KORU Medical Systems (KRMD) 10-Q 2016 Q2 Quarterly report

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 August 31, 2015

Or

[  ]  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.)
24 Carpenter Road, Chester, New York	10918
(Address of Principal Executive Offices)	(Zip Code)

(845) 469-2042

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  [X] Yes  [  ] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [X]  No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [  ]	Accelerated filer [  ]
Non-accelerated filer   [  ] (Do not check if a smaller reporting company)	Smaller reporting company [X]

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 October 2, 2015, 38,006,667 shares of common stock, $.01 par value per share, were outstanding, which excludes 2,340,625 shares of Treasury Stock.

REPRO MED SYSTEMS, INC.

TABLE OF CONTENTS

		PAGE
PART I– FINANCIAL INFORMATION
ITEM 1.	Financial Statements
	Balance Sheets as of August 31, 2015 (Unaudited) and February 28, 2015	3
	Statements of Operations (Unaudited) for the Three Months and Six Months Ended August 31, 2015, and 2014	4
	Statements of Cash Flows (Unaudited) for the Six Months Ended August 31, 2015, and 2014	5
	Notes to Financial Statements	6-8
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9-15
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	16
ITEM 4.	Controls and Procedures	16
PART II– OTHER INFORMATION
ITEM 1.	Legal Proceedings	16
ITEM 1A.	Risk Factors	16
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	16
ITEM 3.	Defaults Upon Senior Securities	17
ITEM 4.	Mine Safety Disclosures	17
ITEM 5.	Other Information	17
ITEM 6.	Exhibits	17

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PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

REPRO MED SYSTEMS, INC.

BALANCE SHEETS

	August 31,
	2015			February 28,
	(Unaudited)			2015
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	3,157,020		$	2,557,235
Certificates of deposit		259,789			259,789
Accounts receivable less allowance for doubtful accounts of $31,581 and $29,865 for August 31, 2015 and February 28, 2015, respectively		1,409,461			1,623,695
Inventory		1,295,709			1,226,636
Prepaid expenses		258,727			240,688
TOTAL CURRENT ASSETS		6,380,706			5,908,043
Property and equipment, net		1,105,869			1,161,432
Patents, net of accumulated amortization of $140,566 and $134,552 at August 31, 2015 and February 28, 2015, respectively		192,431			180,558
Other assets		31,140			31,140
TOTAL ASSETS	$	7,710,146		$	7,281,173
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Deferred capital gain - current portion	$	22,481		$	22,481
Accounts payable		309,796			243,217
Accrued expenses		370,508			304,041
Accrued tax liability		44,307			—
Accrued payroll and related taxes		104,961			121,917
TOTAL CURRENT LIABILITIES		852,053			691,656
Deferred capital gain - less current portion		56,216			67,454
Deferred tax liability		243,847			248,607
TOTAL LIABILITIES		1,152,116			1,007,717
STOCKHOLDERS’ EQUITY
Common stock, $0.01 par value, 50,000,000 shares authorized, 40,347,292 shares issued; 38,006,667 shares outstanding		403,473			403,473
Additional paid-in capital		3,855,188			3,855,188
Retained earnings		2,507,650			2,237,076
		6,766,311			6,495,737
Less: Treasury stock, 2,340,625 shares at cost		(166,281	)		(166,281	)
Less: Deferred compensation cost		(42,000	)		(56,000	)
TOTAL STOCKHOLDERS’ EQUITY		6,558,030			6,273,456
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	7,710,146		$	7,281,173

The accompanying notes are an integral part of these financial statements

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REPRO MED SYSTEMS, INC.

STATEMENTS OF OPERATIONS (UNAUDITED)

	For the Three Months Ended						For the Six Months Ended
	August 31						August 31
	2015			2014			2015			2014
NET SALES	$	3,166,177		$	2,504,854		$	5,796,722		$	5,141,875
Cost of goods sold		1,159,448			868,317			2,272,133			1,979,088
Gross Profit		2,006,729			1,636,537			3,524,589			3,162,787
OPERATING EXPENSES
Selling, general and administrative		1,391,143			1,088,059			2,869,483			2,182,124
Research and development		38,711			158,424			92,376			289,820
Depreciation and amortization		70,094			70,990			134,813			130,680
Total Operating Expenses		1,499,948			1,317,473			3,096,672			2,602,624
Net Operating Profit		506,781			319,064			427,917			560,163
Non-Operating Income/(Expense)
Gain (Loss) currency exchange		9,313			(11,559	)		(5,757	)		(9,715	)
Loss on disposal of fixed assets		(8,718	)		—			(13,324	)		—
Interest expense		—			(512	)		—			(512	)
Interest and other income		1,026			1,706			2,129			2,915
TOTAL OTHER INCOME (EXPENSES)		1,621			(10,365	)		(16,952	)		(7,312	)
INCOME BEFORE TAXES		508,402			308,699			410,965			552,851
Income Tax Expense		(173,188	)		(105,705	)		(140,391	)		(191,801	)
NET INCOME	$	335,214		$	202,994		$	270,574		$	361,050
NET INCOME PER SHARE
Basic	$	0.01		$	0.01		$	0.01		$	0.01
Diluted	$	0.01		$	0.01		$	0.01		$	0.01
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic		38,006,667			37,342,537			38,006,667			37,212,102
Diluted		38,006,667			37,342,537			38,006,667			37,212,102

The accompanying notes are an integral part of these financial statements

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REPRO MED SYSTEMS, INC.

STATEMENTS OF CASH FLOWS

(UNAUDITED)

	For the Six Months Ended
	August 31,
	2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	270,574		$	361,050
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred compensation cost		14,000			65,750
Depreciation and amortization		134,813			130,680
Deferred capital gain - building lease		(11,240	)		(11,240	)
Loss on disposal of fixed assets		13,324			—
Provision for returns and doubtful accounts		152			—
Deferred taxes		(4,760	)		—
Changes in operating assets and liabilities:
Decrease  in accounts receivable		214,083			128,017
Increase in inventory		(69,073	)		(621,794	)
Increase in prepaid expense		(18,039	)		(28,889	)
Increase in accounts payable		66,579			185,755
(Decrease) Increase in accrued payroll and related taxes		(16,956	)		2,324
Increase in accrued expense		66,468			131,432
Increase (Decrease) in accrued tax liability		44,307			(123,089	)
NET CASH PROVIDED  BY OPERATING ACTIVITIES		704,232			219,996
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for property and equipment		(100,110	)		(397,567	)
Proceeds on disposal of fixed assets		13,550			—
Purchase of certificates of deposit		—			(629	)
Payments for patents		(17,887	)		(79,934	)
NET CASH USED IN INVESTING ACTIVITIES		(104,447	)		(478,130	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of securities, net of legal and other fees of $15,000		—			273,000
NET CASH PROVIDED BY FINANCING ACTIVITIES		—			273,000
NET INCREASE IN CASH AND CASH EQUIVALENTS		599,785			14,866
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		2,557,235			2,227,398
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	3,157,020		$	2,242,264
Supplemental Information
Cash paid during the periods for:
Interest	$	—		$	512
Taxes	$	—		$	314,891
NON-CASH FINANCING AND INVESTING ACTIVITIES
Issuance of common stock as compensation	$	—		$	84,000

The accompanying notes are an integral part of these financial statements

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REPRO MED SYSTEMS, INC.

NOTES TO THE UNAUDITED FINANCIAL STATEMENTS

NOTE 1  NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

REPRO MED SYSTEMS, INC. (the “Company”) designs, manufactures and markets proprietary medical devices primarily for the ambulatory infusion market and emergency medical applications. The Food and Drug Administration (the “FDA”) regulates these products. The Company operates as one segment.  

BASIS OF PRESENTATION

The accompanying unaudited financial statements as of August 31, 2015, 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 August 31, 2015, and the results of operations and cash flow for the three month and six month periods ended August 31, 2015, and 2014.

The results of operations for the three and six months ended August 31, 2015, and 2014 are not necessarily indicative of the results to be expected for the full year.  These interim financial statements should be read in conjunction with the financial statements and notes thereto of the Company and management’s discussion and analysis of financial condition and results of operations included in the Company’s Annual Report for the year ended February 28, 2015, as filed with the Securities and Exchange Commission on Form 10-K.

SUBSEQUENT EVENTS EVALUATION

The Company has evaluated subsequent events through October 2, 2015, the date on which the financial statements were issued. There were no material subsequent events that required recognition or additional disclosure in the financial statements, except as disclosed in Note 5 to these financial statements.

USE OF ESTIMATES IN THE FINANCIAL STATEMENTS

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“U.S. 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, and accruals.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-11—Simplifying the Measurement of Inventory.  The ASU was issued as part of the FASB’s simplification initiative and under the ASU, inventory is measured at the lower of cost and net realizable value, which would eliminate the other two options that currently exist for the market: (1) replacement cost and (2) net realizable value less an approximately normal profit margin.  This ASU is effective for interim and annual periods beginning after December 15, 2016.  Early application is permitted and should be applied prospectively.  The Company is assessing the impact of the adoption of the ASU on its financial statements.

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In May 2014, FASB issued ASU No. 2014-09—Revenue from Contracts with Customers. The ASU clarifies the principles for recognizing revenue and develops a common revenue standard for U.S. GAAP and International Financial Reporting Standards (“IFRS”) that removes inconsistencies and weaknesses in revenue requirements, provides a more robust framework for addressing revenue issues, improves comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets, provides more useful information to users of the financial statements through improved disclosure requirements and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. The amendments in this update are effective for the annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Full or modified retrospective adoption is required and early application is not permitted. On July 9, 2015, the FASB issued ASU No. 2015-14 Revenue from Contracts with Customers (Topic 606); Deferral of the Effective Date, which (a) delays the effective date of ASU 2014-09, Revenue from Contracts with Customers (Topic 606), by one year to annual periods beginning after December 15, 2017 and (b) allows early adoption of the ASU by all entities as of the original effective date for public entities.  The Company is assessing the impact of the adoption of the ASU on its financial statements, disclosure requirements and methods of adoption.

RECLASSIFICATION

Certain reclassifications have been made to conform prior period data to the current presentation.  These reclassifications had no effect on reported net income.

NOTE 2  RELATED PARTY TRANSACTIONS

CONSULTING SERVICES

On December 20, 2013, we executed an agreement effective March 1, 2014, with a Company director, Dr. Mark Baker, to provide clinical research and support services related to new and enhanced applications for the FREEDOM60® Syringe Infusion System. Authorized by the Board of Directors, the agreement provides for payment of 420,000 shares of common stock valued at $0.20 per share over a three-year period.  Amortization amounted to $7,000 and $14,000 for the three and six months ended August 31, 2015 and 2014, respectively.  In August, 2014, Dr. Baker was paid a previously approved bonus of $25,000 to assist him in covering taxes due on the grant of common stock.

LEASED AIRCRAFT

The Company leases an aircraft from a company controlled by the president.  The lease payments aggregated were $5,375 and $10,750 for the three and six months ended August 31, 2015, and 2014, respectively.  The original lease agreement has expired and the Company is currently on a month-to-month basis for rental payments.

NOTE 3  PROPERTY AND EQUIPMENT

Property and equipment consists of the following at:

	August 31, 2015		February 28, 2015
Land	$	54,030	$	54,030
Building		171,094		171,094
Furniture, office equipment, and leasehold improvements		940,337		887,959
Manufacturing equipment and tooling		965,027		963,843
		2,130,488		2,076,926
Less: accumulated depreciation		1,024,619		915,494
Property and equipment, net	$	1,105,869	$	1,161,432

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NOTE 4  LEGAL PROCEEDINGS

In 2013 we commenced in the Eastern District of California a declaratory judgment action to establish the invalidity of a competitor’s patent and non-infringement of the Company’s needle sets.  The defendant answered the complaint and asserted infringement and unfair business practice counterclaims. We responded by asserting our own unfair business practice claims against the competitor defendant.  On June 16, 2015, the Court issued what it termed a “narrow” preliminary injunction against the Company from making certain statements regarding certain competitor products.  The Company is complying with that order.  Discovery is ongoing.

On June 25, 2015, the competitor filed a claim of patent infringement, also directed to the Company’s needle sets, in the Eastern District of Texas.  This patent is related to the one concerning the Company’s declaratory judgment action.  The Company has not yet answered or otherwise responded to the complaint in the latter filed case.

On September 11, 2015, the Company requested anex parte reexamination of the patent in the first filed case, and on September 17, 2015 the Company requested aninter partes review of the patent in the second filed case.  Decisions on whether those requests will result in formal patent proceedings are expected within three (3) and six (6) months, respectively.

Although the Company believes it has meritorious claims and defenses in these litigations and proceedings, their outcome cannot be predicted with any certainty.

NOTE 5  STOCK

On September 30, 2015, RMS’s Board of Directors authorized a stock repurchase program pursuant to which the Company will make open market purchases of up to 1,000,000 shares of the Company’s Outstanding Common Stock.  The purchases will be made through a broker to be designated by the Company with price, timing and volume restrictions based on average daily trading volume, consistent with the safe harbor rules of the Securities and Exchange Commission for such repurchases.

On September 30, 2015, the Board of Directors also approved the 2015 Stock Option Plan authorizing the Company to grant awards to certain employees under the plan at fair market value, subject to shareholder approval.  The total number of shares of common stock of the Company, par value $.01 per share (“Common Stock”), with respect to which awards may be granted pursuant to the Plan shall not exceed 2,000,000 shares.

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PART I – ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 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 future operating results, unpredictability related to Food and Drug Administration regulations, introduction of competitive products, limited liquidity, reimbursement related risks, government regulation of the home health care industry, success of the research and development effort, expanding the market of FREEDOM60, availability of sufficient capital to continue operations and dependence on key personnel. 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. These statements involve risks and uncertainties with respect to the ability to raise capital to develop and market new products, acceptance in the marketplace of new and existing products, ability to penetrate new markets, our success in enforcing and obtaining patents, obtaining required Government approvals and attracting and maintaining key personnel that could cause the actual results to differ materially. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. The Company does not undertake any obligation to release publicly any revision to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

RESULTS OF OPERATIONS

Three Months Ended August 31, 2015 compared to August 31, 2014

Net Sales

The following table summarizes our net sales for the three months ended August 31, 2015 and 2014:

	Three Months Ended August 31,				Change from Prior Year				% of Sales
	2015		2014		$		%		2015		2014
Sales
Domestic	$	2,656,449	$	2,063,237	$	593,212	28.8	%	83.9	%	82.4	%
International		509,728		441,617		68,111	15.4	%	16.1	%	17.6	%
Total	$	3,166,177	$	2,504,854	$	661,323	26.4	%

Net sales for the quarter grew 26.4%, an increase of $0.7 million versus the same period last year, driven by domestic sales. This increase was mostly driven by sales of our infusion products.

Gross Profit

Our gross profit for the three months ended August 31, 2015 and 2014 is as follows:

	Three Months Ended August 31,						Change from Prior Year
	2015			2014			$		%
Gross Profit	$	2,006,729		$	1,636,537		$	370,192	22.6	%
Stated as a Percentage of Net Sales		63.4	%		65.3	%

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Gross profit increased $0.4 million or 22.6% in the three months ended August 31, 2015, as compared to the same period in 2014.  This was mostly driven by the increase in revenue for the quarter.  However, stated as a percentage of net sales, our gross profit declined from 65.3% in the three month period ended August 31, 2014 to 63.4% in the three month period ended August 31, 2015.  This decline is due to higher cost of goods sold resulting from consulting fees for lean initiatives, which were completed in the quarter and production equipment repairs, maintenance and validation in the three months ended August 31, 2015.  Had these costs not been incurred in the quarter our gross profit percentage would have been nearly even with the same period last year.  Lean manufacturing is an on-going process of continuous improvement and we anticipate improvements in our gross profit margins during the next six months of our fiscal year.  We are showing initial improvements impacting our return on investment, including increased capacity and reductions of assembly labor costs, which are typical for such processes.

Selling, general and administrative and Research and development

Our selling, general and administrative expenses and research and development costs for the three months ended August 31, 2015 and 2014 are as follows:

	Three Months Ended August 31,						Change from Prior Year
	2015			2014			$			%
Selling, general and administrative	$	1,391,143		$	1,088,059		$	303,084		27.9	%
Research and development		38,711			158,424			(119,713	)	(75.6	)%
	$	1,429,854		$	1,246,483		$	183,371		14.7	%
Stated as a Percentage of Net Sales		45.2	%		49.8	%

Selling, general and administrative expenses increased $0.3 million during the three months ended August 31, 2015 as compared to the same period last year mostly due to legal fees incurred for our patent litigation, recruiting fees incurred to increase our sales force and regulatory consulting fees incurred for FDA reporting requirements.

Research and development expenses decreased by $0.1 million in the three months ended August 31, 2015 compared to the same period last year mostly due to a reduction in outside consulting services and from attrition in the department.  We continue to be committed to our research and development efforts in order to develop new products.  We continue to actively pursue new product development and enhance existing product lines based on demand from the marketplace which includes feedback from sales and marketing at RMS and our distributors, the RMS clinical advisory panel, and our strategic business partners.  We believe that such efforts have been useful in helping us to maintain our competitive position, increase revenue from our existing customer base and expand our market reach. Although our research and development efforts have allowed us to develop the Freedom60, our HIgH-Flo needle sets, and the FreedomEdge in 2015, there can be no assurance that our research and development will result in additional commercially successful products.

Depreciation and amortization

Depreciation and amortization expense decreased slightly by 1.3% down to $70,094 in the three months ended August 31, 2015 compared with $70,990 in the three months ended August 31, 2014.

Net Income

	Three Months Ended August 31,						Change from Prior Year
	2015			2014			$		%
Net Income	$	335,214		$	202,994		$	132,220	65.1	%
Stated as a Percentage of Net Sales		10.6	%		8.1	%

Our net income for the three months ended August 31, 2015 increased $0.1 million or 65.1% compared with the same three months ended August 31, 2014.  The improvement in net income is mostly driven by the increase in sales, partially offset by the increase in selling, general and administrative expenses.

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Six Months Ended August 31, 2015 compared to August 31, 2014

Net Sales

The following table summarizes our net sales for the six months ended August 31, 2015 and 2014:  

	Six Months Ended Aug 31,				Change from Prior Year				% of Sales
	2015		2014		$		%		2015		2014
Sales
Domestic	$	4,665,523	$	4,279,728	$	385,795	9.0	%	80.5	%	83.2	%
International		1,131,199		862,147		269,052	31.2	%	19.5	%	16.8	%
Total	$	5,796,722	$	5,141,875	$	654,847	12.7	%

Net sales increased in the six months ended August 31, 2015 by $0.7 million or 12.7% compared to the six months ended August 31, 2014.  This increase was mostly driven by sales of our infusion products.

Gross Profit

Our gross profit for the six months ended August 31, 2015 and 2014 is as follows:

	Six Months Ended Aug 31,						Change from Prior Year
	2015			2014			$		%
Gross Profit	$	3,524,589		$	3,162,787		$	361,802	11.4	%
Stated as a Percentage of Net Sales		60.8	%		61.5	%

Gross profit increased $0.4 million or 11.4% in the six months ended August 31, 2015 compared to the same period in 2014.  This was mostly due to the increase in sales.  As a percentage of sales we showed a 0.7 basis point drop mostly due to higher cost of goods sold resulting from consulting fees for lean initiatives, which were completed in the quarter and production equipment repairs, maintenance and validation in the three months ended August 31, 2015.  Had these costs not been incurred our gross profit percentage would have been nearly even with the same period last year.  Lean manufacturing is an on-going process of continuous improvement and we anticipate improvements in our gross profit margins in the remaining six months of our fiscal year.  We are showing initial improvements impacting our return on investment, including increased capacity and reductions of assembly labor costs, which are typical for such processes.

Selling, general and administrative and Research and development

Our selling, general and administrative expenses and research and development costs for the six months ended August 31, 2015 and 2014 are as follows:

	Six Months Ended Aug 31,						Change from Prior Year
	2015			2014			$			%
Selling, general and administrative	$	2,869,483		$	2,182,124		$	687,359		31.5	%
Research and development		92,376			289,820			(197,444	)	(68.1	)%
	$	2,961,859		$	2,471,944		$	489,915		19.8	%
Stated as a Percentage of Net Sales		51.1	%		48.1	%

Selling, general and administrative expenses increased $0.7 million during the six months ended August 31, 2015 as compared to the same period last year.   The majority of this increase came from a reorganization effort which included a severance charge of $0.2 million and higher salary costs of $0.2 million, recruiting and consulting fees of $0.1 million and $0.2 million of legal fees incurred mostly for our patent litigation.

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Research and development expenses decreased by $0.2 million in the six months ended August 31, 2015 compared to the same period last year mostly due to a reduction in outside consulting services and from attrition in the department.  We continue to be committed to our research and development efforts in order to develop new products.  We continue to actively pursue new product development and enhance existing product lines based on demand from the marketplace which includes feedback from sales and marketing at RMS and our distributors, the RMS clinical advisory panel, and our strategic business partners.  We believe that such efforts have been useful in helping us to maintain our competitive position, increase revenue from our existing customer base and expand our market reach. Although our research and development efforts have allowed us to develop the Freedom60, our HIgH-Flo needle sets, and the FreedomEdge in 2015, there can be no assurance that our research and development will result in additional commercially successful products.

Depreciation and amortization

Depreciation and amortization expense increased by 3.2% up to $134,813 in the six months ended August 31, 2015 compared with $130,680 in the six months ended August 31, 2014 as a result of continued investment in capital assets and patents.

Net Income

	Six Months Ended Aug 31,						Change from Prior Year
	2015			2014			$			%
Net Income	$	270,574		$	361,050		$	(90,476	)	(25.1	)%
Stated as a Percentage of Net Sales		4.7	%		7.0	%

Our net income for the six months ended August 31, 2015 was $0.3 million compared with net income of $0.4 million for the six months ended August 31, 2014.  This decrease of $0.1 million in net income is mostly the result of the increase in selling, general and administrative expenses of $0.7 million described above, partially offset by increased sales.

LIQUIDITY AND CAPITAL RESOURCES

Our principal source of liquidity is our cash of $3.2 million as of August 31, 2015, and cash flows from operations.  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, research and development costs, capital expenditures and patent costs.

We believe that as of August 31, 2015, 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 the FREEDOM60® continues to find a solid following in the subcutaneous immunoglobulin market and this market is expected to continue to increase both domestically and internationally.

On September 30, 2015, RMS’s Board of Directors authorized a stock repurchase program pursuant to which the Company will make open market purchases of up to 1,000,000 shares of the Company’s Outstanding Common Stock.  The purchases will be made through a broker to be designated by the Company with price, timing and volume restrictions based on average daily trading volume, consistent with the safe harbor rules of the Securities and Exchange Commission for such repurchases.

On September 30, 2015, the Board of Directors also approved the 2015 Stock Option Plan authorizing the Company to grant awards to certain employees under the plan at fair market value, subject to shareholder approval.  The total number of shares of common stock of the Company, par value $.01 per share (“Common Stock”), with respect to which awards may be granted pursuant to the Plan shall not exceed 2,000,000 shares.

RMS HIgH-Flo™ Subcutaneous Safety Needle Sets have clearance for sale in Europe, Canada and the U.S. We believe that the RMS administration sets represent an improvement in performance and safety over competitive devices on the market. We believe we have sufficient resources to continue marketing the needle sets domestically and internationally.

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Cash Flows

The following table summarizes our cash flows:

	Six Months Ended August 31, 2015			Six Months Ended August 31, 2014
Net cash provided by operating activities	$	704,232		$	219,996
Net cash used in investing activities		(104,447	)		(478,130	)
Net cash provided by financing activities		—			273,000

Operating Activities

Net cash provided by operating activities of $0.7 million for the six months ended August 31, 2015, was primarily attributable to our net income of $0.3 million, non-cash charges of $0.1 million for depreciation and amortization of long lived tangible and intangible assets, $14,000 of deferred compensation costs, a reduction of accounts receivable of $0.2 million and an increase in accounts payable and accrued expense of $0.1 million.  The increase in inventory levels of $0.1 million in the six months ended August 31, 2015 was also much lower than the $0.6 million in the six months ended August 31, 2014 due to initial increases resulting from our outsourcing of subassemblies for our manufacturing process and increased finished good levels for needle sets in that period.  Net cash provided by operating activities of $0.2 million for the six months ended August 31, 2014 was primarily attributable to our net income of $0.4 million, non-cash charges of $0.1 million for depreciation and amortization of long lived tangible and intangible assets and $0.1 million of deferred compensation costs, all offset mostly by an increase in inventory levels of $0.6 million in the period as described above.

Investing Activities

Our net cash used in investing activities was $0.1 million for the six months ended August 31, 2015 and $0.5 million for the six months ended August 31, 2014.  The cash used was primarily attributable to capital expenditures and patent costs, of which in the prior year period we opened a second clean room, did facility upgrades and added new production equipment.

OUR PRODUCTS

FREEDOM60 SYRINGE INFUSION SYSTEM

The FREEDOM60 Syringe Infusion System (“FREEDOM60”), comprised of the FREEDOM60 Syringe Infusion Pump and RMS Precision Flow Rate Tubing™, is designed for ambulatory medication infusions.  For the home care patient, FREEDOM60 is an easy-to-use lightweight mechanical pump using a 60ml syringe, completely portable and maintenance free, with no batteries to replace. FREEDOM60 offers increased safety, greater reliability and an overall higher quality infusion.  For the infusion professional, FREEDOM60 delivers accurate infusion rates and class-leading flow performance. For the home infusion provider, FREEDOM60 can be used in place of electronic and disposable pumps.  FREEDOM60s lower acquisition and operating costs free up significant working capital for growing infusion business.

The FREEDOM60 operates in “dynamic equilibrium,” that is, the system finds and maintains a balance between what a patient’s subcutaneous tissues are able to manage and what the pump infuses.  This balance is created by a safe, limited, and controlled pressure, which adjusts the flow rate automatically to the patient’s needs providing a reliable, faster, and more comfortable administration with fewer side effects for those patients.  Electronic devices will increase infusion pressure while attempting to continue an infusion at the programmed rate, while the FREEDOM60 design maintains a safe constant pressure and thereby automatically reduces the flow rate as required, if problems of administration occur.

Ambulatory infusion pumps are most prevalent in the outpatient and home care market although we believe there is potential in the hospital setting as well.  Applications for the FREEDOM60 include the infusion of specialized drugs such as Immunoglobulin G (“IgG”), pain control, and chemotherapy.  We are expanding into intravenous antibiotics including the widely used yet challenging to administer Vancomycin, and beta lactams which require longer infusion times as a part of antimicrobial stewardship.  We have also found a following for FREEDOM60 for use in treating thalassemia with the drug Desferal®.  In Europe, we find additional success in using the FREEDOM60 for pain control, specifically post-operative epidural pain administration.

The FREEDOM60 provides a high-quality delivery to the patient at costs comparable to gravity-driven infusions and is designed for the home health care industry, patient emergency transportation, and for any time a low-cost infusion is required. We continue to meet milestones in building a product franchise with FREEDOM60 and the sale of RMS Precision Flow Rate Tubing. This positions us well to expand on the technology of dynamic equilibrium for other home infusion devices.

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The FREEDOM60 use for treatment of primary immune deficiency diseases by administering IgG under the skin has continued to increase during the past year. The FREEDOM60 is the leading pump in the U.S. used to infuse immune globulin medicines such as Hizentra® and Gammagard® under the skin as a subcutaneous administration (“SCIg”).  For patients with Primary Immunodeficiency, Multifocal Motor Neuropathy, Idiopathic thrombocytopenic purpura, and Chronic Inflammatory Demyelinating Polyneuropathy, this method has provided vastly improved quality of life with much fewer unpleasant side effects over the traditional intravenous route.  There is evidence that indications for SCIg therapy will continue to expand to other disease states. The FREEDOM60 is an ideal system for this administration since the patient is able to self-medicate at home.  The pump is easily configured for this application, and the FREEDOM60 is the lowest cost infusion system available in a heavily cost constrained market.

In March, 2015, at the National Home Infusion Association Show in Phoenix, AZ, we introduced the FreedomEdge™ Syringe Infusion Pump (“FreedomEdge”).  The FreedomEdge has all the trusted technology of the FREEDOM60 in a new, smaller package for use with 20ml or 30ml syringe sizes, utilizing our existing RMS Precision Flow Rate Tubing.  The FreedomEdge is expected to appeal to IgG patients who do not need the larger dose capacity of the FREEDOM60 along with cephalosporin antibiotic infusion, deferoxamine administration, and foreign markets that prefer pumps with a smaller form factor.  To date, we have begun shipping the FreedomEdge for product evaluation.

RMS HIGH-FLO™ SUBCUTANEOUS SAFETY NEEDLE SETS

RMS HIgH-Flo Subcutaneous Safety Needle Sets (“HIgH-Flo”) are designed for self-administration of medicine under the skin. Our needles feature unique design elements specific to subcutaneous self-administration, including a 5-bevel back-cut needle designed for more comfort and less tissue damage. Our needle set design permits drug flows which are the same or faster than those achieved with larger gauge needles currently on the market. This proprietary hydraulic engineering for compatibility with the FREEDOM60 and FreedomEdge, guarantees the sensitivity of the system’s dynamic equilibrium.

Reflecting RMS’ dedication to clinician safety, the sets’ butterfly wing closures encase needles after use and help to protect against accidental needle stick injuries, an area of concern to the medical community.  The sets are called safety needle sets to reflect this safety feature as an integral part of every set.

We expanded the range of HIgH-Flo sets available, including a 24 gauge set for very high flow rates, to meet the delivery demands of new drugs on the market such as Hyqvia®.  HIgH-Flo sets are also being used in major clinical trials world-wide.

RES-Q-VAC® PORTABLE MEDICAL SUCTION

The RES-Q-VAC Portable Medical Suction System (“RES-Q-VAC”) is a lightweight, portable, hand-operated suction device that removes fluids from a patient’s airway by attaching the RES-Q-VAC pump to various proprietary sterile and non-sterile single-use catheters sized for adult and pediatric suctioning. The bottom-hinged one-hand operation makes it extremely effective and the product is generally found in emergency vehicles, hospitals, disaster kits, mass casualty trailers, and wherever portable aspiration is a necessity, including backup support for powered suction systems.  Additional markets include nursing homes, hospice, sub-acute, dental and military applications.  The Full Stop Protection® filter and disposable features of the RES-Q-VAC reduce the risk of exposing the health professional to human immunodeficiency virus (“HIV”) or Tuberculosis (“TB”) when suctioning a patient or during post treatment cleanup.  All of the parts that connect to the pump are disposable.

A critical component and significant advantage of the RES-Q-VAC system is our Full Stop Protection® filter, a patented filtering system that both prevents leakage and overflow of the aspirated fluids, even at full capacity, and traps many air- and fluid-borne pathogens and potentially infectious materials within the sealable container. This protects users from potential exposure to disease and contamination.  Full Stop Protection meets the requirement of the Occupational Safety and Health Administration (“OSHA”) ‘Occupational Exposure to Blood Borne Pathogens” Code of Federal Regulations 29 1910.1030.  The Company has received a letter from OSHA confirming that the RES-Q-VAC with Full Stop Protection falls under the engineering controls of the blood borne pathogen regulation and that the product’s use would fulfill the regulatory requirements.

Centers for Disease Control (“CDC”) and World Health Organization continue to emphasize the importance of minimizing aerosol production during suctioning, in order to reduce the spread of pandemic and epidemic diseases such as Ebola and Influenza. At the current time, we believe that the RES-Q-VAC with Full Stop Protection is the only portable, hand-operated device to comply with CDC directives from 2003.

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Hospitals are required under the Emergency Medical Treatment and Labor Act (“EMTALA”) regulations to provide emergency treatment to patients anywhere in the primary facility and up to 250 yards away.  The RES-Q-VAC ensures full compliance with these regulations and helps minimize unfavorable outcomes and potential lawsuits.  We provide special hospital kits, which are fully stocked to meet all hospital applications, both adult and pediatric.

We continue actively pursuing a direct sales effort into the hospital market working with direct sales and several regional distributors in the respiratory market.  We also work internationally with distributors who are well represented in the hospital and emergency markets.

COMPETITION

The FREEDOM60

Competition for the FREEDOM60 for IgG includes electrically powered infusion devices, which are more costly and can create high pressures during delivery, which can cause complications for the administration of IgG. However, there can be no assurance that other companies, including those with greater resources, will not enter the market with competitive products which will have an adverse effect on our sales.

There is the potential for new drugs to enter the market which might change the market conditions for devices such as the FREEDOM60 and RMS HIgH-Flo Subcutaneous Safety Needle Sets (e.g. Hyaluronidase, which can facilitate absorption of IgG, making multiple site infusions unnecessary).  We believe dynamic equilibrium (the principle behind the FREEDOM60) is ideal for new drug combinations, and that they might increase the size of the subcutaneous market, but there can be no assurance that newer drugs will have the same needs and requirements as the current drugs being used.

We are currently involved in legal proceedings with a competitor who has been offering accessories that can be used with the FREEDOM60 (see Item 1 – Legal Proceedings).

The RES-Q-VAC

We believe that the RES-Q-VAC is currently the performance leader for manual, portable suction instruments. In the hospital market, standard electric powered suction often creates a reliability disadvantage. For outpatient and rehabilitation use, RES-Q-VAC is lighter and quieter than electric units, and offers tactile feedback which is not found in electric suction.

For emergency services we believe that Full Stop Protection substantially separates the RES-Q-VAC from competitive manually operated units, which tend to leak fluid when becoming full or could pass airborne pathogens during use.  There is a heightened concern from health care professionals concerning exposure to disease and we believe the RES-Q-VAC provides improved protection for these users.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-11—Simplifying the Measurement of Inventory.  The ASU was issued as part of the FASB’s simplification initiative and under the ASU, inventory is measured at the lower of cost and net realizable value, which would eliminate the other two options that currently exist for the market: (1) replacement cost and (2) net realizable value less an approximately normal profit margin.  This ASU is effective for interim and annual periods beginning after December 15, 2016.  Early application is permitted and should be applied prospectively.  The Company is assessing the impact of the adoption of the ASU on its financial statements.

In May 2014, FASB issued ASU No. 2014-09—Revenue from Contracts with Customers. The ASU clarifies the principles for recognizing revenue and develops a common revenue standard for U.S. GAAP and International Financial Reporting Standards (“IFRS”) that removes inconsistencies and weaknesses in revenue requirements, provides a more robust framework for addressing revenue issues, improves comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets, provides more useful information to users of the financial statements through improved disclosure requirements and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. The amendments in this update are effective for the annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Full or modified retrospective adoption is required and early application is not permitted. On July 9, 2015, the FASB issued ASU No. 2015-14 Revenue from Contracts with Customers (Topic 606); Deferral of the Effective Date, which (a) delays the effective date of ASU 2014-09, Revenue from Contracts with Customers (Topic 606), by one year to annual periods beginning after December 15, 2017 and (b) allows early adoption of the ASU by all entities as of the original effective date for public entities.  The Company is assessing the impact of the adoption of the ASU on its financial statements, disclosure requirements and methods of adoption.

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PART I – ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.

PART I – ITEM 4.  CONTROLS AND PROCEDURES.

The Company’s management, including the Company’s Principal Executive Officer and Chief Financial Officer, have 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 Chief 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 Chief 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 quarter ended August 31, 2015, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

In 2013 we commenced in the Eastern District of California a declaratory judgment action to establish the invalidity of a competitor’s patent and non-infringement of the Company’s needle sets.  The defendant answered the complaint and asserted infringement and unfair business practice counterclaims. We responded by asserting our own unfair business practice claims against the competitor defendant.  On June 16, 2015, the Court issued what it termed a “narrow” preliminary injunction against the Company from making certain statements regarding certain competitor products.  The Company is complying with that order.  Discovery is ongoing.

On June 25, 2015, the competitor filed a claim of patent infringement, also directed to the Company’s needle sets, in the Eastern District of Texas.  This patent is related to the one concerning the Company’s declaratory judgment action.  The Company has not yet answered or otherwise responded to the complaint in the latter filed case.

On September 11, 2015, the Company requested anex parte reexamination of the patent in the first filed case, and on September 17, 2015 the Company requested aninter partes review of the patent in the second filed case.  Decisions on whether those requests will result in formal patent proceedings are expected within three (3) and six (6) months, respectively.

Although the Company believes it has meritorious claims and defenses in these litigations and proceedings, their outcome cannot be predicted with any certainty.

ITEM 1A.  RISK FACTORS.

Not required for smaller reporting companies.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

On September 30, 2015, RMS’s Board of Directors authorized a stock repurchase program pursuant to which the Company will make open market purchases of up to 1,000,000 shares of the Company’s Outstanding Common Stock.  The purchases will be made through a broker to be designated by the Company with price, timing and volume restrictions based on average daily trading volume, consistent with the safe harbor rules of the Securities and Exchange Commission for such repurchases.

On September 30, 2015, the Board of Directors also approved the 2015 Stock Option Plan authorizing the Company to grant awards to certain employees under the plan at fair market value, subject to shareholder approval.  The total number of shares of common stock of the Company, par value $.01 per share (“Common Stock”), with respect to which awards may be granted pursuant to the Plan shall not exceed 2,000,000 shares.

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On December 20, 2013, we executed an agreement effective March 1, 2014, with a Company director, Dr. Mark Baker, to provide clinical research and support services related to new and enhanced applications for the FREEDOM60® Syringe Infusion System. Authorized by the Board of Directors, the agreement provides for payment of 420,000 shares of common stock valued at $0.20 per share over a three-year period.

On August 8, 2014, we executed an agreement with Horton Capital Partners Fund, an institutional investor based in Philadelphia, PA, to sell one million shares of our common stock and warrants to purchase an additional one million shares of common stock at an exercise price of $0.45 per share.  The aggregate purchase price was $288,000.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.  MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5.  OTHER INFORMATION.

None.

ITEM 6.  EXHIBITS.

4.1	Stock Option Agreement
4.2	2015 Stock Option Plan
31.1	Certification of Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act 2002
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act 2002
32.1	Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act 2002
32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act 2002
101*	Interactive Data Files of Financial Statements and Notes.

* 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.
October 2, 2015	/s/ Andrew I. Sealfon
	Andrew I. Sealfon, President, Chairman of the Board, Director, Principal Executive Officer
October 2, 2015	/s/ Karen Fisher
	Karen Fisher, Chief Financial Officer and Treasurer

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