nine months ended September 30, 2019 and 2018 respectively. Upon the termination of Mr. Sealfon as President and Chief Executive Officer on July 25, 2018, the Company ceased leasing this aircraft.
BUILDING LEASE
Mr. Pastreich, a former director, is a principal in the entity that owns the building leased by us for our corporate headquarters and manufacturing facility at 24 Carpenter Road, Chester, New York 10918. On February 28, 2019, we completed year twenty of a twenty year lease with monthly lease payments of $11,042. On November 14, 2017, we executed a lease extension, which calls for six month extensions beginning March 1, 2019 with the option to renew six times at a monthly lease amount of $12,088. The Company exercised three additional renewal options commencing September 1, 2019 through February 28, 2021.
The lease payments were $36,264 and $33,126 for the three months ended September 30, 2019 and 2018, respectively, and $106,700 and $99,378 for the nine months ended September 30, 2019 and 2018, respectively. The Company also paid property taxes in the amount of $13,749 and $12,431 for the three months ended September 30, 2019 and 2018, respectively and $39,165 and $37,863 for the nine months ended September 30, 2019 and 2018, respectively.
NOTE 3— PROPERTY AND EQUIPMENT
Property and equipment consists of the following at:
|
| September 30, 2019 |
| December 31, 2018 |
| ||
|
|
|
|
|
|
|
|
Land |
| $ | — |
| $ | 54,030 |
|
Building |
|
| — |
|
| 171,094 |
|
Furniture, office equipment, and leasehold improvements |
|
| 1,120,416 |
|
| 1,058,507 |
|
Manufacturing equipment and tooling |
|
| 1,309,172 |
|
| 1,279,865 |
|
|
|
| 2,429,588 |
|
| 2,563,496 |
|
Less: accumulated depreciation |
|
| (1,792,660 | ) |
| (1,704,715 | ) |
Property and equipment, net |
| $ | 636,928 |
| $ | 858,781 |
|
On May 21, 2019, the Company sold the house it owned for $0.2 million.
|
| September 30, 2020 |
| December 31, 2019 |
| ||
Furniture, office equipment, and leasehold improvements |
| $ | 1,291,985 |
| $ | 1,135,107 |
|
Manufacturing equipment and tooling |
|
| 1,856,881 |
|
| 1,295,978 |
|
Total property and equipment |
|
| 3,148,866 |
|
| 2,431,085 |
|
Less: accumulated depreciation |
|
| (1,888,191 | ) |
| (1,819,239 | ) |
Property and equipment, net |
| $ | 1,260,675 |
| $ | 611,846 |
|
Depreciation expense was $69,740$99,071 and $68,991$69,740 for the three months ended September 30, 20192020 and 2018,2019, respectively, and $218,328$251,084 and $202,975$218,328 for the nine months ended September 30, 20192020 and 2018,2019, respectively.
NOTE 4 3 — COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
We areThe Company has been and may again become involved in several lawsuitslegal proceedings, claims and litigation arising in the ordinary course of business. Except as described below, KORU Medical is not presently a party to any litigation or other legal proceeding that is believed to be material to its financial condition.
Litigation
Refer to Form 10-Q for the quarterly period ended June 30, 2020 regarding the dismissed case with our principal competitor, EMED Technologies Corporation (“EMED”). EMED has alleged that our needle sets infringe various patents controlled by EMED. Certain of these lawsuits also allege antitrust violations, unfair business practices, and various other business tort claims. We are vigorously defending against all of the lawsuits brought by EMED. Although no assurances can be given, we believe we have meritorious defenses to all of EMED’s claims.
- 9 -
The initial case involving EMED was filed by us in the United States District Court for the Eastern District of California on September 20, 2013 (the “California case”), in response to a letter from EMED claiming patent infringement by us, and seeking a declaratory judgment establishing the invalidity of the patent referenced in the letter – EMED’s US patent 8,500,703 – “‘703.” EMED answered the complaint and asserted patent infringement of the ‘703 patent and several counterclaims relating generally to claims of unfair business practices against us. We responded by adding several claims against EMED, generally relating to claims of unfair business practices on EMED’s part. Both parties have requested injunctive relief and monetary damages in unspecified amounts. On June 16, 2015, the California court entered a preliminary injunction against KORU Medical making certain statements regarding what products were cleared by the FDA for use, or could be safely used, with KORU Medical’s Freedom60 pump, without voiding the product warranty. On September 11, 2015, we requested an ex parte reexamination of the ‘703 patent by the US Patent and Trademark Office (“USPTO”). The ex parte reexamination resulted in a Final Office Action dated July 19, 2017 rejecting all of EMED’s claims in the patent. On January 25, 2018, EMED filed an Appeal Brief with a Petition for Revival, which was accepted. On April 9, 2018, the USPTO denied EMED’s request for reconsideration of the order rejecting all claims in the ‘703 patent. On June 26, 2019, the Examiner responded to EMED’s appeal brief and maintained all of the final rejections. Both the California case and EMED’s appeal of the USPTO rejections are pending.
The second court case was filed by EMED in the United States District Court for the Eastern District of Texas on June 25, 2015, claiming patent infringement on another of its patents (US 8,961,476 – “‘476”), by our needle sets, and seeking unspecified monetary damages (“ED Texas ‘476 matter”). This ‘476 patent is related to the now rejected EMED ‘703 patent.
On September 17, 2015, we requested an inter partes review (“IPR”) of the ‘476 patent, and in response to our request, the Court entered an order staying the ED Texas ‘476 matter until after the Patent Trial and Appeal Board (“PTAB”) of the USPTO made a decision regarding the validity of the patent. On January 12, 2017, the PTAB issued its Final Written Decision in our favor, invalidating all but one (“dependent Claim 9”) of the claims in the ‘476 patent. EMED appealed the PTAB’s ruling to the United States Court of Appeals for the Federal Circuit, which affirmed the PTAB’s Final Written Decision in our favor on April 3, 2018. On April 18, 2018, EMED filed a petition for en banc rehearing, which was denied. On August 16, 2018, EMED petitioned the United States Supreme Court for a Writ of Certiorari to review the Federal Circuit’s upholding the PTAB’s Final Written Decision. On October 29, 2018 the United States Supreme Court denied EMED’s Petition for a Writ of Certiorari, thus finally affirming the PTAB’s invalidation of ‘476, save for one dependent claim.
Following the PTAB’s Final Written Decision in the IPR regarding the ‘476 patent, EMED filed a new patent application claiming priority back to the application that issued as ‘703, which is the patent at issue in the California case. Submitted for accelerated examination, this new application issued as US 9,808,576 – “‘576” on November 7, 2017. On this same date, EMED filed a new case (the “third case”) in the United States District Court for the Eastern District of Texas claiming patent infringement of ‘576, also directed to our needle sets, and seeking unspecified damages and a preliminary injunction against marketing and sales of our needle sets. We filed a Motion to Dismiss or Transfer Venue to the United States District Court for the Southern District of New York (“SDNY”), which resulted in the transfer of the third case to SDNY (“SDNY ‘576 matter”) on May 30, 2018.
On April 23, 2018, EMED filed a new civil case (the “fourth case”) against us in the United States District Court for the Eastern District of Texas asserting antitrust, defamation and unfair business practice claims, and seeking unspecified damages, similar to those previously presented in the California case, described above. The fourth case also names Andrew Sealfon, then President and CEO of KORU Medical, individually as a defendant. As the result of a hearing on November 14, 2018, on December 7, 2018, the Court entered an order transferring the fourth case to the United States District Court for the Eastern District of California (the “California Court”). The California Court set an initial schedule for a preliminary motion phase and on August 30, 2019 EMED filed a second amended complaint. On September 30, 2019, KORU Medical and Sealfon filed a motion to dismiss that complaint, and Sealfon filed a separate motion to dismiss the case as to him for lack of jurisdiction. Ultimately, we expect this case to be coordinated or consolidated with the California case, or dismissed, as the California Court sees fit.
At the same hearing on November 14, 2018, the Texas Court granted EMED leave to amend its infringement contentions, following the IPR decision invalidating all but one claim of the ‘476 patent, in order to assert infringement of that sole remaining claim, namely dependent Claim 9. The Texas Court’s order allowing EMED’s amendment of its infringement contentions against us was entered on December 7, 2018.
- 10 -
The ED Texas ‘476 matter proceeded under EMED’s amended infringement contention to incorporate the surviving dependent Claim 9, which incorporates Claims 1 and 8 of the ‘476 patent, meaning that, to prove infringement on the part of us, EMED must prove more elements of infringement than it originally charged against us. In April 2019, EMED served its damages expert’s report opining that EMED’s past infringement damages amount to $1.5 million, and in May KORU Medical served its damages expert’s rebuttal report opining that EMED’s expert miscalculated damages which if properly calculated would amount to less than $100,000. The Texas Court had set a trial date of August 19, 2019, for the trial of the ED Texas ‘476 matter. On June 24, 2019, the Texas Court Magistrate Judge issued a Report and Recommendation decision finding no infringement, literally or under the doctrine of equivalents, by KORU Medical’s accused products. EMED filed its objections on June 26, 2019. On June 28, 2019 the United States District Judge for the Eastern District of Texas issued a Final Judgment in favor of KORU Medical and adopted the decision of the Magistrate Judge that was issued on June 24, 2019, overruled EMED’s objections, awarded court costs to KORU Medical, and dismissed the case. A final judgment has been entered. KORU Medical has submitted its Bill of Costs for approximately $16,000 and moved to declare the case exceptional and for recovery of its attorney fees and expenses of approximately $2.3 million in defense of EMED’s assertion of the ‘476 Patent. EMED has objected to our Bill of Costs, opposed the motion for fees, and filed a notice of appeal of the non-infringement judgment to the Court of Appeals for the Federal Circuit. On September 16, 2019, EMED filed its opening appeal brief. KORU Medical plans to oppose EMED’s appeal. The ED Texas court has stayed proceedings in the district court until the appeal process is completed. KORU Medical’s fee motion remains pending lifting of the stay.
The SDNY ‘576 matter proceeded in the New York court through claim construction on the ‘576 Patent, whereupon KORU Medical sought permission from the New York court to file a motion for summary judgement, to which EMED objected. The New York court granted KORU Medical’s request, and on July 10, 2019, KORU Medical filed its motion for summary judgement. EMED opposed that motion, and on August 30, 2019, the New York court granted summary judgement, and dismissed the lawsuit. A final judgement has been entered. KORU Medical has submitted a Bill of Costs for approximately $1,500, to which EMED has objected, and has moved the New York court to declare the case exceptional and for recovery of its attorney fees and expenses of at least $1.16 million. EMED has opposed that motion, which is now fully briefed and has been referred to a United States District Court Magistrate Judge to prepare a report and recommendation. EMED also has appealed the New York court’s judgment of non-infringement to the Court of Appeals of the Federal Circuit, which matter is pending. EMED’s opening appeal brief is currently due November 8, 2019.
As is required by the respective Courts in both the SDNY ‘576 matter and the ED Texas ‘476 matter, the parties are engaging in settlement discussions and have conducted a court-sponsored mediation session, which did not result in settlement.
Although we believe KORU Medical has meritorious claims and defenses in all of the above-described actions and proceedings, their outcomes cannot be predicted with any certainty. If any of these actions against us are successful, they could have a material adverse effect on our business, results of operations, financial condition and cash flows.
NOTE 54 — STOCK-BASED COMPENSATION
On June 29, 2016, the Board of Directors amended the Company’s 2015 Stock Option Plan (as amended, the “Plan”) authorizing the Company to grant awards to certain executives, key employees, and consultants under the Plan, which was approved by shareholders at the Annual Meeting of Shareholders held on September 6, 2016. The total number of shares of Common Stock, with respect to which awards may be granted pursuant to the Plan, may not exceed 6,000,000 pursuant to an amendment to the Plan approved by shareholders on April 23, 2019, at the 2019 Annual Meeting of Shareholders.
As of September 30, 2019,On May 20, 2020, the Company had 3,897,000 time based stock options outstanding to certain executives, key employees and consultants under the Plan, of which 1,650,000 were issued during the nine months ended September 30, 2019. The Company also had 1,000,000 performance based options outstanding under the Plan as of September 30, 2019,entered into a Settlement Agreement related to its Presidentlitigation with EMED as described above in “NOTE 3 — COMMITMENTS AND CONTINGENCIES.” Pursuant to the Settlement Agreement, the Company issued to EMED (i) 95,238 restricted stock units, which vested on May 21, 2020 and Chief Executive Officer,95,238 restricted stock units vesting on January 1, 2021, and (ii) an option to purchase up to 400,000 shares of the Company’s common stock at an exercise price of $11.21 per share prior to February 1, 2021, which allcan be settled in cash in lieu of common stock at the Company’s sole discretion, provided that the number of shares of common stock and/or amount of cash paid by the Company upon exercise will be capped at a value of $16.21 per share. The option was recorded at $347,008, the estimated fair value of the option using the Black-Scholes option pricing model with a volatility rate of 52.68% and a risk-free rate of 0.17%. The Settlement Agreement includes mutual releases and covenants not to sue for any claim arising before May 20, 2020 and the Company covenants not to challenge any EMED patents that were issued during the nine months ending September 30, 2019.subject of the Claims unless EMED asserts them in the future against Company products. This was a non-cash settlement from which we recognized expense in the amount of $2.2 million in the second quarter of 2020.
- 12 -
On February 20, 2019, the Board of Directors of the Company approved an increase in compensation for each non-employee director from $25,000 to $50,000 annually effective January 1, 2019, and an additional $10,000 annually for the chair of each Board committee effective February 20, 2019, in each case to be paid quarterly half in cash and half in common stock at the end of each fiscal quarter. On September 30, 2019, the Board of Directors of the Company named R. John Fletcher, a current KORU Medical director, as Chairman, replacing Executive Chairman, Daniel S. Goldberger, who remains a non-executive member of KORU Medical’s Board of Directors. In Mr. Fletcher’s role as Chairman, he receives an additional $50,000 in annual compensation, to be paid quarterly in shares of KORU Medical common stock based on the closing price of the stock on the last day of each quarter.
Pursuant to Daniel S. Goldberger’s employment agreement dated October 12, 2018, on February 1, 2019, when Donald B. Pettigrew was appointed to President and Chief Executive Officer, Mr. Goldberger was awarded a performance bonus in the amount of $270,000 to be paid half in cash and half in stock on April 1, 2019.stock. The number of shares that were issued totaled 90,604 and was based upon the closing price of the Common Stock of the Company on February 1, 2019, as reported by the OTCQX. These shares were issued on April 3, 2019.
- 11 -
2015 STOCK OPTION PLAN, as amended
Time Based Stock Options
The per share weighted average fair value of stock options granted during the nine months ended September 30, 20192020 and September 30, 20182019 was $1.33$6.53 and $0.68,$1.33, 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 nine months ended September 30, 20192020 and September 30, 2018.2019. 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.
|
| September 30, |
|
| September 30, |
| ||||||||
|
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Dividend yield |
| 0.00% |
|
| 0.00% |
|
| 0.00% |
|
| 0.00% |
| ||
Expected Volatility |
| 56.1 – 60.7% |
|
| 62.8 – 65.2% |
|
| 62.11 – 62.18% |
|
| 56.10 – 60.70% |
| ||
Weighted-average volatility |
| — |
|
| — |
|
| — |
|
| — |
| ||
Expected dividends |
| — |
|
| — |
|
| — |
|
| — |
| ||
Expected term (in years) |
| 10 Years |
|
| 5 Years |
|
| 10 Years |
|
| 10 Years |
| ||
Risk-free rate |
| 1.60 – 2.72% |
|
| 2.80 – 2.90% |
|
| 0.63 – 0.64% |
|
| 1.60 – 2.72% |
|
The following table summarizes the status of the Plan with respect to time based stock options:
|
| Nine months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||||||||
|
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| |||||||||||||
|
| Shares |
| Weighted |
| Shares |
| Weighted |
|
| Shares |
| Weighted |
| Shares |
| Weighted |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Outstanding at January 1 |
| 2,419,000 |
| $ | 1.00 |
|
| 1,038,000 |
| $ | 0.41 |
|
| 3,647,000 |
| $ | 1.32 |
| 2,419,000 |
| $ | 1.00 |
|
Granted |
| 1,650,000 |
| $ | 1.92 |
|
| 1,018,000 |
| $ | 1.23 |
|
| 360,000 |
| $ | 9.54 |
| 1,650,000 |
| $ | 1.92 |
|
Exercised |
| 160,000 |
| $ | 0.37 |
|
| 125,000 |
| $ | 0.41 |
|
| 747,006 |
| $ | 0.65 |
| 160,000 |
| $ | 0.37 |
|
Forfeited |
| 12,000 |
| $ | 0.87 |
|
| 12,000 |
| $ | 0.87 |
|
| 200,000 |
| $ | 2.09 |
| 12,000 |
| $ | 0.87 |
|
Outstanding at September 30 |
| 3,897,000 |
| $ | 1.41 |
|
| 1,919,000 |
| $ | 0.85 |
|
| 3,059,994 |
| $ | 2.40 |
| 3,897,000 |
| $ | 1.41 |
|
Options exercisable at September 30 |
| 1,037,885 |
| $ | 0.81 |
|
| 666,969 |
| $ | 0.40 |
|
| 1,009,629 |
| $ | 1.36 |
| 1,037,885 |
| $ | 0.81 |
|
Weighted average fair value of options granted during the period |
| — |
| $ | 1.33 |
|
| — |
| $ | 0.68 |
|
| — |
| $ | 6.53 |
| — |
| $ | 1.33 |
|
Stock-based compensation expense |
|
|
| $ | 473,139 |
|
| — |
| $ | 51,592 |
|
| — |
| $ | 572,775 |
| — |
| $ | 473,139 |
|
Total stock-based compensation expense totaled $473,139$572,775 and $51,592$473,139 for the nine months ended September 30, 20192020 and 2018,2019, respectively. Cash received from option exercises for the nine months ended September 30, 2020 and 2019 was $95,880 and 2018 was $58,900, and $51,250, respectively.
The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2020 and 2019 was $6.53 and 2018, was $1.33, and $0.68, respectively. The total intrinsic value of options exercised during the nine months ended September 30, 2020 and 2019 was $296,226 and 2018, was $30,022, and $30,664, respectively.
- 13 -
The following table presents information pertaining to options outstanding at September 30, 2019:2020:
Range of Exercise Price |
| Number |
| Weighted |
| Weighted |
| Number |
| Weighted |
|
| Number |
| Weighted |
| Weighted |
| Number |
| Weighted |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 0.38 – 3.15 |
| 3,897,000 |
| 7 years |
| $ | 1.41 |
| 1,037,885 |
| $ | 0.81 |
| |||||||||||||
$0.50 – 9.76 |
| 3,059,994 |
| 7.5 years |
| $ | 2.40 |
| 1,009,629 |
| $ | 1.36 |
|
- 12 -
As of September 30, 2019,2020, there was $2,802,411$3,679,084 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 4248 months. The total fair value of shares vested as of September 30, 2020 and 2019, was $874,041 and 2018, was $506,729, and $139,569, respectively.
Performance Based Stock Options
The per share weighted average fair value of stock options granted during the nine months ended September 30, 2020 and 2019 was zero and 2018 was $1.16, and zero, 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 nine months ended September 30, 20192020 and September 30, 2018.2019. 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.
|
| September 30, |
|
| September 30, |
| ||||||||
|
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Dividend yield |
| 0.00% |
|
| — |
|
| — |
|
| 0.00% |
| ||
Expected Volatility |
| 58.9% |
|
| — |
|
| — |
|
| 58.90% |
| ||
Weighted-average volatility |
| — |
|
| — |
|
| — |
|
| — |
| ||
Expected dividends |
| — |
|
| — |
|
| — |
|
| — |
| ||
Expected term (in years) |
| 10 Years |
|
| — |
|
| — |
|
| 10 Years |
| ||
Risk-free rate |
| 2.07% |
|
| — |
|
| — |
|
| 2.07% |
|
The following table summarizes the status of the Plan with respect to performance based stock options:
|
| Nine months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||||||||
|
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| |||||||||||||
|
| Shares |
| Weighted |
| Shares |
| Weighted |
|
| Shares |
| Weighted |
| Shares |
| Weighted |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Outstanding at January 1 |
| — |
| $ | — |
|
| — |
| $ | — |
|
| 1,000,000 |
| $ | 1.70 |
| — |
| $ | — |
|
Granted |
| 1,000,000 |
| $ | 1.70 |
|
| — |
| $ | — |
|
| — |
| $ | — |
| 1,000,000 |
| $ | 1.70 |
|
Exercised |
| — |
| $ | — |
|
| — |
| $ | — |
|
| — |
| $ | — |
| — |
| $ | — |
|
Forfeited |
| — |
| $ | — |
|
| — |
| $ | — |
|
| — |
| $ | — |
| — |
| $ | — |
|
Outstanding at September 30 |
| 1,000,000 |
| $ | 1.70 |
|
| — |
| $ | — |
|
| 1,000,000 |
| $ | 1.70 |
| 1,000,000 |
| $ | 1.70 |
|
Options exercisable at September 30 |
| — |
| $ | — |
|
| — |
| $ | — |
|
| 333,333 |
| $ | 1.70 |
| — |
| $ | — |
|
Weighted average fair value of options granted during the period |
| — |
| $ | 1.16 |
|
| — |
| $ | — |
|
| — |
| $ | — |
| — |
| $ | 1.16 |
|
Stock-based compensation expense |
| — |
| $ | 167,636 |
|
| — |
| $ | — |
|
| — |
| $ | 438,365 |
| — |
| $ | 167,636 |
|
Total performance stock-based compensation expense totaled $167,636$438,365 and zero$167,636 for the nine months ended September 30, 20192020 and 2018,2019, respectively.
The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2020 and 2019, was zero and September 30, 2018, was $1.16, and zero, respectively.
- 14 -
The following table presents information pertaining to performance based options outstanding at September 30, 2019:2020.
Range of Exercise Price |
| Number |
| Weighted |
| Weighted |
| Number |
| Weighted |
|
| Number |
| Weighted |
| Weighted |
| Number |
| Weighted |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1.70 |
| 1,000,000 |
| 10 years |
| $ | 1.70 |
| — |
| $ | — |
|
| 1,000,000 |
| 8.7 years |
| $ | 1.70 |
| 333,333 |
| $ | 1.70 |
|
- 13 -
As of September 30, 2019,2020, there was $994,925$430,833 of total unrecognized compensation cost related to non-vested performance share option based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 31 months. The total fair value of shares vested as of September 30, 2020 and 2019 was $387,520 and 2018 was zero, for both periods.respectively.
NOTE 65 — DEBT OBLIGATIONS
On February 8, 2018, the Company issued a Promissory Notepromissory note (the “Original Note”) to KeyBank National Association (“KeyBank”) in the amount of $1.5 million as a variable rate revolving line of credit loan due on demand with an interest rate of LIBOR plus 2.25%, collateralized with a certificate of deposit in the amount of $1.5 million. The Company entered into this arrangement to establish a credit lending history and, in the event needed, to have additional cash on hand for future expansion. On September 25, 2018, KeyBank released the certificate of deposit as collateral for the loan and the Company executed a Commercial Security Agreement as collateral for the loan.
On April 14, 2020, the Company issued a promissory note to KeyBank in the aggregate principal amount of $3.5 million (the “Note”) as an extension of its line of credit, replacing its current line of credit agreement and Original Note. The Company drew on the additional $2.0 million on April 23, 2020. The Original Note was in the form of a variable rate revolving line of credit with an interest rate of LIBOR plus 2.25%. The $3.5 million Note is in the form of a variable rate non-disclosable revolving line of credit with an interest rate of Prime Rate announced by the Bank minus 0.75%. Interest is due monthly, and all principal and unpaid interest is due on June 1, 2021. The $3.5 million Note may be prepaid at any time prior to maturity with no prepayment penalties. The $3.5 million Note contains events of default and other provisions customary for a loan of this type.
In connection with the Note, the Company entered into a Commercial Security Agreement with the Bank dated April 14, 2020 (the “Security Agreement”), pursuant to which the Company granted a security interest in substantially all assets of the Company to secure the obligations of the Company under the Note. The Security Agreement contains terms and conditions typical for the granting of security interests of this kind.
The Company had no amount outstanding against the line of credit as of September 30, 2020.
On April 20, 2020, the Company entered into a Loan Agreement with the Bank (the “PPP Loan Agreement”) pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), providing for a loan in the principal amount of $1,476,508 (the “PPP Loan”). The PPP Loan was funded on April 27, 2020. On May 13, 2020, the Company returned the funds it received.
On April 27, 2020, the Company entered into a Progress Payment Loan and Security Agreement (“PPLSA”) and a Master Security Agreement (the “MSA”), each dated as of April 20, 2020, with Key Equipment Finance, a division of the Bank (“KEF”), to provide up to $2.5 million in financing for equipment purchases from third party vendors. The PPLSA allows the Company to make draws with KEF to make certain payments to the equipment suppliers prior to the commencement of periodic payments under a term loan. Each draw under the PPLSA will bear interest at a variable rate equal to the then-current Prime Rate and will be secured by the financed equipment under the MSA. At the end of each calendar quarter or year, the advances made under the PPLSA will be converted to term loans, subject to KEF’s approval of the equipment and certain other closing conditions being met. Once the draws under the PPLSA are converted into a term loan, each promissory note will bear interest at a fixed rate of 4.07% per annum, subject to adjustment based on KEF’s cost of funds, with principal and interest payable in 84 equal consecutive monthly installments. Each fixed rate installment promissory note may be prepaid, subject to a penalty if prepaid before the fifth anniversary of its issuance. As of September 30, 2019,2020, the Company had no amount outstanding amounts against the line of credit.PPLSA.
NOTE 76 — LEASES
We have finance and operating leases for our corporate office and certain office and computer equipment. Our leases have remaining lease terms of 1 to 3 years, some of which include options to extend the leases annually and some with options to terminate the leases within 1 year.
- 15 -
The components of lease expense were as follows:
|
| Three Months Ended |
| Nine Months Ended |
| |||||||||||||||
| September 30, |
| September 30, |
| ||||||||||||||||
|
| Three Months Ended |
| Nine Months Ended |
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease cost |
| $ | 37,922 |
| $ | 111,672 |
|
| $ | 37,921 |
| $ | 37,922 |
| $ | 113,764 |
| $ | 111,672 |
|
Short-term lease cost |
|
| 19,846 |
|
| 5,535 |
|
| 33,535 |
|
| 18,196 |
| |||||||
Total lease cost |
| $ | 57,767 |
| $ | 43,457 |
| $ | 147,299 |
| $ | 129,868 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance lease cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets |
| $ | 1,061 |
| $ | 3,182 |
|
| $ | 791 |
| $ | 1,061 |
| $ | 4,502 |
| $ | 3,182 |
|
Interest on lease liabilities |
|
| 47 |
|
| 178 |
|
|
| 47 |
|
| 47 |
|
| 199 |
|
| 178 |
|
Total finance lease cost |
| $ | 1,108 |
| $ | 3,360 |
|
| $ | 838 |
| $ | 1,108 |
| $ | 4,701 |
| $ | 3,360 |
|
Supplemental cash flow information related to leases was as follows:
| Three Months Ended |
| Nine Months Ended |
| ||
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
Finance cash flows from finance leases | $ | 1,053 |
| $ | 3,122 |
|
Finance lease cost: |
|
|
|
|
|
|
Amortization of right-of-use assets | $ | 1,061 |
| $ | 3,182 |
|
Interest on lease liabilities |
| 47 |
|
| 178 |
|
Total finance lease cost | $ | 1,108 |
| $ | 3,360 |
|
|
| Nine Months Ended |
| ||||
|
| September 30, |
| ||||
|
| 2020 |
| 2019 |
| ||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
Operating cash flows from operating leases |
| $ | 113,764 |
| $ | 111,672 |
|
Financing cash flows from finance leases |
|
| 4,502 |
|
| 3,122 |
|
- 14 -
Supplemental balance sheet information related to leases was as follows:
| September 30, |
| December 31, |
| |||||||
|
| Nine Months Ended |
|
|
|
|
|
|
|
| |
Operating Leases |
|
|
|
|
|
|
|
|
|
| |
Operating lease right-of-use assets |
| $ | 406,954 |
|
| $ | 271,679 |
| $ | 373,734 |
|
|
|
|
|
|
|
|
|
|
|
| |
Operating lease current liabilities |
| 135,275 |
|
|
| 140,450 |
|
| 136,888 |
| |
Operating lease long term liabilities |
|
| 271,679 |
|
|
| 131,229 |
|
| 236,846 |
|
Total operating lease liabilities |
| $ | 406,954 |
|
| $ | 271,679 |
| $ | 373,734 |
|
|
|
|
|
|
|
|
|
|
|
| |
Finance Leases |
|
|
|
|
|
|
|
|
|
| |
Property and equipment, at cost |
| $ | 6,363 |
|
| $ | 12,725 |
| $ | 12,725 |
|
Accumulated depreciation |
|
| 3,182 |
|
|
| (9,344 | ) |
| (4,837 | ) |
Property and equipment, net |
| $ | 3,181 |
|
| $ | 3,381 |
| $ | 7,888 |
|
|
|
|
|
|
|
|
|
|
|
| |
Finance lease current liabilities |
| 3,242 |
|
|
| 3,026 |
|
| 5,296 |
| |
Finance lease long term liabilities |
|
| — |
|
|
| 414 |
|
| 2,646 |
|
Total finance lease liabilities |
| $ | 3,242 |
|
| $ | 3,440 |
| $ | 7,942 |
|
| |||
| |||
|
| ||
|
| ||
| |||
|
| ||
|
|
|
| September 30, |
| December 31, |
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term |
|
|
|
|
|
Operating leases |
| 1.6 Years |
| 2.4 Years |
|
Finance leases |
| 1 Year |
| 1.3 Years |
|
|
|
|
|
|
|
Weighted Average Discount Rate |
|
|
|
|
|
Operating leases |
| 4.75% |
| 4.75% |
|
Finance leases |
| 4.75% |
| 4.75% |
|
- 16 -
Maturities of lease liabilities are as follows:
Year Ending December 31, |
| Operating Leases |
| Finance Leases |
| ||
2019 |
| $ | 37,922 |
| $ | 1,100 |
|
2020 |
|
| 151,685 |
|
| 2,206 |
|
2021 |
|
| 149,476 |
|
| — |
|
2022 |
|
| 97,256 |
|
| — |
|
Total lease payments |
|
| 436,339 |
|
| 3,306 |
|
Less imputed interest |
|
| (29,385 | ) |
| (64 | ) |
Total |
| $ | 406,954 |
| $ | 3,242 |
|
Year Ending December 31, |
| Operating Leases |
| Finance Leases |
| ||
2020 (excluding the nine months ended September 30, 2020) |
| $ | 37,922 |
| $ | 832 |
|
2021 |
|
| 149,476 |
|
| 2,705 |
|
2022 |
|
| 97,256 |
|
| — |
|
2023 |
|
| — |
|
| — |
|
2024 |
|
| — |
|
| — |
|
2025 |
|
| — |
|
| — |
|
Thereafter |
|
| — |
|
| — |
|
Total undiscounted lease payments |
|
| 284,654 |
|
| 3,537 |
|
Less: imputed interest |
|
| (12,975 | ) |
| (97 | ) |
Total lease liabilities |
| $ | 271,679 |
| $ | 3,440 |
|
NOTE 7 — RELATED PARTY TRANSACTIONS
BUILDING LEASE
Mark Pastreich, a former director through April 2019, is a principal in the entity that owns the building leased by us for our corporate headquarters and manufacturing facility at 24 Carpenter Road, Chester, New York 10918. On February 28, 2019, we completed year twenty of a twenty-year lease with monthly lease payments of $11,042. On November 14, 2017, we executed a lease extension, which calls for six-month extensions beginning March 1, 2019 with the option to renew six times at a monthly lease amount of $12,088. The Company exercised four of the six additional renewal options for September 1, 2019 through August 31, 2021.
The lease payments were $36,264 for both three months ended September 30, 2020 and 2019, and $108,792 and $106,700 for the nine months ended September 30, 2020 and 2019, respectively. The Company also paid property taxes in the amount of $12,546 and $13,749 for three months ended September 30, 2020 and 2019, respectively and $39,205 and $39,165 for the nine months ended September 30, 2020 and 2019, respectively.
NOTE 8 SUBSEQUENT EVENTS— EQUITY
On September 30, 2019, R. John Fletcher was appointed ChairmanJune 18, 2020, the Company entered into a Purchase Agreement with Piper Sandler & Co. and Canaccord Genuity LLC, as representatives of the Board. Mr. Fletcher succeeds Daniel S. Goldberger who resigned as Executive Chairmanseveral underwriters named therein (the “Underwriters”), pursuant to which the Company agreed to issue and sell 3,125,000 shares of its common stock. Under the terms of the Purchase Agreement, the Company in connection with his appointment as Chief Executive Officergranted to the Underwriters an option, exercisable for a period of a bioelectronic medical device company. Mr. Goldberger remains with KORU Medical as a non-executive member of the Board of Directors. In Mr. Fletcher’s role as Chairman, he will receive30 days, to purchase up to an additional $50,000 in annual compensation, to be paid quarterly in468,750 shares of KORU Medical common stock based on the closing price of the stock on the last day of each quarter.
On October 14, 2019, KORU Medical announced that its common stock was approved for listing on The Nasdaq Capital Market and began trading on October 17, 2019 under its then current symbol “REPR”.
On October 23, 2019, the Company announced it will operate under a new dba name, KORU Medical Systems, in place of RMS Medical Products. Reflecting this change, the Company’s common stock, commenced trading underwhich the new ticker symbol “KRMD” effective October 24, 2019.Underwriters exercised in full on June 19, 2020. The Underwriters purchased the shares pursuant to the Purchase Agreement, including the shares subject to the option, at a price of $7.52 per share. Proceeds to the Company, net of discounts, commissions, fees and expenses, were $26.5 million.
NOTE 9 — SUBSEQUENT EVENT
On November 11, 2020, the Company entered into a Manufacturing and Supply Agreement with Command Medical Products, Inc. (“Command”), pursuant to which Command has agreed to manufacture and supply the Company’s subassemblies, needle sets and tubing products pursuant to the Company’s specifications and purchase orders. The first binding purchase order pursuant to the Manufacturing and Supply Agreement is expected to be made within the next ten days (the “Effective Date”).
The Manufacturing and Supply Agreement provides for a term of five years from the Effective Date. Either party may terminate the Manufacturing and Supply Agreement upon a material breach by the other Party that has not been cured within 90 days, upon the bankruptcy or insolvency of the other Party or as expressly set forth elsewhere in the Agreement. If the Company terminates the Manufacturing and Supply Agreement other than for those reasons within the first three years from the Effective Date, the Company is obligated to pay an early termination fee to Command.
The Manufacturing and Supply Agreement also includes customary provisions relating to, among other things, delivery, inspection procedures, warranties, quality management, business continuity plans, handling and transport, intellectual property, confidentiality and indemnification.
- 1517 -
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 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.
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, future operating results, unpredictability related to Food and Drug Administration regulations, introduction of competitive products, 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 the research and development effort, expanding the market of FREEDOM60®demand in the SCIg market, availability of sufficient capital if or when needed, dependence on key personnel, and the impact of recent accounting pronouncements and the outcome of litigation.pronouncements. 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. 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. 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, the “Company,” “KORU Medical,” the “Company,” “we,” “us” andor “our” referrefers to Repro Med Systems, Inc.
OVERVIEW
The third quarterCompany designs, manufactures and markets proprietary portable and innovative medical devices primarily for the ambulatory 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.
The following discussion and analysis for the three and nine months ended September 30, 2020 should be read in conjunction with the financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited financial statements for the year ended December 31, 2019 included in our 2019 Annual Report on Form 10-K.
KORU Medical continues to monitor its operations and government recommendations and has made modifications to its normal operations because of 2019 endedthe COVID-19 outbreak, including requiring most of its non-production related team members to work remotely or on a staggered work shift. The Company has continued to maintain a manufacturing operational capacity at its manufacturing facility located in Chester, New York, and has instituted heightened cleaning and sanitization standards and several health and safety protocols and procedures to safeguard its team members who do continue to report in person. Until the ultimate extent and duration of the pandemic is known, we cannot predict the ultimate effects the pandemic may have on our business, in particular with recordrespect to demand for our products, our strategy, and our prospects, the effects on our customers, or the impact on our financial results. For example, our future net sales resultsgrowth may be impacted due to fewer new prescriptions for individuals with Primary Immune Deficiency Disease (“PIDD”) and Chronic Inflammatory Demyelinating Polyneuropathy (“CIDP”) as a result of $6.6 million, an increasethe pandemic. Refer to “PART II – OTHER INFORMATION, ITEM 1A. RISK FACTORS” of 45.5% compared withthis Quarterly Report on Form 10-Q for further discussion of the same period last year. The increase was driven by organic growth mostly from increased volume and to a lesser extent from price increases, two unusually large orders from a domestic distributor and a new customer in Europe, as well as clinical trials. The large domestic distributor orders followedpotential impact of the acquisition of Medical Specialties Distributors, LLC by McKesson Medical-Surgical, Inc. as they move forward with their integration. We cannot predict whether such large distributor orders or volume generally will continue in the future. COVID-19 pandemic on our business.
We ended the third quarter of 2020 with $0.8 million in open orders. Excluding the two large orders, clinical trials and adjusting for the open orders for the quarter, net sales grew in excess of 25% year over year. We believe the organic volume growth continues to be the result of growth in diagnosis of primary immunodeficiency diseases (“PIDD”) and expansion into the neurology market with expanded Hizentra® indication for chronic inflammatory demyelinating polyneuropathy (“CIDP”). Our gross margin percentage improved nearly 2.6 percentage points$6.1 million, down 8.1% versus the same period last year mostly due to price increases. Net income was $0.7 million for period ended September 30, 2019, compared with $0.4 million for the previous year, driven by the increase inprior year’s third quarter. Our net sales partially offsetwere negatively impacted principally by increased legal fees for litigationreduced U.S. clinical trial activity and higher salaryallowances consisting of pricing and growth rebates related expenses resultingto certain customers and payment discounts and distribution fees at our largest distributor under new contract terms. The third quarter of 2019 included two unusually large orders, and the third quarter of 2020 included a significant order from the executive management changes and recently announced new hires. Our cash balance at September 30, 2019, was $5.1 million,our largest distributor placed early in exchange for a nominal discount, which included $0.5 millionmay impact our net sales for the exercisefourth quarter of outstanding warrants.2020.
- 18 -
RESULTS OF OPERATIONS
Three months ended September 30, 20192020 compared to September 30, 20182019
Net Sales
The following table summarizes our net sales for the three months ended September 30, 20192020 and 2018:2019:
|
| Three Months Ended September 30, |
| Change from Prior Year |
| % of Sales |
|
| Three Months Ended September 30, |
| Change from Prior Year |
| % of Sales |
| ||||||||||||||||||
|
| 2019 |
| 2018 |
| $ |
| % |
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| $ |
| % |
| 2020 |
| 2019 |
| ||||||
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
| $ | 5,856,203 |
| $ | 3,699,410 |
| $ | 2,156,793 |
| 58.3% |
| 88.5% |
| 81.4% |
|
| $ | 5,372,536 |
| $ | 5,856,203 |
| $ | (483,667 | ) | (8.3% | ) | 88.4% |
| 88.5% |
|
International |
|
| 761,194 |
|
| 847,777 |
|
| (86,583 | ) | (10.2% | ) | 11.5% |
| 18.6% |
|
|
| 707,779 |
|
| 761,194 |
|
| (53,415 | ) | (7.0% | ) | 11.6% |
| 11.5% |
|
Total |
| $ | 6,617,397 |
| $ | 4,547,187 |
| $ | 2,070,210 |
| 45.5% |
|
|
|
|
|
| $ | 6,080,315 |
| $ | 6,617,397 |
| $ | (537,082 | ) | (8.1% | ) |
|
|
|
|
Total net sales increased $2.1decreased $0.5 million or 45.5%8.1% to $6.1 million for the three months ended September 30, 2019,2020 compared with the same period last year. ThisNet sales decreased primarily due to reduced U.S. clinical trial activity ($0.4 million). Higher allowances consisting of pricing and growth was driven by organic growth mostly from increased volumerebates related to certain customers and payment discounts and distribution fees at our largest distributor under new contract terms and lower international sales also contributed to a lesser extent from price increases,lower net sales in the three months ended September 30, 2020. There were two unusually large orders in the third quarter of 2019, one domestic from a domesticour largest distributor and one from a new customer in Europe, as well as clinical trials. We cannot predict whether such large orders will continueinternational. Sales in the future. We ended thethird quarter with open orders totaling $0.8 million.
- 16 -
Excluding the two large orders, clinical trialsof 2020 included a $1.0 million order from our largest distributor placed early in both periods, and adjustingexchange for a nominal discount, which may impact our net sales for the open orders, net sales increased in excessfourth quarter of 25% year over year. We believe organic volume growth continues to be due to growth in the diagnosis of PIDD and expansion into the neurology market with the expanded Hizentra® indication for CIDP. Internationally, net sales were down mostly due to open orders totaling $0.1 million at the end of the period.2020.
Gross Profit
Our gross profit for the three months ended September 30, 20192020 and 20182019 is as follows:
|
| Three Months Ended September 30, |
| Change from Prior Year |
|
| Three Months Ended September 30, |
| Change from Prior Year |
| ||||||||||||||
|
| 2019 |
| 2018 |
| $ |
| % |
|
| 2020 |
| 2019 |
| $ |
| % |
| ||||||
Gross Profit |
| $ | 4,382,908 |
| $ | 2,891,568 |
| $ | 1,491,340 |
| 51.6% |
|
| $ | 3,940,723 |
| $ | 4,382,908 |
| $ | (442,185 | ) | (10.1% | ) |
Stated as a Percentage of Net Sales |
|
| 66.2% |
|
| 63.6% |
|
|
|
|
|
|
|
| 64.8% |
|
| 66.2% |
|
|
|
|
|
|
Gross profit increased $1.5decreased $0.4 million or 51.6%10.1% in the three months ended September 30, 2019,2020, compared to the same period in 2018. This increase in the quarter was mostly2019, driven by the increase inlower net sales. Gross profit improved 2.6 percentage points compared with the same period last year, mostly due to price increases.sales as described above, partially offset by favorable production variances.
Selling, general and administrative, Litigation and Research and development
Our selling, general and administrative expenses, litigation and research and development costs for the three months ended September 30, 20192020 and 20182019 are as follows:
|
| Three Months Ended September 30, |
| Change from Prior Year |
|
| Three Months Ended September 30, |
| Change from Prior Year |
| ||||||||||||||
|
| 2019 |
| 2018 |
| $ |
| % |
|
| 2020 |
| 2019 |
| $ |
| % |
| ||||||
Selling, general and administrative |
| $ | 2,441,381 |
|
| 1,917,127 |
| $ | 524,254 |
| 27.3% |
|
| $ | 3,075,169 |
| $ | 2,441,381 |
| $ | 633,788 |
| 26.0% |
|
Litigation |
|
| 864,009 |
|
| 286,487 |
|
| 577,522 |
| 201.6% |
|
|
| 675 |
|
| 864,009 |
|
| (863,334 | ) | (99.9% | ) |
Research and development |
|
| 170,260 |
|
| 126,923 |
|
| 43,337 |
| 34.1% |
|
|
| 390,416 |
|
| 170,260 |
|
| 220,156 |
| 129.3% |
|
|
| $ | 3,475,650 |
|
| 2,330,537 |
| $ | 1,145,113 |
| 49.1% |
|
| $ | 3,466,260 |
| $ | 3,475,650 |
| $ | (9,390 | ) | (0.3% | ) |
Stated as a Percentage of Net Sales |
|
| 52.5% |
|
| 51.3% |
|
|
|
|
|
|
|
| 57.0% |
|
| 52.5% |
|
|
|
|
|
|
Selling, general and administrative expenses increased $0.6 million, or 26.0%, during the three months ended September 30, 2019 increased $0.5 million, or 27.4%, over2020 compared to the same period last year. Drivingyear, mostly due to higher salary, related benefits and recruiting fees of $0.4 million resulting from new hires in the 2020 period. Higher consulting fees related to marketing and regulatory initiatives of $0.1 million also added to the increase, wasas well as higher salarydirectors and related benefits including $0.3 million of stock option expense, due to the addition of the Executive Chairman of the Board, our new President and Chief Executive Officerofficer’s insurance premiums and other executive changes, including the additions of Vice Presidents of Medical Affairs, Growth and Innovation, and Sales and Marketing, adding $0.6 million year over year. Partially offsettingmiscellaneous expenses totaling $0.2 million. Offsetting these increases was attrition in regulatory totalingwere lower trade show and travel expenses of $0.1 million.million as a result of COVID-19 related travel restrictions.
Litigation fees continue to be higher thandecreased $0.9 million during the previous year period, up $0.6 million as we continue to defend ourselves against our competitor through several motions and court proceedings, as well as in the patent office. We have had some favorable rulings in the courts and have filed motions for court costs and attorney fees. Refer to Note 4 Legal Proceedings in the Notesthree months ended September 30, 2020 compared to the Financial Statements.same period last year primarily due to the negotiation of and entry into a litigation settlement agreement with EMED in May 2020.
- 19 -
Research and development expenses increased $43,337, or 34.1%, over$0.2 million during the three months ended September 30, 2020 compared with the same period last year mostly due to increased headcounthigher consulting services and expanded productadditional testing related to development initiatives compared to last year.initiatives.
Depreciation and amortization
Depreciation and amortization expense increased by 5.7%39.7% to $115,637 in the three months ended September 30, 2020 compared with $82,774 in the three months ended September 30, 2019 compared with $78,345 in the three months ended September 30, 2018.2019. We continuedcontinue to invest in capital assets, mostly related to production equipment,manufacturing and computer equipment and leasehold improvements, and in patent applications and their maintenance.equipment.
Net Income
|
| Three Months Ended September 30, |
| Change from Prior Year |
|
| Three Months Ended September 30, |
| Change from Prior Year |
| ||||||||||||||
|
| 2019 |
| 2018 |
| $ |
| % |
|
| 2020 |
| 2019 |
| $ |
| % |
| ||||||
Net Income |
| $ | 651,813 |
| $ | 386,553 |
| $ | 265,260 |
| 68.6% |
|
| $ | 249,175 |
| $ | 651,813 |
| $ | (402,638 | ) | (61.8% | ) |
Stated as a Percentage of Net Sales |
| 9.9% |
|
| 8.5% |
|
|
|
|
|
|
|
| 4.1% |
|
| 9.9% |
|
|
|
|
|
|
- 17 -
Our net income for the three months ended September 30, 20192020 was $0.7$0.2 million, compared to $0.4net income of $0.7 million for the same period last year. The increase is mostly driven by the increase inthree months ended September 30, 2019, primarily due to lower net sales partially offset by selling general and administrative fees, as well as litigation fees as described above.of $0.5 million with total operating expenses remaining flat for the same periods.
Nine months ended September 30, 20192020 compared to September 30, 20182019
Net Sales
The following table summarizes our net sales for the nine months ended September 30, 20192020 and 2018:2019:
|
| Nine months Ended September 30, |
| Change from Prior Year |
| % of Sales |
|
| Nine Months Ended September 30, |
| Change from Prior Year |
| % of Sales |
| ||||||||||||||||||
|
| 2019 |
| 2018 |
| $ |
| % |
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| $ |
| % |
| 2020 |
| 2019 |
| ||||||
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
| $ | 14,308,994 |
| $ | 10,657,010 |
| $ | 3,651,984 |
| 34.3% |
| 84.5% |
| 81.5% |
|
| $ | 17,459,212 |
| $ | 14,308,994 |
| $ | 3,150,218 |
| 22.0% |
| 86.8% |
| 84.5% |
|
International |
|
| 2,631,493 |
|
| 2,425,727 |
|
| 205,766 |
| 8.5% |
| 15.5% |
| 18.5% |
|
|
| 2,660,016 |
|
| 2,631,493 |
|
| 28,523 |
| 1.1% |
| 13.2% |
| 15.5% |
|
Total |
| $ | 16,940,487 |
| $ | 13,082,737 |
| $ | 3,857,750 |
| 29.5% |
|
|
|
|
|
| $ | 20,119,228 |
| $ | 16,940,487 |
| $ | 3,178,741 |
| 18.8% |
|
|
|
|
|
Total net sales increased $3.9$3.2 million or 29.5%18.8% for the nine months ended September 30, 2019 driven by growth2020 as compared to the prior year period. The increase was due principally to an increase in all product categories (pumps, needles, and tubing) in the Freedom Infusion System. The nine month period includessales volume, as well as higher U.S. clinical trials at several customers, and two unusually large orders from a domestic distributor and a new customer in Europe. We ended the third quarter with $0.8 million in open orders. Excluding both large orders, clinical trials and adding in the open orders, the net sales increase would have been 24%, demonstrating strength in continued organic growth driven by increased volume and to a lesser extent price increases.trial activity ($1.0 million). We believe the organicincrease in product sales volume growth continues to be driven byreflects an increase in continued growth in the diagnosis of PIDD and expansion intoCIDP. Also contributing to the neurology market with expanded Hizentra® indicationincrease in product sales volume was a $1.0 million order from our largest distributor placed early in exchange for CIDP.a nominal discount, which may impact our net sales for the fourth quarter of 2020. Partially offsetting net sales were higher allowances consisting of pricing and growth rebates related to certain customers and payment discounts at our largest distributor under new contract terms.
Gross Profit
Our gross profit for the nine months ended September 30, 20192020 and 20182019 is as follows:
|
| Nine months Ended September 30, |
| Change from Prior Year |
|
| Nine Months Ended September 30, |
| Change from Prior Year |
| ||||||||||||||
|
| 2019 |
| 2018 |
| $ |
| % |
|
| 2020 |
| 2019 |
| $ |
| % |
| ||||||
Gross Profit |
| $ | 10,906,526 |
| $ | 8,096,976 |
| $ | 2,809,550 |
| 34.7% |
|
| $ | 12,638,813 |
| $ | 10,906,526 |
| $ | 1,732,287 |
| 15.9% |
|
Stated as a Percentage of Net Sales |
|
| 64.4% |
|
| 61.9% |
|
|
|
|
|
|
|
| 62.8% |
|
| 64.4% |
|
|
|
|
|
|
Gross profit increased $2.8$1.7 million or 34.7%15.9% in the nine months ended September 30, 2019,2020, compared to the same period last year.year, reflecting net sales growth described above as well as favorable production variances in the third quarter of 2020. Gross margin improved 2.5 percentage points duringprofit for the periodnine months was negatively impacted by overtime costs related to COVID-19 absenteeism and was driven mostlyan obsolescence reserve resulting from a discontinued product line, partially offset by price increases and to a lesser extent somefavorable production efficiencies.variances in the third quarter of 2020.
- 20 -
Selling, general and administrative, Litigation and Research and development
Our selling, general and administrative expenses, litigation and research and development costs for the nine months ended September 30, 20192020 and 20182019 are as follows:
|
| Nine months Ended September 30, |
| Change from Prior Year |
|
| Nine Months Ended September 30, |
| Change from Prior Year |
| ||||||||||||||
|
| 2019 |
| 2018 |
| $ |
| % |
|
| 2020 |
| 2019 |
| $ |
| % |
| ||||||
Selling, general and administrative |
| $ | 6,976,684 |
| $ | 5,513,727 |
| $ | 1,462,957 |
| 26.5% |
|
| $ | 9,039,980 |
| $ | 6,976,684 |
| $ | 2,063,296 |
| 29.6% |
|
Litigation |
|
| 2,481,471 |
|
| 592,787 |
|
| 1,888,684 |
| 318.6% |
|
|
| 2,446,747 |
|
| 2,481,471 |
|
| (34,724 | ) | (1.4% | ) |
Research and development |
|
| 450,454 |
|
| 160,735 |
|
| 289,719 |
| 180.3% |
|
|
| 944,637 |
|
| 450,454 |
|
| 494,183 |
| 109.7% |
|
|
| $ | 9,908,609 |
| $ | 6,267,249 |
| $ | 3,641,360 |
| 58.1% |
|
| $ | 12,431,364 |
| $ | 9,908,609 |
| $ | 2,522,755 |
| 25.5% |
|
Stated as a Percentage of Net Sales |
|
| 58.5% |
|
| 47.9% |
|
|
|
|
|
|
|
| 61.8% |
|
| 58.5% |
|
|
|
|
|
|
Selling, general and administrative expenses increased $1.5$2.1 million, or 26.5%29.6%, during the nine months ended September 30, 2019 compared to the same period last year. The increase is mostly driven by higher salary and related benefits totaling $1.3 million, due to the addition of the Executive Chairman of the Board, our new President and Chief Executive Officer, including a performance bonus payment to our former interim Chief Executive Officer in the amount of $0.3 million, as well as the addition of Vice Presidents for
- 18 -
Medical Affairs, Growth and Innovation and Sales and Marketing and other executed changes. Included in the $1.3 million of salary and related benefits is $0.5 million in stock option expense. Higher consulting fees of $0.2 million related to strategic initiatives, and higher investor relation expenses and director fees also contributed $0.2 million to the increase. Partially offsetting these increases was lower recruiting fees of $0.2 million.
Litigation expenses continued to increase, up $1.9 million2020 compared to the same period last year, as we continuemostly due to defend ourselves against our competitor through several motionshigher salary and court proceedings,related benefits, severance, bonus and recruiting fees in aggregate totaling $1.4 million. Also contributing to the increase were consulting fees of $0.5 million related to marketing, regulatory and strategic initiatives, as well as increased director fees and higher insurance premiums related to our directors and officers’ insurance policy in aggregate totaling $0.3 million, and miscellaneous expenses of $0.3 million. Offsetting the patent office. We have had several favorable rulings in the courtsincrease were lower trade show and have filed motions for court costs and attorney fees. Refer to Note 4 Legal Proceedings in the Notestravel expenses of $0.4 million as a result of COVID-19 related travel restrictions.
Litigation fees decreased $34,724 compared to the Financial Statements.same period last year due primarily to the negotiation of and entry into a litigation settlement agreement reached with EMED in May 2020 resulting in a non-cash expense of $2.2 million.
Research and development expenseexpenses increased by $0.3$0.5 million or 180.3%, primarilyduring the nine months ended September 30, 2020 compared with the same period last year mostly due to increased salary and related benefits due to higher headcount and expanded productadditional testing as we continue our development initiatives compared to last year.initiatives.
Depreciation and amortization
Depreciation and amortization expense increased by 10.4%17.9% to $297,801 in the nine months ended September 30, 2020 compared with $252,594 in the nine months ended September 30, 2019 compared with $228,900 in the nine months ended September 30, 2018.2019. We continued to invest in capital assets, mostly related to production equipment,manufacturing and computer equipment and leasehold improvements, and in patent applications and their maintenance.equipment.
Net (Loss)/Income
|
| Nine months Ended September 30, |
| Change from Prior Year |
| Nine Months Ended September 30, |
| Change from Prior Year |
| ||||||||||||||
|
| 2019 |
| 2018 |
| $ |
| % |
| 2020 |
| 2019 |
| $ |
| % |
| ||||||
Net Income |
| $ | 644,606 |
| $ | 1,265,703 |
| $ | (621,097 | ) | (49.1%) | ||||||||||||
Net (Loss)/Income |
| $ | (377,435 | ) | $ | 644,606 |
| $ | (1,022,041 | ) | (158.6% | ) | |||||||||||
Stated as a Percentage of Net Sales |
|
| 3.8% |
|
| 9.7% |
|
|
|
|
|
|
| (1.9% | ) |
| 3.8% |
|
|
|
|
|
|
Our net loss for the nine months ended September 30, 2020 was $0.4 million compared to net income of $0.6 million for the nine months ended September 30, 2019, was $0.6 million compared to a net income of $1.3 million for the nine months ended September 30, 2018. This decrease was driven by increasedthe EMED settlement charge and higher selling, general and administrative expenses, and litigation fees,partially offset by higher sales as described above.
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of liquidity is our cash on hand of $5.1$32.4 million as of September 30, 2019. Additionally, we have a $1.52020, which includes the net proceeds from the recent capital raise totaling $26.5 million. In response to concerns about the potential impact of COVID-19, the Company elected to draw $3.5 million during the three months ended June 30, 2020, the full amount available on its line of credit, with no outstanding amounts against it.and paid it back during the three months ended September 30, 2020. Our principal source of operating cash inflows is from sales of our products to customers. Our principal cash outflows relate to the purchase and production of inventory and related costs, selling, general and administrative expenses and professional fees.expenses.
We believe that as of September 30, 2019, cash on hand and cash expected to be generated from future operating activities will be sufficient to fund our operations, including further research and development and capital expenditures, for the next 12 months. We believe KORU Medical’s home infusion products continue to find a solid following in the subcutaneous immunoglobulin (“SCIg”) market and into new markets like neurology where Hizentra® received an expanded indication for CIDP.- 21 -
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 effect on the Company’s business, results of operations, financial condition and cash flows.
Cash Flows
The following table summarizes our cash flows:
|
| Nine months Ended |
| Nine months Ended |
| ||
Net cash (used in)/provided by operating activities |
| $ | (502,014 | ) | $ | 1,352,899 |
|
Net cash provided by/(used in) investing activities |
| $ | 1,389,281 |
| $ | (1,727,598 | ) |
Net cash provided by financing activities |
| $ | 502,958 |
| $ | 49,495 |
|
|
| Nine Months Ended |
| Nine Months Ended |
| ||
Net cash provided by/(used in) operating activities |
| $ | 968,437 |
| $ | (502,014 | ) |
Net cash (used in)/provided by investing activities |
| $ | (1,007,539 | ) | $ | 1,389,281 |
|
Net cash provided by financing activities |
| $ | 26,601,984 |
| $ | 502,958 |
|
- 19 -
Operating Activities
Net cash provided by operating activities of $1.0 million for the nine months ended September 30, 2020 was mostly attributable to non-cash charges for stock-based compensation and litigation settlement expense of $2.5 million, an increase in accounts payable, accrued expenses and accrued payroll of $2.8 million, driven by the litigation settlement with EMED, the capital raise and customer rebates. Further adding to the increase was an increase in depreciation and amortization of $0.3 million and an increase in the accrued tax liability of $0.2 million, resulting from book to tax differences related to stock option expense. Offsetting these were primarily working capital changes which include an increase in inventory of $3.2 million as we built inventory to keep pace with sales growth and to insure timely order fulfillment, an increase in accounts receivable of $0.5 million due to timing of collections, and an increase in prepaid expenses and other assets of $0.5 million relating to increased insurance premiums.
Net cash used in operating activities of $0.5 million for the nine months ended September 30, 2019 was mostly attributable to increased accounts receivable of $2.1 million as one of our major customer’s payment terms changed on January 1, 2019 from net 30 to net 60 days, increased inventory of $0.6 million as we build stock to keep pace with sales growth, as well as severance payments and payments for insurance renewals. Partially offsetting these were our non-cash charges for stock based compensation of $0.9 million and depreciation and amortization of long lived tangible and intangible asset of $0.3 million, as well as increases in accounts payable of $0.4 million primarily for major supplier invoices and accrued expenses of $0.5 million primarily due to legal fees and bonus accruals.
Investing Activities
Net cash provided by operatingused in investing activities of $1.4$1.0 million for the nine months ended September 30, 20182020 was primarily the result of net income of $1.3 million, non-cash charges of $0.2 million for depreciationcapital expenditures for research and amortization of long lived tangibledevelopment and intangible assets and stock based compensation of $0.2 million, a decrease in accounts receivable of $0.4 million and an increase in accounts payable of $0.1 million. Partially offsetting these were increases in inventory and payments for insurance renewals and severance, bonus and commission payments accrued for at December 31, 2017.
Investing Activities
strategic initiatives. Our net cash provided by investing activities of $1.4 million for the nine months ended September 30, 2019 was mostly the result of the maturation of a certificate of deposit for $1.5 million and the sale of the house the Company owned for $0.2 million, offset by capital expenditures of $0.2 million, and patent applications and maintenance of existing applications of $0.2 million. Our net
Financing Activities
Net cash used for investingprovided by financing activities of $1.7 million for the nine months ended September 30, 2018 was mostly2020 of $26.6 million is from the result$26.5 million capital raise, net of the purchase of a certificate of deposit.
Financing Activities
expenses and $0.1 million from options exercised. The $0.5 million provided by financing activities for the nine months ended September 30, 2019 is a result of warrants and options exercised during the period. Net cash provided by financing activities was $49,495
See “NOTE 5 — DEBT OBLIGATIONS” for further detail regarding the nine months endedpromissory note and loan agreement, and “NOTE 8 — EQUITY” regarding the equity offering.
We believe that as of September 30, 2018 mostly resulted from the exercise of options.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13—Financial Instruments – Credit Losses (Topic 326); Measurement of Credit Losses2020, cash on Financial Instruments, which amends guidance on reporting credit losses for assets held at amortized cost basishand 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 amountcash expected to be collected. For availablegenerated from future operating activities will be sufficient to fund our operations, including further research and development and capital expenditures, for sale debt securities, credit losses should be measured inthe next 12 months, as well as accelerate execution of our strategic initiatives. We believe KORU Medical’s home infusion products continue to find 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, 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 August 2018, the FASB issued ASU No. 2018-13 Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure for Fair Value Measurement. The amendments in this ASU modify the disclosure requirements on fair value measurements in Topic 820 based on the conceptssolid following in the Concepts Statement, including the consideration of costs and benefits. The amendments in this ASU are effectivesubcutaneous immunoglobulin (“SCIg”) market, as well as into new markets like neurology where Hizentra® received an expanded indication for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of this ASU. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. The Company is assessing the impact of the adoption of the ASU on its financial statements, disclosure requirements and methods of adoption.
- 20 -
In August 2018, the FASB issued ASU No. 2018-15 Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption of the amendments in this ASU is permitted, including adoption in any interim period, for all entities. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is assessing the impact of the adoption of the ASU on its 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.CIDP.
NON-GAAP FINANCIAL MEASURES
Management of the Company believes that investors’ understanding of the Company’s performance is enhanced by disclosing non-GAAP financial measures as a reasonable basis for comparison of the Company’s ongoing results of operations. These non-GAAP measures should not be considered a substitute for GAAP-basis measures and results. Our non-GAAP measures may not be comparable to non-GAAP measures of other companies. The table below provides a disclosure of these non-GAAP financial measures to the most closely analogous measure determined in accordance with GAAP.
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Non-GAAP financial measures should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. They are limited in value because they exclude charges that have a material effect on our reported results and, therefore, should not be relied upon as the sole financial measures to evaluate our financial results. The non-GAAP financial measures are meant to supplement, and to be viewed in conjunction with, GAAP financial results.
We disclose and discuss Adjusted EBITDA as a non-GAAP financial measure in our public releases, including quarterly earnings releases, and other filings with the Securities and Exchange Commission. We define Adjusted EBITDA as earnings (net income)income/(loss)) before interest, income taxes,tax expense, depreciation and amortization, discontinued product expense, reorganization charges, litigation expenses including stock-based settlement expense, manufacturing initiative and stock option expenses. Prior to January 1, 2020, discontinued product expense and manufacturing initiative expenses were not included in our definition of Adjusted EBITDA. We believe that Adjusted EBITDA is used by investors and other users of our financial statements as a supplemental financial measure that, when viewed with our GAAP results and the accompanying reconciliation, we believe provides additional information that is useful to gain an understanding of the factors and trends affecting our business. We also believe the disclosure of Adjusted EBITDA helps investors meaningfully evaluate and compare our cash flow generating capacity from quarter to quarter and year to year. Adjusted EBITDA is used by management as a supplemental internal measure for planning and forecasting overall expectations and for evaluating actual results against such expectations. Because management uses Adjusted EBITDA for such purposes, the Company uses Adjusted EBITDA as a significant criterion for determining the amount of annual cash incentive compensation paid to our executive officers and employees. We have historically found that Adjusted EBITDA is superior to other metrics for our company-wide cash incentive program, as it is more easily explained and understood by our typical employee.
A reconciliation of our non-GAAP measures is below:
|
| Three Months Ended |
| Nine Months Ended |
| Three Months Ended |
|
| Nine Months Ended | |||||||||||||||||||
Reconciliation of GAAP Net Income |
| September 30, |
| September 30, | ||||||||||||||||||||||||
Reconciliation of GAAP Net Income/(Loss) |
| September 30, |
|
| September 30, | |||||||||||||||||||||||
to Non-GAAP Adjusted EBITDA: |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2020 |
|
| 2019 |
|
| 2020 |
| 2019 | ||||||||||
GAAP Net Income |
| $ | 651,813 |
| $ | 386,553 |
| $ | 644,606 |
| $ | 1,265,703 |
| |||||||||||||||
Tax Expense |
| 186,681 |
|
| 103,263 |
|
| 189,265 |
|
| 337,956 |
| ||||||||||||||||
Depreciation/Amortization |
| 82,774 |
|
| 78,345 |
|
| 252,594 |
|
| 228,900 |
| ||||||||||||||||
GAAP Net Income/(Loss) |
| $ | 249,175 |
|
| $ | 651,813 |
|
| $ | (377,435 | ) | $ | 644,606 |
| |||||||||||||
Income Tax Expense |
| 143,353 |
|
|
| 186,681 |
|
|
| 316,200 |
|
| 189,265 |
| ||||||||||||||
Depreciation and Amortization |
| 115,637 |
|
|
| 82,774 |
|
|
| 297,801 |
|
| 252,594 |
| ||||||||||||||
Interest Income, Net |
| (23,368 | ) |
| (6,972 | ) |
| (59,091 | ) |
| (13,088 | ) |
| (9,662 | ) |
|
| (23,368 | ) |
|
| (23,690 | ) |
| (59,091 | ) | ||
Reorganization Charges |
| — |
|
| 232,471 |
|
| 354,926 |
|
| 383,668 |
|
| — |
|
|
| — |
|
|
| — |
|
| 354,926 |
| ||
Discontinued Product Expense |
| (6,659 | ) |
|
| — |
|
|
| 71,318 |
|
| — |
| ||||||||||||||
Litigation |
| 864,009 |
|
| 286,487 |
|
| 2,481,471 |
|
| 592,787 |
|
| 675 |
|
|
| 864,009 |
|
|
| 2,446,747 |
|
| 2,481,471 |
| ||
Manufacturing Initiative Expenses |
| 59,045 |
|
|
| 120,386 |
|
|
| 194,804 |
|
| 120,386 |
| ||||||||||||||
Stock Option Expense |
| 324,135 |
|
| 24,922 |
|
| 640,775 |
|
| 51,592 |
|
|
| 346,323 |
|
|
| 324,135 |
|
|
| 1,011,140 |
|
| 640,775 |
| |
Non-GAAP Adjusted EBITDA |
| $ | 2,086,044 |
| $ | 1,105,069 |
| $ | 4,504,546 |
| $ | 2,847,518 |
|
| $ | 897,887 |
|
| $ | 2,206,430 |
|
| $ | 3,936,885 |
| $ | 4,624,932 |
|
Discontinued Product Expense. We have excluded the effect of expenses related to a discontinued product line in calculating our non-GAAP Adjusted EBITDA measure. We expected to retire our Res-Q-Vac product line towards the end of 2020, but due to the failure of equipment used to manufacture the product, the discontinuation and resulting expense was accelerated into the first quarter of 2020 which we would not otherwise incur in periods presented as part of our continuing operations. Subsequently, in the second and third quarter of 2020, we sold off a portion of the discontinued inventory previously reserved. We do not expect to incur any significant related expenses in the future.
Reorganization Charges. We have excluded the effect of Reorganization Chargesreorganization charges in calculating our non-GAAP Adjusted EBITDA measure. We incurred significant expenses in connection with the termination and replacement of C-suite executives and senior management which we would not otherwise incur in periods presented as part of our continuing operations. Reorganization charges include costs related to the replacement of C-suite executives including a transition bonus and recruiting fees, prior to March 31, 2019.
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Litigation.We have excluded litigation expenses in calculating our non-GAAP Adjusted EBITDA measure. Litigation expenses include stock-based litigation settlement expense of $2.2 million related to the settlement agreement entered into with EMED on May 20, 2020. We continue to evaluate our business performance excluding litigation fees,fees; however, we expect these expenses related to the EMED litigation to discontinue soon because of the settlement.
Manufacturing Initiative Expenses. We have excluded the effect of expenses related to the implementation of those portions of our strategic plan related to creating manufacturing efficiencies, in calculating our non-GAAP Adjusted EBITDA measure. We incurred expenses in connection with executing on these initiatives which we would not otherwise incur in periods presented as part of our continuing operations. We expect to incur related expenses for the next twelve to eighteen months as we continue in future periods.to execute on our strategic plan.
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Stock Option Expense. We have excluded the effect of stock option expenses in calculating our non-GAAP Adjusted EBITDA measure. Although stock option compensation is a key incentive offered to our employees, we continue to evaluate our business performance excluding stock option compensation expenses. We record non-cash compensation expense related to grants of options and depending upon the size, timing and the terms of the grants, the non-cash compensation expense may vary significantly but will recur in future periods.
PART I – ACCOUNTING PRONOUNCEMENTS RECENTLY ADOPTED
Refer to “NOTE 1 — NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” in the accompanying financial statements, which is incorporated herein by reference.
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
Refer to “NOTE 1 — NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” in the accompanying financial statements, which is incorporated herein by reference.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.applicable.
PART I – ITEM 4. CONTROLS AND PROCEDURES
The Company’s management, including the Company’s Principal Executive Officer and Principal Financial Officer, has 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 September 30, 2019,2020, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
On November 11, 2020, Repro Med Systems, Inc. d/b/a KORU Medical Systems (the “Company”) entered into a Manufacturing and Supply Agreement with Command Medical Products, Inc. (“Command”), pursuant to which Command has agreed to manufacture and supply the Company’s subassemblies, needle sets and tubing products pursuant to the Company’s specifications and purchase orders. The first binding purchase order pursuant to the Manufacturing and Supply Agreement is expected to be made within the next ten days (the “Effective Date”).
The Manufacturing and Supply Agreement provides for a term of five years from the Effective Date. Either party may terminate the Manufacturing and Supply Agreement upon a material breach by the other Party that has not been cured within 90 days, upon the bankruptcy or insolvency of the other Party or as expressly set forth elsewhere in the Agreement. If the Company terminates the Manufacturing and Supply Agreement other than for those reasons within the first three years from the Effective Date, the Company is obligated to pay an early termination fee to Command.
The Manufacturing and Supply Agreement also includes customary provisions relating to, among other things, delivery, inspection procedures, warranties, quality management, business continuity plans, handling and transport, intellectual property, confidentiality and indemnification.
The foregoing description of the Manufacturing and Supply Agreement is not complete and is qualified in its entirety by reference to the full text of the Manufacturing and Supply Agreement, a copy of which is attached as an exhibit to this Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2020.
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ITEM 1. LEGAL PROCEEDINGS
We areThe Company has been and may again become involved in several lawsuitslegal proceedings, claims and litigation arising in the ordinary course of business. Except as described below, KORU Medical is not presently a party to any litigation or other legal proceeding that is believed to be material to its financial condition.
Litigation
Refer to Form 10-Q for the quarterly period ended June 30, 2020 regarding the dismissed case with our principal competitor, EMED Technologies Corporation (“EMED”). EMED has alleged that our needle sets infringe various patents controlled by EMED. Certain of these lawsuits also allege antitrust violations, unfair business practices, and various other business tort claims. We are vigorously defending against all of the lawsuits brought by EMED. Although no assurances can be given, we believe we have meritorious defenses to all of EMED’s claims.
The initial case involving EMED was filed by us in the United States District Court for the Eastern District of California on September 20, 2013 (the “California case”), in response to a letter from EMED claiming patent infringement by us, and seeking a declaratory judgment establishing the invalidity of the patent referenced in the letter – EMED’s US patent 8,500,703 – “‘703.” EMED answered the complaint and asserted patent infringement of the ‘703 patent and several counterclaims relating generally to claims of unfair business practices against us. We responded by adding several claims against EMED, generally relating to claims of unfair business practices on EMED’s part. Both parties have requested injunctive relief and monetary damages in unspecified amounts. On June 16, 2015, the California court entered a preliminary injunction against KORU Medical making certain statements regarding what products were cleared by the FDA for use, or could be safely used, with KORU Medical’s Freedom60 pump, without voiding the product warranty. On September 11, 2015, we requested an ex parte reexamination of the ‘703 patent by the US Patent and Trademark Office (“USPTO”). The ex parte reexamination resulted in a Final Office Action dated July 19, 2017 rejecting all of EMED’s claims in the patent. On January 25, 2018, EMED filed an Appeal Brief with a Petition for Revival, which was accepted. On April 9, 2018, the USPTO denied EMED’s request for reconsideration of the order rejecting all claims in the ‘703 patent. On June 26, 2019, the Examiner responded to EMED’s appeal brief and maintained all of the final rejections. Both the California case and EMED’s appeal of the USPTO rejections are pending.
The second court case was filed by EMED in the United States District Court for the Eastern District of Texas on June 25, 2015, claiming patent infringement on another of its patents (US 8,961,476 – “‘476”), by our needle sets, and seeking unspecified monetary damages (“ED Texas ‘476 matter”). This ‘476 patent is related to the now rejected EMED ‘703 patent.
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On September 17, 2015, we requested an inter partes review (“IPR”) of the ‘476 patent, and in response to our request, the Court entered an order staying the ED Texas ‘476 matter until after the Patent Trial and Appeal Board (“PTAB”) of the USPTO made a decision regarding the validity of the patent. On January 12, 2017, the PTAB issued its Final Written Decision in our favor, invalidating all but one (“dependent Claim 9”) of the claims in the ‘476 patent. EMED appealed the PTAB’s ruling to the United States Court of Appeals for the Federal Circuit, which affirmed the PTAB’s Final Written Decision in our favor on April 3, 2018. On April 18, 2018, EMED filed a petition for en banc rehearing, which was denied. On August 16, 2018, EMED petitioned the United States Supreme Court for a Writ of Certiorari to review the Federal Circuit’s upholding the PTAB’s Final Written Decision. On October 29, 2018 the United States Supreme Court denied EMED’s Petition for a Writ of Certiorari, thus finally affirming the PTAB’s invalidation of ‘476, save for one dependent claim.
Following the PTAB’s Final Written Decision in the IPR regarding the ‘476 patent, EMED filed a new patent application claiming priority back to the application that issued as ‘703, which is the patent at issue in the California case. Submitted for accelerated examination, this new application issued as US 9,808,576 – “‘576” on November 7, 2017. On this same date, EMED filed a new case (the “third case”) in the United States District Court for the Eastern District of Texas claiming patent infringement of ‘576, also directed to our needle sets, and seeking unspecified damages and a preliminary injunction against marketing and sales of our needle sets. We filed a Motion to Dismiss or Transfer Venue to the United States District Court for the Southern District of New York (“SDNY”), which resulted in the transfer of the third case to SDNY (“SDNY ‘576 matter”) on May 30, 2018.
On April 23, 2018, EMED filed a new civil case (the “fourth case”) against us in the United States District Court for the Eastern District of Texas asserting antitrust, defamation and unfair business practice claims, and seeking unspecified damages, similar to those previously presented in the California case, described above. The fourth case also names Andrew Sealfon, then President and CEO of KORU Medical, individually as a defendant. As the result of a hearing on November 14, 2018, on December 7, 2018, the Court entered an order transferring the fourth case to the United States District Court for the Eastern District of California (the “California Court”). The California Court set an initial schedule for a preliminary motion phase and on August 30, 2019 EMED filed a second amended complaint. On September 30, 2019, KORU Medical and Sealfon filed a motion to dismiss that complaint, and Sealfon filed a separate motion to dismiss the case as to him for lack of jurisdiction. Ultimately, we expect this case to be coordinated or consolidated with the California case, or dismissed, as the California Court sees fit.
At the same hearing on November 14, 2018, the Texas Court granted EMED leave to amend its infringement contentions, following the IPR decision invalidating all but one claim of the ‘476 patent, in order to assert infringement of that sole remaining claim, namely dependent Claim 9. The Texas Court’s order allowing EMED’s amendment of its infringement contentions against us was entered on December 7, 2018.
The ED Texas ‘476 matter proceeded under EMED’s amended infringement contention to incorporate the surviving dependent Claim 9, which incorporates Claims 1 and 8 of the ‘476 patent, meaning that, to prove infringement on the part of us, EMED must prove more elements of infringement than it originally charged against us. In April 2019, EMED served its damages expert’s report opining that EMED’s past infringement damages amount to $1.5 million, and in May KORU Medical served its damages expert’s rebuttal report opining that EMED’s expert miscalculated damages which if properly calculated would amount to less than $100,000. The Texas Court had set a trial date of August 19, 2019, for the trial of the ED Texas ‘476 matter. On June 24, 2019, the Texas Court Magistrate Judge issued a Report and Recommendation decision finding no infringement, literally or under the doctrine of equivalents, by KORU Medical’s accused products. EMED filed its objections on June 26, 2019. On June 28, 2019 the United States District Judge for the Eastern District of Texas issued a Final Judgment in favor of KORU Medical and adopted the decision of the Magistrate Judge that was issued on June 24, 2019, overruled EMED’s objections, awarded court costs to KORU Medical, and dismissed the case. A final judgment has been entered. KORU Medical has submitted its Bill of Costs for approximately $16,000 and moved to declare the case exceptional and for recovery of its attorney fees and expenses of approximately $2.3 million in defense of EMED’s assertion of the ‘476 Patent. EMED has objected to our Bill of Costs, opposed the motion for fees, and filed a notice of appeal of the non-infringement judgment to the Court of Appeals for the Federal Circuit. On September 16, 2019, EMED filed its opening appeal brief. KORU Medical plans to oppose EMED’s appeal. The ED Texas court has stayed proceedings in the district court until the appeal process is completed. KORU Medical’s fee motion remains pending lifting of the stay.
The SDNY ‘576 matter proceeded in the New York court through claim construction on the ‘576 Patent, whereupon KORU Medical sought permission from the New York court to file a motion for summary judgement, to which EMED objected. The New York court granted KORU Medical’s request, and on July 10, 2019, KORU Medical filed its motion for summary judgement. EMED opposed that motion, and on August 30, 2019, the New York court granted summary judgement, and dismissed the lawsuit. A final judgement has been entered. KORU Medical has submitted a Bill of Costs for approximately $1,500, to which EMED has objected, and has moved the New York court to declare the case exceptional and for recovery of its attorney fees and expenses of at least $1.16 million. EMED has opposed that motion, which is now fully briefed and has been referred to a United States District Court Magistrate Judge to prepare a report and recommendation. EMED also has appealed the New York court’s judgment of non-infringement to the Court of Appeals of the Federal Circuit, which matter is pending. EMED’s opening appeal brief is currently due November 8, 2019.
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As is required by the respective Courts in both the SDNY ‘576 matter and the ED Texas ‘476 matter, the parties are engaging in settlement discussions and have conducted a court-sponsored mediation session, which did not result in settlement.
Although we believe KORU Medical has meritorious claims and defenses in all of the above-described actions and proceedings, their outcomes cannot be predicted with any certainty. If any of these actions against us are successful, they could have a material adverse effect on our business, results of operations, financial condition and cash flows.
ITEM 1A. RISK FACTORS
Our operations and financial results are subject to various risks and uncertainties, including those described in Part I, Item 1A, “Risk Factors”“PART 1, ITEM 1A. RISK FACTORS” in our Annual Report on Form 10-K for the year ended December 31, 2018,2019, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common stock. The following are material changes to our risk factors since our Annual Report on Form 10-K for the year ended December 31, 2018:
Our common stock is now listed on the Nasdaq Stock Market LLC (Nasdaq Capital Market) and is no longer subject to penny stock regulations.2019:
IfOur business has been and could continue to be adversely affected by the COVID-19 pandemic.
The COVID-19 pandemic has and will continue affecting economies and businesses around the world. We are closely monitoring the impact of COVID-19 on all aspects of our business, including how it may impact our employees and business operations. While we faildid not incur significant manufacturing disruptions during the quarter ended September 30, 2020 from the COVID-19 pandemic, customer purchasing patterns and clinical trial activity have been less predictable as a result of the pandemic. We may experience disruptions that could severely impact our results of operations and financial condition. We are unable to predict the impact that COVID-19 will have on our future operating results and financial condition due to numerous uncertainties. These uncertainties include the geographic spread of the pandemic, the severity of the virus, the impact of the virus directly on our employees or those of our suppliers, the duration of the outbreak, governmental actions, travel restrictions and social distancing, business closures or business disruptions (including those impacting our supply chain), delays in clinical trials, the effectiveness of actions taken in the United States and other countries to contain and treat the disease, the availability of plasma and drugs that are administered by our products, the number of new prescriptions for PIDD and CIDP, purchasing patterns of customers in response to the pandemic, changes to our operations, or whether the United States and additional countries are required to move to complete lock-down status, among others. Our sales representatives are unable to hold in-person meetings with customers and health care providers to discuss our products, which may further impact our sales. As local jurisdictions continue to put restrictions in place, our ability to continue to manufacture our products may also be limited. Such events may result in a period of business and manufacturing disruption, and in reduced operations, any of which could materially affect our business, financial condition and results of operations. The health of our workforce and our ability to meet staffing needs at our facility cannot be predicted and is vital to our operations. We will continue to monitor the listing standardsCOVID-19 situation closely and intend to follow health and safety guidelines as they evolve. Further, the spread of COVID-19, which has caused a broad impact globally, may materially affect us economically. While the Nasdaq Stock Market LLC (“Nasdaq”), our common stockpotential economic impact brought by, and the duration of, COVID-19 may be delisted,difficult to assess or predict, it has resulted in significant disruption of global financial markets, which could have a material adverse effect onreduce our ability to access capital, negatively affecting our liquidity. In addition, the liquidityrecession resulting from the spread of COVID-19 could materially affect our common stock.
Our common stock is currently listed onbusiness and the Nasdaq Capital Market. Nasdaq has requirements that a company must meet in order to remain listed on Nasdaq. In particular, Nasdaq rules require us to maintain a minimum bid price of $1.00 per sharevalue of our common stock. If the closing bid priceThe ultimate long-term impact of our common stock were to fall below $1.00 per share for 30 consecutive trading days or we do not meet other listing requirements, we would fail toCOVID-19 is highly uncertain and cannot be in compliancepredicted with Nasdaq listing standards. There can be no assurance that we will continue to meet the minimum bid price requirement, or any other requirement in the future. If we fail to meet the minimum bid price requirement, The Nasdaq Stock Market LLC may initiate the delisting process. In addition, we may be unable to meet other applicable Nasdaq listing requirements, including maintaining minimum levels of stockholders’ equity or market values of our common stock in which case, our common stock could be delisted. If our common stock were to be delisted, the liquidity of our common stock would be adversely affected and the market price of our common stock could decrease.confidence.
PART II – - 25 -
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On February 20, 2019, the Board of DirectorsEach non-employee director of the Company approved non-employee director compensationis eligible to receive of $50,000 annually effective(effective January 1, 2019, and an additional2019) plus $10,000 annually for the chair of eachchairing a Board committee effective(effective February 20, 2019, in each case2019), all to be paid quarterly half in cash and half in common stock atand pro-rated for partial service. The Chairman of the end of each fiscal quarter.Board is eligible to receive an additional $50,000 annually (effective October 1, 2019), all to be paid in common stock. The Company issued an aggregate of 12,4476,681 and 47,14323,869 shares of common stock to its non-employee directors duringfor the three and nine month periodmonths ended September 30, 2019,2020, respectively.
On January 7, 2020, Manuel Marques, the Company’s Chief Operating Officer, exercised options held by him for an aggregate 175,000 shares of common stock for an aggregate exercise price of $85,500.
On May 9, 2020, Karen Fisher, the Company’s Chief Financial Officer, exercised options held by her for an aggregate 535,000 shares of common stock through delivery of previously owned shares having an aggregate fair market value of $322,294.
On May 20, 2020, the Company entered into a Settlement Agreement with EMED Technologies Corporation (“EMED”) to settle all claims in connection with all pending litigation matters between them (the “Claims”). Pursuant to Daniel S. Goldberger’s employment agreement dated October 12, 2018,the Settlement Agreement, the Company issued to EMED (i) 95,238 restricted stock units, which vested on May 21, 2020 and 95,238 restricted stock units vesting on January 1, 2021, and (ii) an option to purchase up to 400,000 shares of the Company’s common stock at an exercise price of $11.21 per share prior to February 1, 2019, when Donald B. Pettigrew was appointed to President and Chief Executive Officer, Mr. Goldberger was awarded a performance bonus in the amount of $270,000, half2021, which can be settled in cash and half in lieu of common stock to be paid on April 1, 2019. Theat the Company’s sole discretion, provided that the number of shares of common stock issued was 90,604 basedand/or amount of cash paid by the Company upon exercise will be capped at a value of $16.21 per share. The Settlement Agreement includes mutual releases and covenants not to sue for any claim arising before May 20, 2020 and the closing priceCompany covenants not to challenge any EMED patents that were the subject of the Common Stock ofClaims unless EMED asserts them in the future against Company on February 1, 2019 as reported by the OTCQX.products.
During the three months ended September 30, 2019, 350,000 options were issued to key employees under the Company’s 2015 Stock Option Plan, as amended (the “Plan”). There are 6,000,000 options authorized for issuance under the Plan. During the three months ended September 30, 2019, 95,000 options were exercised at an exercise price of $0.36.
The following table describes the options issued to Company key employees for the three months ended September 30, 2019:
Date Issued |
| Options Awarded |
| Vesting Schedule |
| Exercise Price $ |
7/1/2019 |
| 250,000 |
| Vest 25% annually on anniversary date |
| 2.83 |
8/19/2019 |
| 100,000 |
| Vest 25% annually on anniversary date |
| 3.15 |
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.
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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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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.
| REPRO MED SYSTEMS, INC. |
|
|
November | /s/ Donald B. Pettigrew |
| Donald B. Pettigrew, President and Chief Executive Officer |
|
|
November | /s/ Karen Fisher |
| Karen Fisher, Chief Financial Officer and Treasurer |
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