We are currently a “smaller reporting company” and a “non-accelerated filer”, as those terms are defined in the Securities Act. Accordingly, we take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “smaller reporting companies” and “non-accelerated filers,” including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the provisions of Section 404(b) of the Sarbanes-Oxley Act of 2002 requiring that independent registered public accounting firms provide an attestation report on the effectiveness of internal control over financial reporting. Decreased disclosures in our SEC filings due to our status as a “smaller reporting company” and “non-accelerated filer” may make it harder for investors to analyze our results of operations and financial prospects.
We cannot predict if investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our share price may be more volatile.
A resale registration statement covering 17% and 8% of our outstanding common stock held by two stockholders, respectively, are freely tradeable in the market pursuant to a resale registration statement. These stockholders purchased those shares at prices significantly lower than the price at which our common stock is currently trading. In the event either of these significant stockholders choose to sell a substantial portion of their holdings, the price of our common stock may decline suddenly and sharply. This may make it difficult or impossible for other investors to sell their stock at any price.
Our officers and directors beneficially own approximately 39% of our outstanding common stock as of February 27, 2020. Each individual officer and director may be able to sell up to 1% of our outstanding common stock every ninety (90) days in the open market pursuant to Rule 144, which may have a negative effect on our stock price. In addition, if our officers and directors are selling their stock into the open market, it may make it difficult or impossible for investors to sell their stock at any price.
We cannot predict the size of future issuances or sales of our common stock or other equity securities future acquisitions or capital raising activities, or the effect, if any, that such issuances or sales may have on the market price of our common stock. The issuance and sale of substantial amounts of common stock or other equity securities or announcement that such issuances and sales may occur, could adversely affect the market price of our common stock. Any decline in the price of our common stock may encourage short sales, which could place further downward pressure on the price of our common stock and may impair our ability to raise additional capital through the sale of equity securities.
Only recently has there been any active trading market in our common stock. We cannot assure you that such an active trading market for our common stock will be sustained. Regardless of whether an active and liquid public market exists, negative fluctuations in our actual or anticipated operating results will likely cause the market price of our common stock to fall, making it more difficult for you to sell our common stock at a favorable price, or at all.
Our common stock is currently listed on 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 share of our common stock. If the closing bid price 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 to be in compliance 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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
We currently rent a masonry and steel frame building erected on 3.27 acres of land located at 24 Carpenter Road, Chester, New York 10918. This facility is used as our headquarters and for our general operations.
On February 28, 2019, we completed year twenty of a twenty year lease. 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. The Company exercised three additional renewal options for September 1, 2019 through February 28, 2021.
We believe our current facilities are suitable and adequate for our current business operations. We continue to seek another location with more square footage to provide us room for growth. In addition to the increased costs of occupying a larger space, we expect to incur additional costs in connection with construction and FDA compliance with respect to the new location.
ITEM 3. LEGAL PROCEEDINGS
We are involved in several lawsuits 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 for making certain statements regarding products cleared for use by the FDA, or that 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 issued 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. On December 31, 2019, the Patent Trial and Appeal Board (“PTAB”) of the USPTO issued its decision sustaining the invalidity of claims 1-10 of the ‘703 patent, but reversing the Examiner’s rejection of claim 11, leaving claim 11 as the only surviving claim of the ‘703 patent. Claim 11 of the ‘703 patent, however, was not asserted in the California case. Both the California case and EMED’s appeal of the USPTO rejections are pending. EMED’s deadline to take action in response to the PTAB decision has not yet expired.
The second court case was filed by EMED in the United States District Court for the Eastern District of Texas (the “Texas Court”) 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 PTAB 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 Texas Court claiming patent infringement of ‘576, also directed to our needle sets, and seeking unspecified
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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 Texas Court 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 our part, 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 Texas Court 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. On October 28, 2019, KORU Medical filed its responsive brief, and on November 7, 2019 EMED filed its reply brief. On November 20, 2019, KORU Medical filed a motion for leave to file a sur-reply brief to respond to a new argument raised by EMED in its reply brief, which EMED opposed, and which the Court has referred to the judicial panel that will hear the appeal for consideration. The appeal remains pending, with oral argument scheduled for April 8, 2020. The 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 was referred to a United States District Court Magistrate Judge to prepare a report and recommendation. On November 12, 2019, the Magistrate Judge issued a Report and Recommendation that KORU Medical’s fee motion be granted, and KORU Medical be awarded approximately $1.1 million in fees and expenses. EMED has filed objections to the Report and Recommendation, to which KORU Medical has responded, and which objections are now pending before the District Court Judge for resolution. EMED has also appealed the New York court’s judgment of non-infringement to the Court of Appeals of the Federal Circuit, which matter also is pending. EMED’s opening appeal brief was due November 8, 2019, but EMED filed its brief on November 12, 2019. EMED filed a motion to extend the time to file its opening brief, which KORU Medical opposed, but the motion was granted. KORU Medical filed its responsive brief on December 23, 2019, on January 9, 2020 EMED filed the joint appendix in support of the parties’ briefing, and on January 13, 2020, EMED filed its reply brief. The appeal remains pending, waiting for the Court to schedule oral argument.
As is required by the respective Courts in both the SDNY ‘576 matter and the ED Texas ‘476 matter, the parties have engaged in settlement discussions and have conducted a court-sponsored mediation session, which did not result in settlement.
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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 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
We are authorized to issue 77,000,000 shares of capital stock, of which 75,000,000 are designated common stock, $0.01 par value per share (“Common Stock”), and 2,000,000 are designated preferred stock. As of December 31, 2019, 39,502,557 shares of Common Stock were issued and outstanding and there were approximately 734 stockholders of record. There were no shares of preferred stock issued and outstanding.
Our Common Stock is traded on the Nasdaq Capital Market under the symbol, “KRMD”. We have not paid any cash dividends on our Common Stock and do not plan to pay any such dividends in the foreseeable future. We currently intend to use all available funds for our business operations.
On February 20, 2019, the Board of Directors of the Company approved non-employee director compensation of $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. In Mr. Fletcher’s role as Chairman, he will receive an additional $50,000 in annual compensation, to be paid quarterly in shares of KORU common stock based on the closing price of the stock on the last day of each quarter. The Company issued an aggregate of 58,273 shares of common stock to its non-employee directors during the year ended December 31, 2019 that were not previously reported in a quarterly report on Form 10-Q filed by the Company.
During the year ended December 31, 2019, excluding those previously reported in a quarterly report on Form 10-Q filed by the Company, there were options exercised for an aggregate 160,000 shares of common stock.
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.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included under ITEM 8 of this Annual Report on Form 10-K. This discussion contains forward-looking statements about our business and operations. Our actual results may differ materially from those we currently anticipate as a result of many factors, including those described under Part I – FORWARD LOOKING STATEMENTS and elsewhere in this Annual Report.
OVERVIEW
We manufacture and sell mechanical infusion pumps, and single-use flow rate tubing and needle sets that allow patients to self-administer subcutaneous and intravenous infusion therapy. During 2019 we continued to expand our market presence by executing on the objectives included in our Strategic Plan which was approved by our Board of Directors in January 2019.
We ended 2019 with record net sales of $23.2 million, an increase of 33.5% compared with the same period last year, driven primarily by higher sales volume in needle sets, tubing and pump sales, and to a lesser extent, price increases. The volume increase was driven by what we believe was a 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”).
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Our gross margin percentage, which is gross profit stated as a percentage of net sales, improved to 64%, up from 62% in the prior year mostly due to higher volume and to a lesser extent price increases.
Net income was $0.6 million for the year, compared with $0.9 million for the previous year, driven by higher net sales, offset by increased legal fees for litigation activity and higher salary and related expenses resulting from the executive management changes and new hires.
Our cash balance at December 31, 2019, was $5.9 million up from $5.3 million last year.
We appointed R. John Fletcher as Chairman of the Board in September 2019 and shareholders elected Kathy S. Frommer as a new, independent member of our board in April 2019. We received FDA 510(k) clearance from the U.S. Food and Drug Administration for our High-Flo Super26™ Subcutaneous Needle Sets,filled key management roles throughout the organization, uplisted to the NASDAQ Capital Market, and rebranded our Company to KORU Medical Systems.
RESULTS OF OPERATIONS
Year Ended December 31, 2019 compared to Year Ended December 31, 2018
Net Sales
The following table summarizes our net sales for the years ended December 31, 2019, and 2018.
| | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | Change from Prior Year | | % of Net Sales | |
| | 2019 | | 2018 | | $ | | % | | 2019 | | 2018 | |
Net Sales | | | | | | | | | | | | | | | | |
Domestic | | $ | 19,467,788 | | $ | 14,235,689 | | $ | 5,232,099 | | 36.8% | | 84.0% | | 82.0% | |
International | | | 3,694,833 | | | 3,118,048 | | | 576,785 | | 18.5% | | 16.0% | | 18.0% | |
Total | | $ | 23,162,621 | | $ | 17,353,737 | | $ | 5,808,884 | | 33.5% | | | | | |
Net sales increased $5.8 million or 33.5% compared with the prior year, driven by growth in all product categories (needles, tubing, and pumps) in the Freedom System. The growth includes clinical trials at several customers as well as price increases. We believe the volume growth continues to be driven the growth in the diagnosis of PIDD and expansion into the neurology market with expanded Hizentra® indications for CIDP.
Gross Profit
Our gross profit for the years ended December 31, 2019, and 2018 is as follows:
| | | | | | | | | | | |
| | Years Ended December 31, | | Change from Prior Year |
| | 2019 | | 2018 | | $ | | % |
Gross Profit | | $ | 14,853,810 | | $ | 10,810,488 | | $ | 4,043,322 | | 37.4% |
Stated as a Percentage of Net Sales | | | 64.1% | | | 62.3% | | | | | |
Gross profit for the year ended December 31, 2019 increased $4.0 million or 37.4% compared to the same period last year. Gross margin improved 1.8 percentage points for the year, driven mostly by volume and price increases.
Selling, general and administrative, Litigation, and Research and development
Our selling, general and administrative expenses and research and development costs for the years ended December 31, 2019, and 2018 are as follows:
| | | | | | | | | | | |
| | Years Ended December 31, | | Change from Prior Year |
| | 2019 | | 2018 | | $ | | % |
Selling, general and administrative | | $ | 9,771,744 | | $ | 8,196,562 | | $ | 1,575,182 | | 19.2% |
Litigation | | | 3,415,683 | | | 899,003 | | | 2,516,680 | | 279.9% |
Research and development | | | 740,475 | | | 241,124 | | | 499,351 | | 207.1% |
| | $ | 13,927,902 | | $ | 9,336,689 | | $ | 4,591,213 | | 49.2% |
Stated as a Percentage of Net Sales | | | 60.1% | | | 53.8% | | | | | |
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Selling, general and administrative expenses increased $1.6 million, or 19.2%, for the year ended December 31, 2019, compared with the same period last year. The increase was mostly driven by higher salary and related benefits totaling $1.3 million, mostly due to the executive and senior management changes and headcount additions during the year, including a performance bonus payment to our former interim Chief Executive Officer in the amount of $0.3 million, as well as stock option expense totaling $0.9 million. Higher consulting fees of $0.3 million related to strategic initiatives, and higher investor relation expenses and director fees also contributed $0.4 million to the increase. Partially offsetting these expenses were lower general corporate counsel fees and recruiting fees of $0.4 million.
Litigation fees continued to increase, up $2.5 million compared to the same period last year, due to the continued defense and increased activity against our competitor. We have had several favorable rulings in the New York and Texas courts dismissing those cases and have filed motions for court costs and attorney fees of which one fee motion has been recommended to be granted by the Magistrate Judge in New York, and the fee motion in Texas is stayed pending appeal of the case. Refer to Note 9 Legal Proceedings in the Notes to the Financial Statements.
Research and development costs increased $0.5 million, or 207.1%, due to an increase in headcount and expanded product development initiatives compared with last year.
Depreciation and amortization
For the year ended December 31, 2019, depreciation and amortization expense increased $30,966, or 10.0%, compared with the same period last year. We continued to invest in capital assets, mostly related to production equipment, computer equipment and leasehold improvements, and in patent applications and their maintenance.
Net Income
| | | | | | | | | | | |
| | Years Ended December 31, | | Change from Prior Year |
| | 2019 | | 2018 | | $ | | % |
Net Income | | $ | 564,349 | | $ | 910,570 | | $ | (346,221) | | (38.0%) |
Stated as a Percentage of Net Sales | | | 2.4% | | | 5.2% | | | | | |
Our net income for the year ended December 31, 2019 was $0.6 million, as compared to net income of $0.9 million for the year ended December 31, 2018. This decrease was driven by increased selling, general and administrative expenses and litigation fees, as described above.
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of liquidity is our cash of $5.9 million as of December 31, 2019. Additionally, we have a $1.5 million line of credit with no outstanding amounts against it. 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 litigation fees.
We believe that as of December 31, 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 market and into new markets like neurology where Hizentra® received an expanded indication for CIDP.
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:
| | | | | | | |
| | Year Ended
December 31, 2019 | | Year Ended
December 31, 2018 | |
Net cash provided by operating activities | | $ | 320,620 | | $ | 1,479,662 | |
Net cash provided by/(used in) investing activities | | $ | 1,310,209 | | $ | (1,729,824 | ) |
Net cash provided by financing activities | | $ | 501,297 | | $ | 14,429 | |
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Operating Activities
Net cash provided by operating activities of $0.3 million for the year ended December 31, 2019 resulted from the non-cash charges for stock based compensation of $1.2 million, depreciation and amortization of long lived tangible and intangible asset of $0.3 million, as well as increases in accrued expenses of $0.6 million primarily due to bonus, rebate and legal accruals and an increase in accrued taxes of $0.2 million. Partially offsetting these were higher accounts receivable of $1.8 million, increased inventory of $0.3 million as we build stock to keep pace with sales growth, as well as severance payments paid this year against last year’s accrual and increases in prepaids of $0.1 million related to directors and officers insurance.
Net cash provided by operating activities of $1.5 million for the year ended December 31, 2018, was primarily attributable to net income of $0.9 million, non-cash charges of $0.3 million for depreciation and amortization of long lived tangible and intangible assets, stock based compensation of $0.4 million, and a decrease in accounts receivable of $0.5 million. Partially offsetting these was an increase in inventory of $0.4 million, as we build to increase our reserve of inventory.
Investing Activities
Our net cash provided by investing activities of $1.3 million for the year ended December 31, 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 cash used for investing activities of $1.7 million for the year ended December 31, 2018, was mostly the result of the purchase of a certificate of deposit.
Financing Activities
The $0.5 million provided by financing activities for the year ended December 31, 2019 was a result of warrants and options exercised during the period. Net cash provided by financing activities was $14,429 for the year ended December 31, 2018, resulting mostly from the exercise of options less payment for cancelled shares.
Lease Commitments
We currently rent a masonry and steel frame building erected on 3.27 acres of land located at 24 Carpenter Road, Chester, New York 10918. This facility is used as our headquarters and for our general operations.
On February 28, 2019, we completed year twenty of a twenty year lease. 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. The Company exercised three additional renewal options for September 1, 2019, through February 28, 2021.
We believe our current facilities are suitable and adequate for our current business operations. As we execute on our strategic plan, we continue to seek another location with more square footage to provide us room for growth. In addition to the increased costs of occupying a larger space, we expect to incur additional costs in connection with construction and FDA compliance with respect to the new location.
ACCOUNTING POLICIES
Preparation in conformity with accounting principles generally accepted in the United States (“GAAP”) requires us to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. These estimates are based on our best knowledge of current events and actions we may undertake in the future. Estimates used in accounting are, among other items, allowance for excess and obsolete inventory, useful lives for depreciation and amortization of long lived assets, contingencies and allowances for doubtful accounts. Actual results may ultimately differ from our estimates, although we do not generally believe such differences would materially affect the financial statements in any individual year.
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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.
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) before interest, income taxes, depreciation and amortization, reorganization charges, litigation and stock option expenses. 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:
| | | | | | | |
Reconciliation of GAAP Net Income | | Year Ended December 31, | |
to Non-GAAP Adjusted EBITDA: | | 2019 | | 2018 | |
GAAP Net Income | | $ | 564,349 | | $ | 910,570 | |
Tax Expense | | | 132,069 | | | 266,380 | |
Depreciation/Amortization | | | 340,229 | | | 309,263 | |
Interest Income, Net | | | (80,663 | ) | | (28,104 | ) |
Reorganization Charges | | | 354,926 | | | 996,447 | |
Litigation | | | 3,415,683 | | | 899,003 | |
Stock Option Expense | | | 888,319 | | | 248,040 | |
Non-GAAP Adjusted EBITDA | | $ | 5,614,912 | | $ | 3,601,599 | |
Reorganization Charges. We have excluded the effect of Reorganization 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.
Litigation.We have excluded litigation expenses in calculating our non-GAAP Adjusted EBITDA measure. We continue to evaluate our business performance excluding litigation fees, which we expect will continue in future periods.
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.
- 24 -
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 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, 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 adoption of this ASU, effective January 1, 2020, is not expected to have a material effect 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 is not expected to have a material impact on the Company’s consolidated operating results, cash flows, financial condition or related disclosures.
In December 2019, the FASB issued ASU No. 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing several exceptions including the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- 25 -
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Repro Med Systems, Inc.
Chester, New York
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Repro Med Systems, Inc. (the “Company”) as of December 31, 2019 and 2018, the related statements of operations, changes in equity, and cash flows for years then ended December 31, 2019, and 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and 2018, and the results of its operations and its cash flows for the years then ended December 31, 2019, and 2018, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ McGrail Merkel Quinn & Associates, P.C.
We have served as the Company’s auditor since 2014.
Scranton, Pennsylvania
March 4, 2020
- 26 -
REPRO MED SYSTEMS, INC.
BALANCE SHEETS
| | | | | | | | |
| | December 31, | | December 31, | |
| | 2019 | | 2018 | |
| | | | | |
ASSETS | |
| | | | | | | |
CURRENT ASSETS | | | | | | | |
Cash and cash equivalents | | $ | 5,870,929 | | $ | 3,738,803 | |
Certificates of deposit | | | — | | | 1,517,927 | |
Accounts receivable less allowance for doubtful accounts of $32,645 and $37,500 for December 31, 2019, and December 31, 2018, respectively | | | 3,234,521 | | | 1,425,854 | |
Inventory | | | 2,388,477 | | | 2,103,879 | |
Prepaid expenses | | | 387,396 | | | 246,591 | |
TOTAL CURRENT ASSETS | | | 11,881,323 | | | 9,033,054 | |
Property and equipment, net | | | 611,846 | | | 858,781 | |
Patents, net of accumulated amortization of $288,967 and $239,581 at December 31, 2019 and December 31, 2018, respectively | | | 807,135 | | | 632,156 | |
Right of use assets, net | | | 373,734 | | | — | |
Deferred tax asset | | | 188,241 | | | 1,466 | |
Other assets | | | 19,582 | | | 19,582 | |
TOTAL ASSETS | | $ | 13,881,861 | | $ | 10,545,039 | |
| |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | | | | | | |
CURRENT LIABILITIES | | | | | | | |
Deferred capital gain - current | | $ | — | | $ | 3,763 | |
Accounts payable | | | 572,656 | | | 453,498 | |
Accrued expenses | | | 1,296,612 | | | 688,649 | |
Accrued payroll and related taxes | | | 190,265 | | | 421,714 | |
Accrued tax liability | | | 204,572 | | | 16,608 | |
Finance lease liability - current | | | 5,296 | | | — | |
Operating lease liability - current | | | 136,888 | | | — | |
TOTAL CURRENT LIABILITIES | | | 2,406,289 | | | 1,584,232 | |
Finance lease liability, net of current portion | | | 2,646 | | | — | |
Operating lease liability, net of current portion | | | 236,846 | | | — | |
TOTAL LIABILITIES | | | 2,645,781 | | | 1,584,232 | |
| | | | | | | |
STOCKHOLDERS’ EQUITY | | | | | | | |
Common stock, $0.01 par value, 75,000,000 shares authorized, 42,239,788 and 40,932,911 shares issued; 39,502,557 and 38,195,680 shares outstanding at December 31, 2019, and December 31, 2018, respectively | | | 422,398 | | | 409,329 | |
Additional paid-in capital | | | 6,293,069 | | | 4,595,214 | |
Retained earnings | | | 4,864,817 | | | 4,300,468 | |
| | | 11,580,284 | | | 9,305,011 | |
Less: Treasury stock, 2,737,231 shares at December 31, 2019 and December 31, 2018, respectively, at cost | | | (344,204 | ) | | (344,204 | ) |
TOTAL STOCKHOLDERS’ EQUITY | | | 11,236,080 | | | 8,960,807 | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 13,881,861 | | $ | 10,545,039 | |
The accompanying notes are an integral part of these Financial Statements.
- 27 -
REPRO MED SYSTEMS, INC.
STATEMENTS OF OPERATIONS
| | | | | | | |
| | For the Years Ended | |
| | December 31, | | December 31 | |
| | 2019 | | 2018 | |
| | | | | |
NET SALES | | $ | 23,162,621 | | $ | 17,353,737 | |
Cost of goods sold | | | 8,308,811 | | | 6,543,249 | |
Gross Profit | | | 14,853,810 | | | 10,810,488 | |
| | | | | | | |
OPERATING EXPENSES | | | | | | | |
Selling, general and administrative | | | 9,771,744 | | | 8,196,562 | |
Litigation | | | 3,415,683 | | | 899,003 | |
Research and development | | | 740,475 | | | 241,124 | |
Depreciation and amortization | | | 340,229 | | | 309,263 | |
Total Operating Expenses | | | 14,268,131 | | | 9,645,952 | |
| | | | | | | |
Net Operating Profit | | | 585,679 | | | 1,164,536 | |
| | | | | | | |
Non-Operating Income/(Expense) | | | | | | | |
Gain on sale of fixed asset | | | 47,830 | | | 4,930 | |
Loss on foreign currency exchange | | | (17,754 | ) | | (20,620 | ) |
Interest income, net | | | 80,663 | | | 28,104 | |
| | | | | | | |
INCOME BEFORE TAXES | | | 696,418 | | | 1,176,950 | |
| | | | | | | |
Income tax expense | | | 132,069 | | | 266,380 | |
| | | | | | | |
NET INCOME | | $ | 564,349 | | $ | 910,570 | |
| | | | | | | |
NET INCOME PER SHARE | | | | | | | |
Basic | | $ | 0.01 | | $ | 0.02 | |
Diluted | | $ | 0.01 | | $ | 0.02 | |
| | | | | | | |
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING | | | | | | | |
Basic | | | 38,778,074 | | | 38,128,260 | |
Diluted | | | 39,061,310 | | | 38,921,622 | |
The accompanying notes are an integral part of these financial statements.
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REPRO MED SYSTEMS, INC.
STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2019 AND DECEMBER 31, 2018
| | | | | | | | | | | | | | | | | | |
| | | | Additional | | | | | | Total | |
| | Common Stock | | Paid-in | | Retained | | Treasury | | Stockholders’ | |
| | Shares | | Amount | | Capital | | Earnings | | Stock | | Equity | |
| | | | | | | | | | | | | | | | | | |
BALANCE, DECEMBER 31, 2017 | | 40,731,529 | | $ | 407,315 | | $ | 4,216,718 | | $ | 3,389,898 | | $ | (344,204 | ) | $ | 7,669,727 | |
| | | | | | | | | | | | | | | | | | |
Issuance of stock based compensation | | 99,134 | | | 991 | | | 117,050 | | | — | | | — | | | 118,041 | |
Compensation expense related to stock options | | — | | | — | | | 248,040 | | | — | | | — | | | 248,040 | |
Cancellation of common stock | | (22,752 | ) | | (227 | ) | | (36,594 | ) | | — | | | — | | | (36,821 | ) |
Issuance of options exercised | | 125,000 | | | 1,250 | | | 50,000 | | | — | | | — | | | 51,250 | |
Net income for the year ended December 31, 2018 | | — | | | — | | | — | | | 910,570 | | | — | | | 910,570 | |
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 | | 148,877 | | | 1,489 | | | 315,036 | | | — | | | — | | | 316,525 | |
Compensation expense related to stock options | | — | | | — | | | 888,319 | | | — | | | — | | | 888,319 | |
Cancellation of common stock | | (2,000 | ) | | (20 | ) | | (2,800 | ) | | — | | | — | | | (2,820 | ) |
Issuance of options exercised | | 160,000 | | | 1,600 | | | 57,300 | | | — | | | — | | | 58,900 | |
Issuance of warrants exercised | | 1,000,000 | | | 10,000 | | | 440,000 | | | — | | | — | | | 450,000 | |
Net income for the year ended December 31, 2019 | | — | | | — | | | — | | | 564,349 | | | — | | | 564,349 | |
BALANCE, DECEMBER 31, 2019 | | 42,239,788 | | $ | 422,398 | | $ | 6,293,069 | | $ | 4,864,817 | | $ | (344,204 | ) | $ | 11,236,080 | |
The accompanying notes are an integral part of these Financial Statements.
- 29 -
REPRO MED SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
| | | | | | | |
| | For the Years Ended | |
| | December 31, | | December 31, | |
| | 2019 | | 2018 | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | |
Net Income | | $ | 564,349 | | $ | 910,570 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | |
Stock based compensation expense | | | 1,204,844 | | | 366,081 | |
Depreciation and amortization | | | 340,229 | | | 309,263 | |
Gain on sale of fixed asset | | | (47,830 | ) | | (4,930 | ) |
Deferred capital gain | | | (3,763 | ) | | (22,480 | ) |
Deferred taxes | | | (186,775 | ) | | (23,141 | ) |
Provision for returns and doubtful accounts | | | (4,855 | ) | | (39,567 | ) |
Changes in operating assets and liabilities: | | | | | | | |
(Increase)/ Decrease in accounts receivable | | | (1,803,812 | ) | | 475,662 | |
Increase in inventory | | | (284,598 | ) | | (445,198 | ) |
Increase in prepaid expense | | | (140,805 | ) | | (75,852 | ) |
Decrease in other assets | | | — | | | 12,000 | |
Increase/(Decrease) in accounts payable | | | 119,158 | | | (900 | ) |
(Decrease)/Increase in accrued payroll and related taxes | | | (231,449 | ) | | 86,811 | |
Increase in accrued expense | | | 607,963 | | | 30,589 | |
Increase/(Decrease) in accrued tax liability | | | 187,964 | | | (99,246 | ) |
NET CASH PROVIDED BY OPERATING ACTIVITIES | | | 320,620 | | | 1,479,662 | |
| | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | |
Payments for capital expenditures | | | (201,174 | ) | | (297,018 | ) |
Payments for patents | | | (224,365 | ) | | (184,148 | ) |
Purchase of certificate of deposit | | | — | | | (1,500,000 | ) |
Proceeds from certificates of deposit | | | 1,517,927 | | | 245,342 | |
Proceeds on sale of fixed assets | | | 217,821 | | | 6,000 | |
NET CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES | | | 1,310,209 | | | (1,729,824 | ) |
| | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | |
Stock issuances | | | 508,900 | | | 51,250 | |
Finance lease | | | (4,783 | ) | | — | |
Payment for cancelled shares | | | (2,820 | ) | | (36,821 | ) |
NET CASH PROVIDED BY FINANCING ACTIVITIES | | | 501,297 | | | 14,429 | |
| | | | | | | |
Net Increase (Decrease) in CASH AND CASH EQUIVALENTS | | | 2,132,126 | | | (235,733 | ) |
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | | | 3,738,803 | | | 3,974,536 | |
CASH AND CASH EQUIVALENTS, END OF YEAR | | $ | 5,870,929 | | $ | 3,738,803 | |
| | | | | | | |
Supplemental Information | | | | | | | |
Cash paid during the years for: | | | | | | | |
Interest | | $ | 342 | | $ | — | |
Taxes | | $ | 130,879 | | $ | 378,000 | |
NON-CASH FINANCING AND INVESTING ACTIVITIES | | | | | | | |
Issuance of common stock as compensation | | $ | 316,525 | | $ | 118,041 | |
The accompanying notes are an integral part of these Financial Statements.
- 30 -
REPRO MED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND DECEMBER 31, 2018
NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
REPRO MED SYSTEMS, INC. (the “Company”, “KORU”) 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.
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.
CERTIFICATES 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%. As of December 31, 2019, the money market account interest rate was 1.71%.
INVENTORY
Inventories of raw materials are stated at the lower of standard cost, which approximates average cost, or market value including allocable overhead. Work-in-process and finished goods are stated at the lower of standard cost or market value and include direct labor and allocable overhead.
PATENTS
Costs incurred in obtaining patents have been capitalized and are being amortized over the legal life of the patents.
INCOME TAXES
Deferred income taxes are provided using the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences.
The Company believes that it has no uncertain tax positions requiring disclosure or adjustment. Generally, tax years starting with 2017 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.
STOCK-BASED COMPENSATION
The Company maintains various long-term incentive stock benefit plans under which it grants stock options and stock 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 are recorded at the fair value of the shares at the grant date.
- 31 -
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, director and consultant stock options (See Note 5).
| | | | | | | |
| | For the Years Ended | |
| | December 31, 2019 | | December 31, 2018 | |
| | | | | |
Net income | | $ | 564,349 | | $ | 910,570 | |
| | | | | | | |
Weighted Average Outstanding Shares: | | | | | | | |
Outstanding shares | | | 38,778,074 | | | 38,128,260 | |
Option shares includable | | | 283,236 | | | 793,362 | |
| | | 39,061,310 | | | 38,921,622 | |
| | | | | | | |
Net income per share | | | | | | | |
Basic | | $ | 0.01 | | $ | 0.02 | |
Diluted | | $ | 0.01 | | $ | 0.02 | |
USE OF ESTIMATES IN THE FINANCIAL STATEMENTS
The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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.
REVENUE RECOGNITION
The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 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.
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 volume rebates are variable consideration and are recorded as a reduction of revenue in the same period the related sales are recorded or when it’s 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.
- 32 -
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 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, 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 adoption of this ASU, effective January 1, 2020, is not expected to have a material effect 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 is not expected to have a material impact on the Company’s consolidated operating results, cash flows, financial condition or related disclosures.
In December 2019, the FASB issued ASU No. 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing several exceptions including the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash, trade receivables, accounts payable and accrued expenses approximate fair value based on the short-term maturity of these instruments.
- 33 -
ACCOUNTING FOR LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment at least annually or whenever the circumstances and situations change such that there is an indication that the carrying amounts may not be recoverable. As of December 31, 2019, the Company does not believe that any of its assets are impaired.
NOTE 2 INVENTORY
Inventory consists of:
| | | | | | | |
| | December 31, 2019 | | December 31, 2018 | |
Raw materials and Work-in-process | | $ | 1,863,978 | | $ | 1,155,632 | |
Finished goods | | | 552,989 | | | 1,020,930 | |
Total | | | 2,416,967 | | | 2,176,562 | |
Less: reserve for obsolete inventory | | | 28,490 | | | 72,683 | |
Inventory, net | | $ | 2,388,477 | | $ | 2,103,879 | |
NOTE 3 PROPERTY AND EQUIPMENT
Property and equipment consists of the following at:
| | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 | | Estimated
Useful Lives | |
| | | | | | | | | | |
Land | | $ | — | | $ | 54,030 | | | | |
Building | | | — | | | 171,094 | | | 20 years | |
Furniture, office equipment, and leasehold improvements | | | 1,135,107 | | | 1,058,507 | | | 3-10 years | |
Manufacturing equipment and tooling | | | 1,295,978 | | | 1,279,865 | | | 3-12 years | |
Total | | | 2,431,085 | | | 2,563,496 | | | | |
Less: accumulated depreciation | | | 1,819,239 | | | 1,704,715 | | | | |
Property and equipment, net | | $ | 611,846 | | $ | 858,781 | | | | |
On May 21, 2019, the Company sold the house it owned for $0.2 million.
Depreciation expense was $286,004 and $273,450 for the years ended December 31, 2019, and ended December 31, 2018, respectively.
NOTE 4 RELATED PARTY TRANSACTIONS
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 for September 1, 2019, through February 28, 2021.
The lease payments were $142,964 and $132,504 for the years ended December 31, 2019, and 2018, respectively. The Company also paid property taxes in the amount of $52,195 and $50,072 for the years ended December 31, 2019, and 2018, respectively.
NOTE 5 STOCK-BASED COMPENSATION
On June 29, 2016, the Board of Directors amended the 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 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.
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As of December 31, 2019, the Company had 3,647,000 time-based stock options outstanding to certain executives, key employees and consultants under the Plan, of which 1,400,000, net of forfeitures, were issued during the twelve months ended December 31, 2019. The Company also had 1,000,000 performance-based options outstanding under the Plan as of December 31, 2019, to its President and Chief Executive Officer, of which all were issued during the twelve months ended December 31, 2019.
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 director, as Chairman, replacing Executive Chairman, Daniel S. Goldberger, who will remain as a non-executive member of KORU’s Board of Directors. In Mr. Fletcher’s role as Chairman, he will receive an additional $50,000 in annual compensation, to be paid quarterly in shares of KORU 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. 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.
2015 STOCK OPTION PLAN, as amended
Time-Based Stock Options
The per share weighted average fair value of stock options granted during the year ended December 31, 2019, and December 31, 2018 was $1.33 and $0.83, 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 year ended December 31, 2019, and December 31, 2018. 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.
| | | | | | | |
| | December 31, 2019 | | December 31, 2018 | |
| | | | | | | |
Dividend yield | | | 0.00% | | | 0.00% | |
Expected Volatility | | | 56.1-60.3% | | | 61.1%-65.2% | |
Weighted-average volatility | | | — | | | — | |
Expected dividends | | | — | | | — | |
Expected term (in years) | | | 10 Years | | | 5-10 Years | |
Risk-free rate | | | 1.60-2.72% | | | 2.8%-3.15% | |
The following table summarizes the status of the Company’s stock option plan:
| | | | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 | |
| | Shares | | Weighted
Average
Exercise
Price | | Shares | | Weighted
Average
Exercise
Price | |
| | | | | | | | | |
Outstanding at January 1 | | | 2,419,000 | | $ | 1.00 | | | 1,038,000 | | $ | 0.41 | |
Granted | | | 1,650,000 | | $ | 1.92 | | | 1,518,000 | | $ | 1.34 | |
Exercised | | | 160,000 | | $ | 0.37 | | | 125,000 | | $ | 0.41 | |
Forfeited | | | 262,000 | | $ | 2.74 | | | 12,000 | | $ | 0.87 | |
Outstanding at year end | | | 3,647,000 | | $ | 1.32 | | | 2,419,000 | | $ | 1.00 | |
Options exercisable | | | 1,078,510 | | $ | 0.82 | | | 785,094 | | $ | 0.55 | |
Weighted average fair value of options granted during the period | | | | | $ | 1.33 | | | | | $ | 0.83 | |
Stock-based compensation expense | | | | | $ | 594,956 | | | | | $ | 248,040 | |
Total stock-based compensation expense, net of forfeitures, for stock option awards totaled $594,956 and $248,040 for the year ended December 31, 2019, and 2018, respectively. Cash received from option exercises for the years ended December 31, 2019 and 2018 was $58,900 and $51,250, respectively.
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The weighted-average grant-date fair value of options granted during the years ended December 31, 2019, and 2018, was $2,202,678 and $1,255,234 respectively. The total intrinsic value of options exercised during the years ended December 31, 2019, and 2018, was $58,900 and $51,250, respectively.
The following table presents information pertaining to options outstanding as of December 31, 2019:
| | | | | | | | | | | | | |
Range of Exercise Price | | Number
Outstanding | | Weighted
Average
Remaining
Contractual
Life | | Weighted
Average
Exercise
Price | | Number
Exercisable | | Weighted
Average
Exercise
Price | |
| | | | | | | | | | | | | |
$0.38-3.15 | | 3,647,000 | | 6.0 years | | $ | 1.32 | | 1,078,510 | | $ | 0.82 | |
As of December 31, 2019, there was $2,188,008 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 44 months. The total fair value of vested options was $539,553 and $258,666 at December 31, 2019, and December 31, 2018, respectively.
Performance-Based Stock Options
The per share weighted average fair value of stock options granted during the year ended December 31, 2019, 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 year ended December 31, 2019, and December 31, 2018. 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.
| | | | | | | |
| | December 31, | |
| | 2019 | | 2018 | |
| | | | | | | |
Dividend yield | | | 0.00% | | | — | |
Expected Volatility | | | 58.9% | | | — | |
Weighted-average volatility | | | — | | | — | |
Expected dividends | | | — | | | — | |
Expected term (in years) | | | 10 Years | | | — | |
Risk-free rate | | | 2.07% | | | — | |
The following table summarizes the status of the Plan with respect to performance-based stock options:
| | | | | | | | | | | | |
| | December 31, | |
| | 2019 | | 2018 | |
| | Shares | | Weighted
Average
Exercise
Price | | Shares | | Weighted
Average
Exercise
Price | |
| | | | | | | | | |
Outstanding at January 1 | | — | | $ | — | | | — | | $ | — | |
Granted | | 1,000,000 | | $ | 1.70 | | | — | | $ | — | |
Exercised | | — | | $ | — | | | — | | $ | — | |
Forfeited | | — | | $ | — | | | — | | $ | — | |
Outstanding at year end | | 1,000,000 | | $ | 1.70 | | | — | | $ | — | |
Options exercisable | | — | | $ | — | | | — | | $ | — | |
Weighted average fair value of options granted during the period | | — | | $ | 1.16 | | | — | | $ | — | |
Stock-based compensation expense | | — | | $ | 293,363 | | | — | | $ | — | |
Total performance stock-based compensation expense totaled $293,363 and zero for the years ended December 2019 and 2018, respectively.
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The weighted-average grant-date fair value of options granted during the years ended December 31, 2019 and 2018, was $1,162,561 and zero, respectively.
The following table presents information pertaining to performance-based options outstanding as of December 31, 2019:
| | | | | | | | | | | | | |
Range of Exercise Price | | Number
Outstanding | | Weighted
Average
Remaining
Contractual
Life | | Weighted
Average
Exercise
Price | | Number
Exercisable | | Weighted
Average
Exercise
Price | |
| | | | | | | | | | | | | |
$1.70 | | 1,000,000 | | 10 years | | $ | 1.70 | | — | | $ | — | |
As of December 31, 2019, there was $869,198 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 December 31, 2019, and 2018 was zero for both periods.
NOTE 6 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.
The components of lease expense were as follows:
| | | | |
| | Year Ended
December 31, 2019 | |
| | | | |
Operating lease cost | | $ | 149,594 | |
| | | | |
Finance lease cost: | | | | |
Amortization of right-of-use assets | | $ | 4,837 | |
Interest on lease liabilities | | | 239 | |
Total finance lease cost | | $ | 5,076 | |
Supplemental cash flow information related to leases was as follows:
| | | |
| Year Ended
December 31, 2019 | |
| | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Finance cash flows from finance leases | $ | 4,783 | |
Finance lease cost: | | | |
Amortization of right-of-use assets | $ | 4,837 | |
Interest on lease liabilities | | 239 | |
Total finance lease cost | $ | 5,076 | |
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Supplemental balance sheet information related to leases was as follows:
| | | | |
| | Year Ended
December 31, 2019 | |
Operating Leases | | | | |
Operating lease right-of-use assets | | $ | 373,734 | |
| | | | |
Operating lease current liabilities | | | 136,888 | |
Operating lease long term liabilities | | | 236,846 | |
Total operating lease liabilities | | $ | 373,734 | |
| | | | |
Finance Leases | | | | |
Property and equipment, at cost | | $ | 12,725 | |
Accumulated depreciation | | | 4,837 | |
Property and equipment, net | | $ | 7,888 | |
| | | | |
Finance lease current liabilities | | | 5,296 | |
Finance lease long term liabilities | | | 2,646 | |
Total finance lease liabilities | | $ | 7,942 | |
| | | |
| | Year Ended
December 31, 2019 | |
Weighted Average Remaining Lease Term | | | |
Operating leases | | 2.4 Years | |
Finance leases | | 1.3 Years | |
| | | |
Weighted Average Discount Rate | | | |
Operating leases | | 4.75% | |
Finance leases | | 4.75% | |
Maturities of lease liabilities are as follows:
| | | | | | | |
Year Ended December 31, | | Operating Leases | | Finance Leases | |
2020 | | $ | 151,686 | | $ | 5,533 | |
2021 | | | 149,476 | | | 2,705 | |
2022 | | | 97,256 | | | — | |
Total lease payments | | | 398,418 | | | 8,238 | |
Less imputed interest | | | (24,684 | ) | | (296 | ) |
Total | | $ | 373,734 | | $ | 7,942 | |
NOTE 7 FEDERAL AND STATE INCOME TAXES
The provision for income taxes as of December 31, 2019, and 2018 consisted of:
| | | | | | | |
| | December 31,
2019 | | December 31,
2018 | |
State income tax: | | | | | |
Current, net of refund | | $ | 22,514 | | $ | 12,391 | |
Federal income tax: | | | | | | | |
Deferred | | | (186,775 | ) | | 23,141 | |
Current | | | 296,330 | | | 230,848 | |
Total | | $ | 132,069 | | $ | 266,380 | |
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The reconciliation of income taxes shown in the financial statements and amounts computed by applying the Federal expected tax rate of 21% for year 2019 and 2018 is as follows:
| | | | | | | |
| | December 31,
2019 | | December 31,
2018 | |
| | | | | |
Income before tax | | $ | 696,418 | | $ | 1,176,950 | |
Computed expected tax | | $ | 146,248 | | $ | 247,160 | |
State income and franchise tax | | | 22,514 | | | 12,391 | |
Other | | | (36,693 | ) | | 6,829 | |
Provision for taxes | | $ | 132,069 | | $ | 266,380 | |
The components of deferred tax assets at December 31, 2019, and 2018, respectively, are as follows:
| | | | | | | |
| | December 31,
2019 | | December 31,
2018 | |
| | | | | |
Deferred compensation cost | | $ | 259,068 | | $ | 79,632 | |
Depreciation and amortization | | | (71,331 | ) | | (79,640 | ) |
Allowance for bad debts and other | | | 504 | | | 1,474 | |
Deferred tax asset | | $ | 188,241 | | $ | 1,466 | |
NOTE 8 MAJOR CUSTOMERS
For the years ended December 31, 2019, and December 31, 2018, approximately 53% and 52%, respectively, of the Company’s net product revenues were derived from one major customer. As of December 31, 2019, and December 31, 2018, accounts receivable due from this customer were $1.9 million and $0.8 million, respectively.
The largest customer in both years is a domestic medical products and supplies distributor. Although a number of larger infusion customers have elected to consolidate their purchases through one or more distributors in recent years, we continue to maintain strong direct relationships with them. We do not believe that their continued purchase of FREEDOM System products and related supplies is contingent upon the distributor.
NOTE 9 LEGAL PROCEEDINGS
We are involved in several lawsuits 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 for making certain statements regarding products cleared for use by the FDA, or that 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 issued 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. On December 31, 2019, the Patent Trial and Appeal Board (“PTAB”) of the USPTO issued its decision sustaining the invalidity of claims 1-10 of the ‘703 patent, but reversing the Examiner’s rejection of claim 11, leaving claim 11 as the only surviving claim of the ‘703 patent. Claim 11 of the ‘703 patent, however, was not asserted in the California case. Both the California case and EMED’s appeal of the USPTO rejections are pending. EMED’s deadline to take action in response to the PTAB decision has not yet expired.
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The second court case was filed by EMED in the United States District Court for the Eastern District of Texas (the “Texas Court”) 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 PTAB 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 Texas Court 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 Texas Court 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 our part, 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 Texas Court 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. On October 28, 2019, KORU Medical filed its responsive brief, and on November 7, 2019 EMED filed its reply brief. On November 20, 2019, KORU Medical filed a motion for leave to file a sur-reply brief to respond to a new argument raised by EMED in its reply brief, which EMED opposed, and which the Court has referred to the judicial panel that will hear the appeal for consideration. The appeal remains pending, with oral argument scheduled for April 8, 2020. The 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.
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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 was referred to a United States District Court Magistrate Judge to prepare a report and recommendation. On November 12, 2019, the Magistrate Judge issued a Report and Recommendation that KORU Medical’s fee motion be granted, and KORU Medical be awarded approximately $1.1 million in fees and expenses. EMED has filed objections to the Report and Recommendation, to which KORU Medical has responded, and which objections are now pending before the District Court Judge for resolution. EMED has also appealed the New York court’s judgment of non-infringement to the Court of Appeals of the Federal Circuit, which matter also is pending. EMED’s opening appeal brief was due November 8, 2019, but EMED filed its brief on November 12, 2019. EMED filed a motion to extend the time to file its opening brief, which KORU Medical opposed, but the motion was granted. KORU Medical filed its responsive brief on December 23, 2019, on January 9, 2020 EMED filed the joint appendix in support of the parties’ briefing, and on January 13, 2020, EMED filed its reply brief. The appeal remains pending, waiting for the Court to schedule oral argument.
As is required by the respective Courts in both the SDNY ‘576 matter and the ED Texas ‘476 matter, the parties have engaged 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 10 EMPLOYEE BENEFITS
We provide a safe harbor 401(k) plan for our employees that allows for employee elective contributions, Company matching contributions and discretionary profit-sharing contributions. Employee elective contributions are funded through voluntary payroll deductions. The Company makes safe harbor matching contributions in an amount equal to 100% of the employee’s contribution, not to exceed 3% of employee’s compensation plus 50% of employee’s pay contributed between 3% and 5% of employee’s compensation. Company matching expense for the period ended December 31, 2019, and December 31, 2018, was $118,632 and $121,834, respectively. The Company has not provided for a discretionary profit-sharing contribution.
NOTE 11 DEBT OBLIGATIONS
On February 8, 2018, the Company issued a Promissory 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. As of December 31, 2019, and 2018, the Company had no outstanding amounts against the line of credit.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer or CEO, and Chief Financial Officer or CFO, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31, 2019. Based on that evaluation, our management, including our CEO and CFO, concluded that as of December 31, 2019, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosure.
- 41 -
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer, and implemented in conjunction with management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with generally accepted accounting principles.
There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019. This assessment was based on criteria for effective internal control over financial reporting described in “Internal Control - Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management determined that, as of December 31, 2019, the Company maintained effective internal control over financial reporting.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter ended December 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
On March 2, 2020, upon recommendation of the Compensation Committee of the Board of Directors, the Board of Directors approved annual performance bonuses pursuant to their employment contracts and objectives set by the Company to the following persons in the following amounts: Donald Pettigrew, President and Chief Executive Officer - $262,440; Karen Fisher, Chief Financial Officer - $94,725; and Manuel Marques, Chief Operating Agreement - $83,525.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Information regarding our executive officers required by Item 10 of Part III is set forth in Item 1 of Part I “Business — Executive Officers.” Information required by Item 10 of Part III regarding our directors and any material changes to the process by which security holders may recommend nominees to the Board of Directors is included in our Proxy Statement relating to our 2020 Annual Meeting of Shareholders, and is incorporated herein by reference. Information relating to our Code of Ethics and to compliance with Section 16(a) of the 1934 Act is set forth in our Proxy Statement relating to our 2020 Annual Meeting of Shareholders and is incorporated herein by reference. We intend to disclose amendments to our Code of Ethics, as well as waivers of the provisions thereof, on our website under the heading “Investors - Governance” at www.korumedical.com.
ITEM 11. EXECUTIVE COMPENSATION
Information required by Item 11 of Part III is included in our Proxy Statement relating to our 2020 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information required by Item 12 of Part III is included in our Proxy Statement relating to our 2020 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information required by Item 13 of Part III is included in our Proxy Statement relating to our 2020 Annual Meeting of Shareholders and is incorporated herein by reference.
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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by Item 14 of Part III is included in our Proxy Statement relating to our 2020 Annual Meeting of Shareholders and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been omitted because they are not required, not applicable, not present in amounts sufficient to require submission of the schedule, or the required information is otherwise included.
The following exhibits are filed herewith or incorporated by reference as part of this Annual Report.
| | |
Exhibit No. | | Description |
| | |
3.1(i) | | Restated Certificate of Incorporation effective March 1, 2019 (incorporated by reference to our Form 10-K filed with the SEC on March 5, 2019). |
| | |
3.1(ii) | | Amended and Restated By-Laws dated December 5, 2018 (incorporated by reference to our Form 8-K filed with the SEC on December 7, 2018). |
| | |
4.1 | | Description of Securities, filed herewith. |
| | |
10.1 | | Amended and Restated Employment Agreement made as of January 1, 2020 between Repro Med Systems, Inc. and Karen Fisher (incorporated by reference to the Company's Form 8-K filed with the SEC on January 24, 2020).* |
| | |
10.2 | | Employment Agreement made as of September 4, 2018 between Repro Med Systems, Inc. and Donald B. Pettigrew (incorporated by reference to the Company's Form 8-K filed with the SEC on September 4, 2018).* |
| | |
10.3 | | Employment Agreement made as of October 10, 2017 between Repro Med Systems, Inc. and Manuel Marques, filed herewith.* |
| | |
10.4 | | 2015 Stock Option Plan, as amended (incorporated by reference to the Company's Proxy Statement on Schedule 14A filed with the SEC on July 28, 2016). |
| | |
10.5 | | Common Stock Purchase Agreement dated as of December 17, 2018 by and among Repro Med Systems, Inc., the Sellers named therein and the Purchasers named therein (incorporated by reference to the Company's Form 8-K filed with the SEC on December 17, 2018). |
| | |
23.1 | | Consent of Independent Auditors, filed herewith. |
| | |
31.1 | | Certification of the Principal Executive Officer of registrant required under Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. |
| | |
31.2 | | Certification of the Principal Financial Officer of registrant required under Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. |
| | |
32.1 | | Certification of the Principal Executive Officer of registrant required under Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. |
| | |
32.2 | | Certification of the Principal Financial Officer of registrant required under Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. |
| | |
101 | | Interactive Data File (Annual Report on Form 10-K, for the year ended December 31, 2019), furnished in XBRL (eXtensible Business Reporting Language). |
ITEM 16. FORM 10-K SUMMARY
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on March 4, 2020.
REPRO MED SYSTEMS, INC.
/s/ Donald B. Pettigrew
Donald B. Pettigrew, President and Chief Executive Officer
/s/ Karen Fisher
Karen Fisher, Chief Financial Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 4, 2020.
/s/ R. John Fletcher
R. John Fletcher, Chairman of the Board
/s/ Robert T. Allen
Robert T. Allen, Director
/s/ David Anderson
David Anderson, Director
/s/ James M. Beck
James M. Beck, Director
/s/ Kathy S. Frommer
Kathy S. Frommer, Director
/s/ Daniel S. Goldberger
Daniel S. Goldberger, Director
/s/ Joseph M. Manko, Jr.
Joseph M. Manko, Jr., Director
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