UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended NovemberJune 30, 20162017
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
Commission File Number:0-12305
REPRO MED SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
New York | 13-3044880 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
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24 Carpenter Road, Chester, New York | 10918 |
(Address of Principal Executive Offices) | (Zip Code) |
(845) 469-2042
(Registrant’s telephone number, including area code)
February 28
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer [ ] | Accelerated filer [ ] |
| Non-accelerated filer [ ] | Smaller reporting company [X] |
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(Do not check if a smaller reporting company) |
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
As of January 5,August 4, 2017, 37,749,08137,834,871 shares of common stock, $.01$0.01 par value per share, were outstanding, which excludes 2,735,9812,737,231 shares of treasury stock.
REPRO MED SYSTEMS, INC.
TABLE OF CONTENTS
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PART I– FINANCIAL INFORMATION | ||
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ITEM 1. | Financial Statements |
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| Balance Sheets as of | 3 |
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| Statements of Operations (Unaudited) for the | 4 |
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| Statements of Cash Flows (Unaudited) for the | 5 |
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| Notes to Financial Statements | 6-11 |
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ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk |
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ITEM 4. | Controls and Procedures |
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PART II– OTHER INFORMATION | ||
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ITEM |
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| Unregistered Sales of Equity Securities and Use of Proceeds |
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ITEM 6. | Exhibits |
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- 2 -
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
REPRO MED SYSTEMS, INC.
BALANCE SHEETS
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| November 30, |
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| June 30, |
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| February 29, |
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| 2017 |
| February 28, |
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| 2016 |
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ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
| $ | 3,440,160 |
| $ | 4,201,949 |
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| $ | 2,982,508 |
| $ | 3,313,265 |
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Certificates of deposit |
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| 261,118 |
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| 261,118 |
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| 262,315 |
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| 262,314 |
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Accounts receivable less allowance for doubtful accounts and returns of $20,519 at November 30, 2016 and $37,486 at February 29, 2016 |
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| 1,661,214 |
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| 1,350,180 |
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Accounts receivable less allowance for doubtful accounts of $13,046 at June 30, 2017 and $18,046 at February 28, 2017 |
| 1,899,622 |
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| 1,502,030 |
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Inventory |
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| 1,299,411 |
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| 1,040,277 |
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| 1,267,214 |
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| 1,353,703 |
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Tax Receivable |
| — |
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| 172,457 |
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Prepaid expenses |
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| 456,934 |
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| 265,123 |
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| 229,667 |
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| 175,955 |
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TOTAL CURRENT ASSETS |
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| 7,118,837 |
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| 7,118,647 |
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| 6,641,326 |
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| 6,779,724 |
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Property and equipment, net |
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| 933,947 |
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| 996,822 |
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| 901,464 |
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| 932,092 |
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Patents, net of accumulated amortization of $174,434 and $147,380 at November 30, 2016 and February 29, 2016, respectively |
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| 390,578 |
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| 247,691 |
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Patents, net of accumulated amortization of $188,735and $180,137 at June 30, 2017 and February 28, 2017, respectively |
| 429,974 |
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| 426,943 |
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Other assets |
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| 31,490 |
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| 31,140 |
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| 31,582 |
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| 31,490 |
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TOTAL ASSETS |
| $ | 8,474,852 |
| $ | 8,394,300 |
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| $ | 8,004,346 |
| $ | 8,170,249 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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CURRENT LIABILITIES |
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Deferred capital gain - current portion |
| $ | 22,481 |
| $ | 22,481 |
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Deferred capital gain - current |
| $ | 22,481 |
| $ | 22,481 |
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Accounts payable |
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| 910,763 |
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| 307,764 |
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| 279,130 |
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| 772,428 |
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Accrued expenses |
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| 582,998 |
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| 499,406 |
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| 353,997 |
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| 417,357 |
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Accrued payroll and related taxes |
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| 112,213 |
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| 148,766 |
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| 212,083 |
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| 177,018 |
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Accrued tax liability |
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| — |
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| 129,497 |
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| 1,384 |
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TOTAL CURRENT LIABILITIES |
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| 1,628,455 |
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| 1,107,914 |
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| 869,075 |
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| 1,389,284 |
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Deferred capital gain - less current portion |
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| 28,116 |
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| 44,976 |
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Deferred capital gain – long term |
| 15,002 |
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| 22,496 |
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Deferred tax liability |
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| 82,196 |
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| 123,111 |
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| 95,133 |
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| 82,422 |
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TOTAL LIABILITIES |
| $ | 1,738,767 |
| $ | 1,276,001 |
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| $ | 979,210 |
| $ | 1,494,202 |
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STOCKHOLDERS’ EQUITY |
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Common stock, $0.01 par value; authorized shares, 75,000,000 at November 30, 2016 and 50,000,000 at November 30, 2015; 40,485,062 shares issued at November 30, 2016 and 40,487,532 shares issued at February 29, 2016; 37,749,081 shares outstanding at November 30, 2016 and 37,966,501 shares outstanding at February 29, 2016 |
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| 404,851 |
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| 404,875 |
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Common stock, $0.01 par value; 75,000,000 shares authorized, 40,572,102 and 40,558,429 shares issued, 37,834,871 and 37,821,198 shares outstanding at June 30, 2017 and February 28, 2017, respectively |
| 405,721 |
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| 405,584 |
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Additional paid-in capital |
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| 4,082,218 |
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| 3,968,342 |
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| 4,117,845 |
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| 4,129,726 |
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Retained earnings |
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| 2,599,736 |
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| 3,019,940 |
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| 2,845,774 |
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| 2,484,941 |
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| 7,086,805 |
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| 7,393,157 |
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| 7,369,340 |
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| 7,020,251 |
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Less: Treasury stock at cost, 2,735,981 shares at November 30, 2016 and 2,521,031 at February 29, 2016 |
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| (343,720 | ) |
| (246,858 | ) | |||||||
Less: Deferred compensation cost |
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| (7,000 | ) |
| (28,000 | ) | |||||||
Less: Treasury stock, 2,737,231 shares at June 30, 2017 and February 28, 2017 |
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| (344,204 | ) |
| (344,204 | ) | |||||||
TOTAL STOCKHOLDERS’ EQUITY |
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| 6,736,085 |
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| 7,118,299 |
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| 7,025,136 |
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| 6,676,047 |
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
| $ | 8,474,852 |
| $ | 8,394,300 |
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| $ | 8,004,346 |
| $ | 8,170,249 |
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The accompanying notes are an integral part of these financial statements
- 3 -
REPRO MED SYSTEMS, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
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| For the Three Months Ended |
| For the Nine Months Ended |
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| For the One Month Ended |
| For the Three Months Ended |
| For the Four Months Ended |
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| November 30 |
| November 30 |
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| March 31 |
| June 30 |
| June 30 |
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| 2016 |
| 2015 |
| 2016 |
| 2015 |
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
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NET SALES |
| $ | 3,193,113 |
| $ | 3,144,954 |
| $ | 9,331,208 |
| $ | 8,941,676 |
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| $ | 1,509,619 |
| $ | 1,276,299 |
| $ | 3,829,457 |
| $ | 2,795,894 |
| $ | 5,339,076 |
| $ | 4,072,193 |
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Cost of goods sold |
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| 1,129,170 |
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| 1,035,675 |
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| 3,375,862 |
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| 3,307,808 |
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| 536,823 |
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| 446,618 |
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| 1,532,158 |
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| 1,008,749 |
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| 2,068,981 |
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| 1,455,367 |
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Gross Profit |
| 2,063,943 |
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| 2,109,279 |
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| 5,955,346 |
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| 5,633,868 |
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| 972,796 |
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| 829,681 |
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| 2,297,299 |
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| 1,787,145 |
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| 3,270,095 |
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| 2,616,826 |
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OPERATING EXPENSES |
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Selling, general and administrative |
| 2,034,016 |
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| 1,698,226 |
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| 6,145,769 |
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| 4,567,709 |
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| 637,707 |
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| 655,043 |
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| 2,005,336 |
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| 2,118,159 |
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| 2,643,043 |
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| 2,773,202 |
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Research and development |
| 59,142 |
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| 51,564 |
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| 183,497 |
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| 143,940 |
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| 7,872 |
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| 14,535 |
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| 24,840 |
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| 57,403 |
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| 32,712 |
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| 71,938 |
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Depreciation and amortization |
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| 83,254 |
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| 69,274 |
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| 227,109 |
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| 204,087 |
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| 25,576 |
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| 23,536 |
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| 76,781 |
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| 73,041 |
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| 102,357 |
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| 96,577 |
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Total Operating Expenses |
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| 2,176,412 |
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| 1,819,064 |
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| 6,556,375 |
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| 4,915,736 |
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| 671,155 |
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| 693,114 |
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| 2,106,957 |
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| 2,248,603 |
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| 2,778,112 |
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| 2,941,717 |
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Net Operating (Loss)/Profit |
| (112,469 | ) |
| 290,215 |
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| (601,029 | ) |
| 718,132 |
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Net Operating Profit/(Loss) |
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| 301,641 |
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| 136,567 |
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| 190,342 |
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| (461,458 | ) |
| 491,983 |
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| (324,891 | ) | |||||||||||||
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Non-Operating (Expense)/Income |
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Loss on currency exchange |
| (43,546 | ) |
| (36,663 | ) |
| (33,802 | ) |
| (42,420 | ) | ||||||||||||||||||||
Loss on disposal of fixed assets |
| — |
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| (253 | ) |
| (1 | ) |
| (13,577 | ) | ||||||||||||||||||||
Interest expense |
| (1,930 | ) |
| — |
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| (1,886 | ) |
| — |
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Non-Operating Income/(Expense) |
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Gain/(Loss) on currency exchange |
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| 19,988 |
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| 36,673 |
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| 34,671 |
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| (24,340 | ) |
| 54,659 |
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| 12,333 |
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Interest and other income |
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| 454 |
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| 929 |
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| 1,549 |
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| 3,058 |
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| 322 |
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| 321 |
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| 421 |
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| 752 |
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| 743 |
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| 1,073 |
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TOTAL OTHER (EXPENSES) INCOME |
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| (45,022 | ) |
| (35,987 | ) |
| (34,140 | ) |
| (52,939 | ) | |||||||||||||||||||
TOTAL OTHER INCOME/(EXPENSE) |
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| 20,310 |
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| 36,994 |
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| 35,092 |
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| (23,588 | ) |
| 55,402 |
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| 13,406 |
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(LOSS) INCOME BEFORE TAXES |
| (157,491 | ) |
| 254,228 |
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| (635,169 | ) |
| 665,193 |
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PROFIT/(LOSS) BEFORE TAXES |
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| 321,951 |
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| 173,561 |
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| 225,434 |
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| (485,046 | ) |
| 547,385 |
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| (311,485 | ) | |||||||||||||
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Income Tax Benefit (Expense) |
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| 53,216 |
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| (86,676 | ) |
| 214,965 |
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| (227,067 | ) | |||||||||||||||||||
Income Tax (Expense)Benefit |
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| (109,590 | ) |
| (59,231 | ) |
| (76,962 | ) |
| 164,834 |
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| (186,552 | ) |
| 105,603 |
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NET (LOSS) INCOME |
| $ | (104,275 | ) | $ | 167,552 |
| $ | (420,204 | ) | $ | 438,126 |
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NET INCOME/(LOSS) |
| $ | 212,361 |
| $ | 114,330 |
| $ | 148,472 |
| $ | (320,212 | ) | $ | 360,833 |
| $ | (205,882 | ) | |||||||||||||
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NET (LOSS)/INCOME PER SHARE |
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NET INCOME/(LOSS) PER SHARE |
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Basic |
| $ | — |
| $ | — |
| $ | (0.01 | ) | $ | 0.01 |
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| $ | 0.01 |
| $ | — |
| $ | — |
| $ | (0.01 | ) | $ | 0.01 |
| $ | (0.01 | ) |
Diluted |
| $ | — |
| $ | — |
| $ | (0.01 | ) | $ | 0.01 |
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| $ | 0.01 |
| $ | — |
| $ | — |
| $ | (0.01 | ) | $ | 0.01 |
| $ | (0.01 | ) |
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WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING |
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Basic |
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| 37,746,731 |
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| 38,006,667 |
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| 37,857,074 |
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| 38,006,667 |
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| 37,821,198 |
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| 37,966,501 |
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| 37,825,209 |
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| 37,964,985 |
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| 37,824,189 |
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| 37,965,370 |
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Diluted |
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| 37,794,350 |
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| 38,006,667 |
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| 37,904,693 |
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| 38,006,667 |
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| 37,847,628 |
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| 37,966,501 |
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| 37,891,306 |
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| 37,964,985 |
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| 37,877,694 |
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| 37,965,370 |
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The accompanying notes are an integral part of these financial statements
- 4 -
REPRO MED SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
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| For the Nine Months Ended |
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| For the Four Months Ended |
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| November 30, |
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| 2016 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net (Loss) Income |
| $ | (420,204 | ) | $ | 438,126 |
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Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: |
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Net Income (Loss) |
| $ | 360,833 |
| $ | (205,882 | ) | |||||||
Adjustments to reconcile net income (loss) to net cash used in operating activities: |
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| ||||||||
Amortization of deferred compensation cost |
| 21,000 |
|
| 21,000 |
|
| — |
|
| 7,000 |
| ||
Stock based compensation expense |
| 157,245 |
|
| 38,360 |
|
| 7,615 |
|
| 69,714 |
| ||
Depreciation and amortization |
| 227,109 |
|
| 204,087 |
|
| 102,357 |
|
| 96,577 |
| ||
Deferred capital gain - building lease |
| (16,860 | ) |
| (16,860 | ) |
| (7,493 | ) |
| (7,493 | ) | ||
Deferred taxes |
| (40,914 | ) |
| (17,063 | ) |
| 12,711 |
|
| (15,144 | ) | ||
Loss on disposal of fixed assets |
| — |
|
| 13,577 |
| ||||||||
Provision for returns and doubtful accounts |
| (16,967 | ) |
| (70 | ) |
| (5,000 | ) |
| (10,312 | ) | ||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||
Increase in accounts receivable |
| (294,066 | ) |
| (134,196 | ) |
| (392,592 | ) |
| (376,551 | ) | ||
Increase in inventory |
| (259,134 | ) |
| (32,165 | ) | ||||||||
Increase in prepaid expense |
| (192,161 | ) |
| (49,695 | ) | ||||||||
Increase in accounts payable |
| 602,998 |
|
| 279,122 |
| ||||||||
Decrease in accrued payroll and related taxes |
| (36,553 | ) |
| (3,724 | ) | ||||||||
Increase in accrued expense |
| 83,593 |
|
| 130,076 |
| ||||||||
(Decrease) Increase in accrued tax liability |
| (129,497 | ) |
| 43,424 |
| ||||||||
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES |
|
| (314,411 | ) |
| 913,999 |
| |||||||
Decrease in inventory |
| 86,489 |
|
| 1,575 |
| ||||||||
Decrease/(Increase) in prepaid expense and other assets |
| 118,652 |
|
| (108,855 | ) | ||||||||
(Decrease)/Increase in accounts payable |
| (493,297 | ) |
| 186,109 |
| ||||||||
Increase/(Decrease) in accrued payroll and related taxes |
| 35,065 |
|
| (21,489 | ) | ||||||||
Decrease in accrued expense |
| (63,360 | ) |
| (67,383 | ) | ||||||||
Increase/(Decrease) in accrued tax liability |
| 1,384 |
|
| (92,003 | ) | ||||||||
NET CASH USED IN OPERATING ACTIVITIES |
|
| (236,636 | ) |
| (544,137 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
| ||
Payments for property and equipment |
| (137,182 | ) |
| (106,337 | ) |
| (63,133 | ) |
| (74,549 | ) | ||
Proceeds on disposal of fixed assets |
| — |
|
| 13,550 |
| ||||||||
Payments for patents |
| (169,941 | ) |
| (38,916 | ) |
| (11,628 | ) |
| (29,085 | ) | ||
NET CASH USED IN INVESTING ACTIVITIES |
|
| (307,123 | ) |
| (131,703 | ) |
|
| (74,761 | ) |
| (103,634 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
| ||
Purchase of Treasury Stock |
| (140,255 | ) |
| — |
| ||||||||
Payment for cancelled shares |
| (19,360 | ) |
| — |
| ||||||||
Purchase of treasury stock |
| — |
|
| (1,105 | ) | ||||||||
NET CASH USED IN FINANCING ACTIVITIES |
|
| (140,255 | ) |
| — |
|
|
| (19,360 | ) |
| (1,105 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
| (761,789 | ) |
| 782,296 |
| ||||||||
NET DECREASE IN CASH AND CASH EQUIVALENTS |
| (330,757 | ) |
| (648,876 | ) | ||||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
| 4,201,949 |
|
| 2,557,235 |
|
|
| 3,313,265 |
|
| 4,201,948 |
|
CASH AND CASH EQUIVALENTS, END OF PERIOD |
| $ | 3,440,160 |
| $ | 3,339,531 |
|
| $ | 2,982,508 |
| $ | 3,553,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Supplemental Information |
|
|
|
|
|
|
|
|
|
|
|
| ||
Cash paid during the periods for: |
|
|
|
|
|
|
|
|
|
|
|
| ||
Interest |
| $ | — |
| $ | — |
|
| $ | — |
| $ | — |
|
Taxes |
| $ | 99,342 |
| $ | 100,000 |
|
| $ | — |
| $ | 90,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
NON-CASH FINANCING AND INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
| ||
Issuance of common stock as compensation |
| $ | — |
| $ | — |
|
| $ | 45,000 |
| $ | 24,718 |
|
The accompanying notes are an integral part of these financial statements
- 5 -
REPRO MED SYSTEMS, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
REPRO MED SYSTEMS, INC. (the “Company”, “RMS”, or “we”) designs, manufactures and markets proprietary medical devices primarily for the ambulatory infusion market and emergency medical applications as governed by the United States Food and Drug Administration (the “FDA”) quality and regulatory system and international standards for quality management systems. The Company operates as one segment.
FISCAL YEAR END
On March 22, 2017, the Board of Directors approved a change in the Company’s fiscal year end from February 28 to December 31. With this fiscal year end change, the Company will report one-time, transitional financial information for the month of March 2017 and the quarter April through June 2017 on Form 10-Q.
BASIS OF PRESENTATION
The accompanying unaudited financial statements as of NovemberJune 30, 2016,2017, have been prepared in accordance with generally accepted accounting principles and with instructions to SEC regulation S-X for interim financial statements.
In the opinion of the Company’s management, the financial statements contain all adjustments consisting of normal recurring accruals necessary to present fairly the Company’s financial position as of NovemberJune 30, 2016,2017, and the results of operations and cash flow for the three month and nine monthfour months periods ended NovemberJune 30, 2016,2017, and 2015.2016.
The results of operations for the three and ninefour months ended NovemberJune 30, 2016,2017, and 20152016 are not necessarily indicative of the results to be expected for the full year. These interim financial statements should be read in conjunction with the financial statements and notes thereto of the Company and management’s discussion and analysis of financial condition and results of operations included in the Company’s Annual Report for the year ended February 29, 2016,28, 2017, as filed with the Securities and Exchange Commission on Form 10-K.
USE OF ESTIMATES IN THE FINANCIAL STATEMENTS
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Important estimates include but are not limited to, asset lives, valuation allowances, inventory, and accruals.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2016,May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-19—Technical Corrections and Improvements2017-09—Compensation-Stock Compensation (Topic 718), which contains amendments that affect a wide variety of topics in the Accounting Standards Codification (“ASC”). The reason for each amendment is provided before each of the amendments forprovides clarity and ease of understanding. The amendments generally fall into one of the following types of categories; (a) Amendments related to differences between original guidancereduce both (1) diversity in practice and the ASC: these amendments arose because of differences between original guidance (for example, FASB Statements, Emerging Issues Task Force (“EITF”) Issues,(2) cost and so forth) and the ASC. These amendments principally carry forward pre-codification guidance or subsequent amendments into the ASC. Many times, either the writing style or phrasing of the original guidance did not directly translate into the ASC format and style. As a result, the meaning ofcomplexity when applying the guidance might have been unintentionally altered. Alternatively,in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments in this category may relateupdate affect any entity that changes the terms or conditions of a share-based payment award. The amendments in this update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this update should be applied prospectively to guidance that was codified without some text, reference,an award modified on or phrasing that, upon review, was deemed important toafter the guidance; (b) Guidance clarification and reference corrections: these amendments provide clarification through updating wording, correcting references, or a combination of both. In most cases, the feedback suggested that, without these enhancements, guidance may be misapplied; (c) Simplification: these amendments streamline or simplify the ASC through minor structural changes to headings or minor editing of text to improve the usefulness and understandability of the ASC; or (d) Minor improvements: these amendments improve the guidance and are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities.adoption date. The Company is assessing the impact of the adoption of the ASU on its financial statements, disclosure requirements and methods of adoption.
- 6 -
In June 2016, FASB issued ASU No. 2016-13—Financial Instruments – Credit Losses (Topic 326); Measurement of Credit Losses on Financial Instruments, which amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. This ASU affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is assessing the impact of the adoption of the ASU on its financial statements, disclosure requirements and methods of adoption.
In May 2016, FASB issued ASU No. 2016-12—Revenue from Contracts with Customers (Topic 606); Narrow-Scope Improvements and Practical Expedients, which is intended to not change the core principle of the guidance in Topic 606, but rather affect only the narrow aspects of Topic 606 by reducing the potential for diversity in practice at initial application and by reducing the cost and complexity of applying Topic 606 both at transition and on an ongoing basis. The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by update 2014-09). The Company is assessing the impact of the adoption of the ASU on its financial statements, disclosure requirements and methods of adoption.
In May 2016, the FASB issued ASU No. 2016-11 Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815); Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 Emerging Issues Task Force (“EITF”) Meeting, which is rescinding certain SEC Staff Observer comments that are codified in Topic 605, Revenue Recognition, and Topic 932, Extractive Activities—Oil and Gas, effective upon adoption of Topic 606. The Company does not expect the adoption of the ASU to have any impact on its financial statements.
In May 2014, the FASB issued ASU No. 2014-09—Revenue from Contracts with Customers. The ASU clarifies the principles for recognizing revenue and develops a common revenue standard for U.S. GAAP and International Financial Reporting Standards (“IFRS”) that removes inconsistencies and weaknesses in revenue requirements, provides a more robust framework for addressing revenue issues, improves comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets, provides more useful information to users of the financial statements through improved disclosure requirements and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. The amendments in this update are effective for the annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Full or modified retrospective adoption is required and early application is not permitted. On July 9, 2015, the FASB issued ASU No. 2015-14 Revenue from Contracts with Customers (Topic 606); Deferral of the Effective Date, which (a) delays the effective date of ASU 2014-09, Revenue from Contracts with Customers (Topic 606), by one year to annual periods beginning after December 15, 2017 and (b) allows early adoption of the ASU by all entities as of the original effective date for public entities. We currently anticipate adopting the new standard using the modified retrospective method beginning January 1, 2018. In March 2016, the FASB issued ASU No. 2016-08 Revenue from Contracts with Customers (Topic 606); Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations and the effective date is the same as the requirements in ASU 2014-09. In April 2016, the FASB issued ASU No. 2016-10 Revenue from Contracts with Customers (Topic 606); Identifying Performance Obligations and Licensing, which is intended to clarify identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas and the effective date is the same as the requirements in ASU 2014-09. The CompanyIn May 2016, FASB issued ASU No. 2016-12—Revenue from Contracts with Customers (Topic 606); Narrow-Scope Improvements and Practical Expedients, which is assessingintended to not change the impactcore principle of the adoptionguidance in Topic 606, but rather affect only the narrow aspects of Topic 606 by reducing the ASUpotential for diversity in practice at initial application and by reducing the cost and complexity of applying Topic 606 both at transition and on its financial statements, disclosurean ongoing basis. The effective date and transition requirements for the amendments in this update are the same as the effective date and methods of adoption.
transition requirements for Topic 606 (and any other Topic amended by update 2014-09). In MarchDecember 2016, the FASB issued ASU No. 2016-09 — Compensation – Stock Compensation (Topic 718):2016-20 Technical Corrections and Improvements to Employee Share-Based Payment Accounting. The ASU was issued as partTopic 606, Revenue from Contracts with Customers, which represents changes to make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. This update is the final, combined version of the FASB’s simplification initiativeProposed Accounting Standards Updates 2016-240 and under the ASU, the areas of simplification in the update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classifications of awards as either equity or liabilities,2016-320 (both entitled Technical Corrections and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. The amendment eliminates the guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004)Improvements), Share-Based Payment. This shouldwhich have been deleted. Based upon our initial evaluation, we do not result in a change in practice because the guidance that is being superseded was never effective. The amendment in this ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is assessing the impact ofexpect the adoption of the ASUstandard and related amendments to have a material effect on itsour financial statements, disclosure requirements and methodscondition or results of adoption.operations.
- 7 -
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The main difference between the current requirement under GAAP and this ASU is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases. This ASU requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases). Classification will be based on criteria that are largely similar to those applied in current lease accounting. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. This is effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. This ASU must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. We are currently assessing the potential impact of this ASU on our financial statements, disclosure requirements and expect it willmethods of adoption.
- 7 -
The Company considers the applicability and impact of all recently issued accounting pronouncements. Recent accounting pronouncements not specifically identified in our disclosures are either not applicable to the Company or are not expected to have a material impacteffect on our financial condition andor results of operations upon adoption.
In July 2015, the FASB issued ASU No. 2015-11—Simplifying the Measurement of Inventory. The ASU was issued as part of the FASB’s simplification initiative and under the ASU, inventory is measured at the lower of cost and net realizable value, which would eliminate the other two options that currently exist for the market: (1) replacement cost and (2) net realizable value less an approximately normal profit margin. This ASU is effective for interim and annual periods beginning after December 15, 2016. Early application is permitted and should be applied prospectively. The Company does not expect the adoption of the ASU to have any impact on its financial statements.operations.
STOCK-BASED COMPENSATION
The Company maintains a long-term incentive stock benefit plan under which it grants stock options and restricted stock to certain directors and key employees. 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, over the vesting period.
RECLASSIFICATION
Certain reclassifications have been made to conform prior period data to the current presentation. These reclassifications had no effect on reported net income.
NOTE 2 RELATED PARTY TRANSACTIONS
On December 20, 2013, we executed an agreement effective March 1, 2014, with a Company director, Dr. Mark Baker, to provide clinical research and support services related to new and enhanced applications for the FREEDOM60® Syringe Infusion System. Authorized by the Board of Directors, the agreement provides for payment of 420,000 shares of common stock valued at $0.20 per share over a three-year period. Amortization amounted to $7,000zero and $21,000$7,000 for the three and ninefour months ended NovemberJune 30, 2017 and 2016, and November 30, 2015, respectively.
On October 21, 2015, Cyril Narishkin was appointed to the Board of Directors and Interim Chief Operating Officer of the Company. Also effective October 21, 2015, we entered into a consulting agreement with Mr. Narishkin, to support our expanded management team and accelerate our growth opportunities under his role of Interim Chief Operating Officer. The agreement provided for payment of $16,000 per month for eight days per month, of which half was to be paid in cash and half was to be paid in shares of common stock. Effective January 1, 2016, the agreement provided for the same payment of $16,000 per month, of which seventy-five percent was to be paid in cash and twenty-five percent was to be paid in shares of common stock.
On June 24, 2016, Cyril Narishkin executed a termination and general release agreement, which terminated his previous consulting agreement, and resigned as an officer and director for personal reasons. Mr. Narishkin will bewas compensated for services as a consultant through January 31, 2017 at a monthly rate of $16,000 per month for up to eight days of service a month upon request of the Company. Mr. NarishkinNarishkin’s compensation was granted compensation of $48,000zero and $198,000$118,000 for the three and ninefour months ended NovemberJune 30, 2017 and 2016, respectively. In accordance with the agreement, the Company repurchased 96,542 shares of common stock of the Company owned by Mr. Narishkin at an aggregate purchase price of $43,393.
- 8 -
LEASED AIRCRAFT
The Company leases an aircraft from a company controlled by Andrew Sealfon, the Company’s President and Chief Executive Officer. The lease payments were $5,375$5,668 and $16,125$7,167 for the three and ninefour months ended NovemberJune 30, 20162017 and NovemberJune 30, 2015,2016, respectively. The original lease agreement has expired and the Company is currently on a month-to-month basis for rental payments.
BUILDING LEASE
Mr. Mark Pastreich, a director, is a principal in the entity that owns the building leased by Company. The Company is in year seventeennineteen of a twenty-year lease. There have been no changes to lease terms since his directorship and none are expected through the life of the current lease. With a monthly lease amount of $11,042, the lease payments were $33,126$44,168 for each of the four months ended June 30, 2017 and $99,378June 30, 2016. The Company also paid property taxes for the three and ninefour months ended NovemberJune 30, 2017 and June 30, 2016 in the amount of $16,236 and $15,825, respectively.
We are currently seeking another location within a 30 mile radius from our current facility with more square footage to accommodate our expanding needs. 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. There can be no assurance that we will find a suitable location before our current lease expires on terms that are economically favorable to us or at all.
- 8 -
NOTE 3 PROPERTY AND EQUIPMENT
Property and equipment consists of the following at:
|
| November 30, 2016 |
| February 29, 2016 |
|
| June 30, 2017 |
| February 28, 2017 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Land |
| $ | 54,030 |
| $ | 54,030 |
|
| $ | 54,030 |
| $ | 54,030 |
|
Building |
| 171,094 |
|
| 171,094 |
|
|
| 171,094 |
|
| 171,094 |
| |
Furniture, office equipment, and leasehold improvements |
| 1,003,250 |
|
| 923,394 |
|
|
| 1,048,818 |
|
| 1,022,942 |
| |
Manufacturing equipment and tooling |
|
| 966,080 |
|
| 961,486 |
|
|
| 1,031,207 |
|
| 1,003,166 |
|
|
| 2,194,454 |
|
| 2,110,004 |
|
|
| 2,305,149 |
|
| 2,251,232 |
| |
Less: accumulated depreciation |
|
| 1,260,507 |
|
| 1,113,182 |
|
|
| 1,403,685 |
|
| 1,319,140 |
|
Property and equipment, net |
| $ | 933,947 |
| $ | 996,822 |
|
| $ | 901,464 |
| $ | 932,092 |
|
NOTE 4 LEGAL PROCEEDINGS
OnLawyers representing EMED Technologies Corp. (“EMED”) sent RMS a letter dated, May 1, 2013, which alleged that the RMS High-Flo Butterfly design infringed a patent controlled by EMED. RMS disputed this claim and we believed that our design did not infringe and that the EMED patent itself was not valid. Under advice of counsel, on September 20, 2013, the Company commenced in the United States District Court for the Eastern District of California a declaratory judgment action against competitor, EMED Technologies Corp. (“EMED”) to establish the invalidity of one of EMED’s patents and non-infringement of the Company’s needle sets. EMED answered the complaint and asserted patent infringement and unfair business practice counterclaims. The Company responded by asserting its own unfair business practice claims against EMED. Both parties have requested injunctive relief and monetary damages. Discovery is ongoing.
On June 16, 2015, the Court issued what it termed a “narrow” preliminary injunction against the Company from making certain statements regarding some of EMED’s products. On June 23, 2016, EMED filed a motion seeking to have the Company held in contempt, claiming that certain language in the Company’s device labeling does not comply with the injunction. In response to a show cause order, the Company advised the Court that the language in the Company’s labeling that EMED challenged is language that the FDA directed the Company to use in its labeling. The Court discharged the show cause order, effectively rejecting EMED’s contempt argument.
On March 24, 2016, EMED filed a motion seeking a second preliminary injunction prohibiting RMS from selling three of its products in California. The Company opposed that motion on April 19, 2016. A decision on the motion is still pending.
On June 25, 2015, EMED filed a claim of patent infringement for the second of its patents, also directed to the Company’s needle sets, in the United States District Court for the Eastern District of Texas. This second patent is related to the one concerning the Company’s declaratory judgment action. Given the close relationship between the two patents, the Company requested that the Texas suit be transferred to California. Also, based on a validity review of the patent in the U.S. Patent and Trademark Office (“USPTO”), discussed below, the Company requested the Texas suit be stayed. On May 12, 2016, the Court entered an order staying the case until after the Patent Trial and Appeal Board (“PTAB”) at the USPTO issuesissued a final written decision regarding the validity of the patent. On January 12, 2017, the PTAB issued its final written decision invalidating the claims asserted by EMED in the Texas litigation. On January 26, 2017, the Company and EMED requested that the Texas case remain stayed pending EMED’s appeal of the PTAB’s final ruling to the Court of Appeals for the Federal Circuit (“CAFC”).
- 9 -
On September 11, 2015, the Company requested an ex parte reexamination of the patent in the first filed case, and on September 17, 2015 the Company requested an inter partes review (“IPR”) of the patent in the second filed case. On November 20, 2015, the USPTO instituted the ex parte reexamination request having found a substantial new question of patentability concerning EMED’s patent in the first filed case. TheAll EMED claims have been rejected by the USPTO Examiner in a Non-Final Office Action. EMED filed a response that is awaiting consideration by the Examiner. Thus, the ex parte reexamination is ongoing. A decision to institute the IPR for EMED’s patent in the second filed case was ordered by the USPTO on February 19, 2016 having determined a reasonable likelihood all claims of the patent may be found to be unpatentable. Oral argument for the IPR was held on November 22, 2016 and a final ruling issued on January 12, 2017. In its final ruling, the PTAB held the claim asserted by EMED against the Company in the second filed case was invalid. EMED appealed the PTAB’s final ruling, and EMED’s opening brief in the CAFC was filed on June 26, 2017. The Company is due on or before February 19, 2017.now responding.
Although the Company believes it has meritorious claims and defenses in these actions and proceedings, their outcomes cannot be predicted with any certainty. IfWe believe that it is very likely both patents will be determined invalid, however, if any of these actions against the Company are successful, they could have a material adverse effect on the Company’s business, results of operations, financial condition and cash flows.
- 9 -
NOTE 5 STOCKHOLDERS’ EQUITY
On September 30, 2015, RMS’s Board of Directors authorized a stock repurchase program pursuant to which the Company has and expects to continue to make open market purchases of up to 2,000,000 shares of the Company’s outstanding common stock. The Board of Directors initially authorized such purchases up to 1,000,000 shares. On June 29, 2016, the Board of Directors approved the amendment to the stock repurchase program increasing the authorized to be repurchased to 2,000,000 shares.Outstanding Common Stock. The purchases will beare made through a broker to be designated by the Company, with price, timing and volume restrictions based on average daily trading volume, consistent with the safe harbor rules of the Securities and Exchange Commission (the “Commission”) for such repurchases.
As of NovemberJune 30, 2016,2017, the Company had repurchased 395,356396,606 shares at an average price of $0.45 under the program. The management of the Company decided to discontinue repurchasing its outstanding common stock under the program for an undetermined period of time to utilize cash for capital investments needed to expand the business.
NOTE 6 STOCK-BASED COMPENSATION
On September 30, 2015, the Board of Directors approved the 2015 Stock Option Plan (“the Plan”) authorizing the Company to grant stock option awards to certain officers, employees and consultants under the Plan, subject to shareholder approval at the Annual Meeting of Shareholders held on September 6, 2016. The total number of shares of common stock of the Company, par value $0.01 per share (“Common Stock”), with respect to which awards may be granted pursuant to the Plan was not to exceed 2,000,000 shares.
On June 29, 2016, the Board of Directors approved the amendment to the Plan authorizing the total number of shares of common stock authorized to be subject to awards granted under the Plan to be increased to 4,000,000 shares. On September 6, 2016, at the Annual Shareholder Meeting, the Company’s shareholders approved the Plan as amended.
As of NovemberJune 30, 2016, the Company had2017, there were outstanding 1,113,000 options awarded 905,000 options to certain executives, and key employees and advisory board members under the Plan.
On October 21, 2015, the Board of Directors of the Company approved non-employee director compensation of $25,000 each annually, to be paid quarterly half in cash and half in common stock, beginning September 1, 2015.
The per share weighted average fair value of stock options granted during the ninefour months ended NovemberJune 30, 2017 and June 30, 2016 was $0.24 and November 30, 2015 was zero, and $0.19, 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 ninefour months ended NovemberJune 30, 2017 and June 30, 2016. 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:
|
| November 30, |
|
| June 30, |
| ||||||||
|
| 2016 |
| 2015 |
|
| 2017 |
| 2016 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield |
|
| 0.00% |
|
| 0.00% |
|
|
| 0.00% |
|
| 0.00% |
|
Expected Volatility |
|
| 59.00% |
|
| 59.00% |
|
|
| 59.00-72.2% |
|
| 59.00% |
|
Weighted-average volatility |
|
| — |
|
| — |
|
|
| — |
|
| — |
|
Expected dividends |
|
| — |
|
| — |
|
|
| — |
|
| — |
|
Expected term (in years) |
|
| 5 Years |
|
| 5 Years |
|
|
| 4 - 5 Years |
|
| 5 Years |
|
Risk-free rate |
|
| 2.17% |
|
| 2.17% |
|
|
| 2.17-2.48% |
|
| 2.17% |
|
- 10 -
The following table summarizes the status of the Plan:
|
| Nine Months Ended November 30, |
|
| Four Months Ended June 30, |
| ||||||||||||||||||
|
| 2016 |
| 2015 |
|
| 2017 |
| 2016 |
| ||||||||||||||
|
| Shares |
| Weighted |
| Shares |
| Weighted |
|
| Shares |
| Weighted |
| Shares |
| Weighted |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Outstanding at March 1 |
| 1,060,000 |
| $ | 0.36 - 0.38 |
|
| — |
| $ | — |
|
| 1,345,000 |
| $ | 0.39 |
|
| 1,060,000 |
| $ | 0.37 |
|
Granted |
| — |
| $ | — |
|
| 1,155,000 |
| $ | 0.36 - 0.38 |
|
| 18,000 |
| $ | — |
|
| — |
| $ | — |
|
Exercised |
| — |
| $ | — |
|
| — |
| $ | — |
|
| — |
| $ | — |
|
| — |
| $ | — |
|
Forfeited |
| 155,000 |
| $ | 0.36 - 0.38 |
|
| — |
| $ | — |
|
| 250,000 |
| $ | 0.36 |
|
| — |
| $ | — |
|
Outstanding at November 30 |
| 905,000 |
| $ | 0.36 - 0.38 |
|
| 1,155,000 |
| $ | 0.36 - 0.38 |
| ||||||||||||
Options exercisable at November 30, |
| 500,000 |
| $ | 0.38 |
|
| — |
| $ | — |
| ||||||||||||
Outstanding at June 30 |
| 1,113,000 |
| $ | 0.39 |
|
| 1,060,000 |
| $ | 0.37 |
| ||||||||||||
Options exercisable at June 30, |
| 538,000 |
| $ | 0.38 |
|
| — |
| $ | — |
| ||||||||||||
Weighted average fair value of options granted during the period |
| — |
| $ | — |
|
| — |
| $ | — |
|
| — |
| $ | — |
|
| — |
| $ | — |
|
Stock-based compensation expense |
| — |
| $ | 101,337 |
|
| — |
| $ | 10,717 |
|
| — |
| $ | (37,385 | ) |
| — |
| $ | 50,055 |
|
Total stock-based compensation expense, net of estimated forfeitures for stock option awards totaled $101,337$(37,385) and $10,717$50,055 for the ninefour months ended NovemberJune 30, 20162017 and NovemberJune 30, 2015,2016, respectively.
The weighted-average grant-date fair value of options granted during the ninefour months ended NovemberJune 30, 2017 and June 30, 2016, was $4,356 and November 30, 2015 was zero, for both periods.respectively. The total intrinsic value of options exercised during the ninefour months ended NovemberJune 30, 20162017 and NovemberJune 30, 2015,2016, was zero for both periods.
The following table presents information pertaining to options outstanding at NovemberJune 30, 2016:2017:
Range of Exercise Price |
| Number |
| Weighted |
| Weighted |
| Number |
| Weighted |
|
| Number |
| Weighted |
| Weighted |
| Number |
| Weighted |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.36 - $0.38 |
| 905,000 |
| 5 years |
| $ | 0.37 |
| — |
| $ | — |
| |||||||||||||
$0.36 - $0.41 |
| 1,113,000 |
| 5 years |
| $ | 0.39 |
| 538,000 |
| $ | 0.38 |
|
As of NovemberJune 30, 2016,2017, there was $35,958$113,821 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 17 months. The total fair value of shares vested during the ninefour months ended NovemberJune 30, 2017 and June 30, 2016, and November 30, 2015, was $98,432$9,300 and zero, respectively.
- 11 -
PART I – ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This Quarterly Report on Form 10-Q contains certain “forward-looking” statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) and information relating to us that are based on the beliefs of the management, as well as assumptions made and information currently available.
Our actual results may vary materially from the forward-looking statements made in this report due to important factors such as uncertainties associated with future operating results, unpredictability related to Food and Drug Administration regulations, introduction of competitive products, limited liquidity, reimbursement related risks, government regulation of the home health care industry, success of the research and development effort, expanding the market of FREEDOM60®, availability of sufficient capital to continue operations, dependence on key personnel and the outcome of litigation and regulatory investigation. When used in this report, the words “estimate,” “project,” “believe,” “may,” “will,” “anticipate,” “intend,” “expect” and similar expressions are intended to identify forward-looking statements. Such statements reflect current views with respect to future events based on currently available information and are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. These statements involve risks and uncertainties with respect to the ability to raise capital if or when needed to develop and market new products, acceptance of and demand for new and existing products, ability to penetrate new markets, our success in enforcing and obtaining patents, obtaining required Government approvals, attracting and maintaining key personnel, succeeding in defending litigation claims and resolving the FDA Warning Letter that could cause the actual results to differ materially. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. The Company does not undertake any obligation to release publicly any revision to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Throughout this report, “RMS,” the “Company,” “we,” “us” and “our” refer to Repro Med Systems, Inc.
OVERVIEW
On March 22, 2017, the Board of Directors approved a change in the Company’s fiscal year end from February 28 to December 31. With this fiscal year end change, the Company is reporting one-time, transitional financial information for the month of March 2017 and the quarter April through June 2017.
During the four month period ended June 30, 2017, we delivered sales growth both domestically and internationally, ramped up production to keep pace with demand and found ways to lower costs. The FDA renewed our Certificate to Foreign Government which is used to communicate to foreign governments that the FDA certified that RMS meets good manufacturing practices and quality system regulations. We received registrations in new countries, launched our new flow controller in Europe and started several clinical trials with drug companies. Furthermore, we have launched a new marketing campaign, redesigned our packaging and entered the social media world to help extend our brand awareness. We plan to continue to focus on global sales growth, cost control and new product development. Additionally, we continue to look for a new facility with more square footage to accommodate our expanding needs.
Our net sales results for the three and ninefour months ended NovemberJune 30, 20162017 increased 1.5% and 4.4%31.1%, respectively, versus the same periodsperiod last year. ThePart of the increase iswas the result of backorders of $0.4 million at February 28, 2017 which were filled during the four months ended June 30, 2017. Excluding these backorders, net sales grew 21.6% driven by new customers in our international region as well as organic growth with our existing customers both domestically and internationally. We have increased our sales force internationally, which has resulted in gainingincluded two new accountslarge pump orders accelerated into this period and we expecta large return of product related to bring on more new customers in the future.a market withdrawal last year. Our selling, general and administrative costs are 19.8% and 34.5% higherwere 4.7% lower for the three and ninefour months ended NovemberJune 30, 20162017 compared with the same period last year. We continue to have high professionalsaw a significant reduction in legal fees related to our litigation and FDA regulatory efforts and, although we are making every effort to resolve the litigation and close out our FDA Warning Letter,efforts. However, we cannot predict the timing of either of these efforts,whether this trend will continue, nor can we predict the outcome.outcome of the litigation or regulatory process. We have hired a Chief Medical Officeralso had reductions in sales and planmarketing driven by reduced recruiting and consulting fees that were incurred last year related to increaseour website redesign, public relations, sales training and lead generation efforts and the timing of spend for current year marketing initiatives. Offsetting these savings were increased salary and related benefit costs in our regulatory department due to headcount to facilitatesupport our regulatory compliance with our quality management system. We are also seeking to fill the role of Chief Operating Officer prior to the end of our fourth quarter to facilitate RMS’s future growth.requirements.
- 12 -
RESULTS OF OPERATIONS
ThreeFour Months Ended NovemberJune 30, 20162017 compared to NovemberJune 30, 20152016
Net Sales
The following table summarizes our net sales for the threefour months ended NovemberJune 30, 20162017 and 2015:2016:
|
| Three Months Ended November 30, |
| Change from Prior Year |
| % of Sales |
|
| Four Months Ended June 30, |
| Change from Prior Year |
| % of Sales |
| ||||||||||||||||||
|
| 2016 |
| 2015 |
| $ |
| % |
| 2016 |
| 2015 |
|
| 2017 |
| 2016 |
| $ |
| % |
| 2016 |
| 2015 |
| ||||||
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
| $ | 2,652,107 |
| $ | 2,645,241 |
| $ | 6,866 |
| 0.3 | % | 83.1% |
| 84.1 | % |
| $ | 4,254,605 |
| $ | 3,287,740 |
| $ | 966,865 |
| 29.4% |
| 79.7% |
| 80.7% |
|
International |
|
| 541,006 |
|
| 499,713 |
|
| 41,293 |
| 8.3 | % | 16.9% |
| 15.9 | % |
|
| 1,084,471 |
|
| 784,453 |
|
| 300,018 |
| 38.2% |
| 20.3% |
| 19.3% |
|
Total |
| $ | 3,193,113 |
| $ | 3,144,954 |
| $ | 48,159 |
| 1.5 | % |
|
|
|
|
| $ | 5,339,076 |
| $ | 4,072,193 |
| $ | 1,266,883 |
| 31.1% |
|
|
|
|
|
- 12 -
Total net sales increased $48,159$1.3 million or 1.5%31.1% for the quarterfour months ended NovemberJune 30, 20162017 compared towith the quarter ended November 30, 2015. Whilesame period last year. Part of the increase came from fulfilling backorders of $0.4 million at February 28, 2017. Excluding these backorders, net sales increased 21.6%. This growth was driven by both domestic and international sales, resulting from increased organic growth in all product categories. The launch of a new drug generated increased needle sales as customers built inventory, two large pump orders were nearly even withaccelerated forward into this period and last year our internationalincluded a large return of product related to a market increased $41,293 or 8.3% mostly due to new customers.withdrawal. We continue to concentrate the majority of our efforts in our infusion product lines, specifically towards new applications in both domestic and international markets. We anticipate sales to continue to increase as new markets, including new patient therapies andpursue registrations in new countries, although revenue realization could take up to eighteen months from the initial registration efforts. We also continue to develop and as we work on new enhancements to the FREEDOM60 that we believe will expand markets even further. For example, our sales efforts to reenter into the antibiotic market resulted in a large home care hospital system selecting the FREEDOM60 for all patients receiving this therapy.market.
Gross Profit
Our gross profit for the threefour months ended NovemberJune 30, 20162017 and 20152016 is as follows:
|
| Three Months Ended November 30, |
| Change from Prior Year |
|
| Four Months Ended June 30, |
| Change from Prior Year |
| ||||||||||||||
|
| 2016 |
| 2015 |
| $ |
| % |
|
| 2017 |
| 2016 |
| $ |
| % |
| ||||||
Gross Profit |
| $ | 2,063,943 |
| $ | 2,109,279 |
| $ | (45,336 | ) | (2.1 | )% |
| $ | 3,270,095 |
| $ | 2,616,826 |
| $ | 653,269 |
| 25.0% |
|
Stated as a Percentage of Net Sales |
|
| 64.6 | % |
| 67.1 | % |
|
|
|
|
|
|
| 61.2% |
|
| 64.3% |
|
|
|
|
|
|
Gross profit decreased $45,336increased $0.7 million or 2.1%25.0% in the threefour months ended NovemberJune 30, 2016, as2017, compared to the same period in 2015.2016. This decreaseincrease in the quarter was mostly driven by the increasesincrease in sales rebatesnet revenues of $1.3 million. Partially offsetting this increase was higher production costs related to scrap during quality inspections as we work to implement a specific customer contract renewal in the quarter comparednondestructive testing protocol. Additionally, we had higher sterilization costs due to more frequent cycles required to meet demand and backlog and increased shipping costs due to the same period last year, as well as an increase inbacklog. We also had higher production salary and related benefits costs associated with higher headcount in our quality departmentfrom overtime and the addition of a second shift to ensure compliance with our quality management system.meet increased demand.
Selling, general and administrative and Research and development
Our selling, general and administrative expenses and research and development costs for the threefour months ended NovemberJune 30, 20162017 and 20152016 are as follows:
|
| Three Months Ended November 30, |
| Change from Prior Year |
|
| Four Months Ended June 30, |
| Change from Prior Year |
| ||||||||||||||
|
| 2016 |
| 2015 |
| $ |
| % |
|
| 2017 |
| 2016 |
| $ |
| % |
| ||||||
Selling, general and administrative |
| $ | 2,034,016 |
| $ | 1,698,226 |
| $ | 335,790 |
| 19.8 | % |
| $ | 2,643,043 |
| $ | 2,773,202 |
|
| (130,159 | ) | (4.7% | ) |
Research and development |
|
| 59,142 |
|
| 51,564 |
|
| 7,578 |
| 14.7 | % |
|
| 32,712 |
|
| 71,938 |
|
| (39,226 | ) | (54.5% | ) |
|
| $ | 2,093,158 |
| $ | 1,749,790 |
| $ | 343,368 |
| 19.6 | % |
| $ | 2,675,755 |
| $ | 2,845,140 |
|
| (169,385 | ) | (-6.0% | ) |
Stated as a Percentage of Net Sales |
|
| 65.6 | % |
| 55.6 | % |
|
|
|
|
|
|
| 50.1% |
|
| 69.9% |
|
|
|
|
|
|
- 13 -
Selling, general and administrative expenses increased $0.3decreased $0.1 million, or 4.7%, during the threefour months ended NovemberJune 30, 20162017 compared to the same period last year. The increase came primarily fromdecrease was the result of a significant reduction in legal fees related to our litigation and regulatory efforts. However, we cannot predict whether this trend will continue, nor can we predict the outcome of the litigation. We are making every effort to manage the spend on professional fees while making sure we do whatever is necessary to achieve a positive outcome regarding out litigation and consultantsFDA matters. We also had reductions in sales and marketing driven by reduced recruiting fees, lower consulting fees related to litigation, regulatory complianceour website redesign last year, timing of spend this year on marketing initiatives and implementing the FDA’s unique device identification system, representing an aggregate increase of approximately $0.4 million. This was offset by approximately $0.1 million of lower salary and related benefits in sales and marketingcosts due to lowerattrition. Partially offsetting these savings were increased costs in our regulatory department due to headcount domestically and lower annual bonus expense in the quarter versus last year.to support our regulatory compliance requirements.
Research and development expenses increasedexpense decreased by 14.7%54.5%, primarily due to additional engineering employeesattrition for the period. We are committed to our research and consultants.development activities and are actively searching to replace the open position. We continue to actively pursue new product development and enhance existing product lines based on demand from the marketplace which includes feedback from sales and marketing at RMS and our distributors, the RMS clinical advisory panel, and our strategic business partners. We believe that such efforts have been useful in helping us to maintain our competitive position, increase revenue from our existing customer base and expand our market reach. Although our research and development efforts have allowed us to develop the Freedom60, our HIgH-Flo needle sets, and the FreedomEdge® in 2015, there can be no assurance that our research and development will result in additional commercially successful products.
Depreciation and amortization
Depreciation and amortization expense increased by 20.2%6.0% up to $83,254$102,357 in the threefour months ended NovemberJune 30, 20162017 compared with $69,274$96,577 in the threefour months ended NovemberJune 30, 20152016 as a result of continued investment in new patent applications and maintenance of existing patents.
- 13 -
Net (Loss)/Income
|
| Three Months Ended November 30, |
| Change from Prior Year |
| |||||||
|
| 2016 |
| 2015 |
| $ |
| % |
| |||
Net (Loss)/Income |
| $ | (104,275 | ) | $ | 167,552 |
| $ | (271,827 | ) | (162.2 | )% |
Stated as a Percentage of Net Sales |
|
| (3.3 | )% |
| 5.3 | % |
|
|
|
|
|
Our net losscomputer equipment for the three months ended November 30, 2016 was $0.1 million compared to net income of $0.2 million for the three months ended November 30, 2015, a $0.3 million decrease, which was mostly a result of the increase in selling, general and administrative expenses of $0.3 million as described above.
Nine months Ended November 30, 2016 compared to November 30, 2015
Net Sales
The following table summarizes our net sales for the nine months ended November 30, 2016 and 2015:
|
| Nine Months Ended November 30, |
| Change from Prior Year |
| % of Sales |
| |||||||||
|
| 2016 |
| 2015 |
| $ |
| % |
| 2016 |
| 2015 |
| |||
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
| $ | 7,584,332 |
| $ | 7,396,597 |
| $ | 187,735 |
| 2.5 | % | 81.3 | % | 82.7 | % |
International |
|
| 1,746,876 |
|
| 1,545,079 |
|
| 201,797 |
| 13.1 | % | 18.7 | % | 17.3 | % |
Total |
| $ | 9,331,208 |
| $ | 8,941,676 |
| $ | 389,532 |
| 4.4 | % |
|
|
|
|
Net sales increased in the nine months ended November 30, 2016 by $0.4 million or 4.4% compared to the nine months ended November 30, 2015. This increase was mostly driven by sales of our infusion products which resulted from both organic growth and new customers.
Gross Profit
Our gross profit for the nine months ended November 30, 2016 and 2015 is as follows:
|
| Nine Months Ended November 30, |
| Change from Prior Year |
| |||||||
|
| 2016 |
| 2015 |
| $ |
| % |
| |||
Gross Profit |
| $ | 5,955,346 |
| $ | 5,633,868 |
| $ | 321,478 |
| 5.7 | % |
Stated as a Percentage of Net Sales |
|
| 63.8 | % |
| 63.0 | % |
|
|
|
|
|
Gross profit increased $0.3 million or 5.7% in the nine months ended November 30, 2016 compared to the same period in 2015. This was mostly due to the increase in sales. As a percentage of sales we showed an increase due to the moratorium on the medical device tax offset by the increase in salary and related costs associated with the increased headcount in our quality department.
Selling, general and administrative and Research and development
Our selling, general and administrative expenses and research and development costs for the nine months ended November 30, 2016 and 2015 are as follows:
|
| Nine Months Ended November 30, |
| Change from Prior Year |
| |||||||
|
| 2016 |
| 2015 |
| $ |
| % |
| |||
Selling, general and administrative |
| $ | 6,145,769 |
| $ | 4,567,709 |
| $ | 1,578,060 |
| 34.5 | % |
Research and development |
|
| 183,497 |
|
| 143,940 |
|
| 39,557 |
| 27.5 | % |
|
| $ | 6,329,266 |
| $ | 4,711,649 |
| $ | 1,617,617 |
| 34.3 | % |
Stated as a Percentage of Net Sales |
|
| 67.8 | % |
| 52.7 | % |
|
|
|
|
|
- 14 -
Selling, general and administrative expenses increased $1.6 million during the nine months ended November 30, 2016 as compared to the same period last year. The increase came primarily from professional fees and consultants related to litigation, regulatory compliance, operations management and implementing the FDA’s unique device identification system representing an aggregate increase of approximately $1.5 million. Additionally, expenses were higher in sales and marketing as a result of our reorganization last year and the increase in headcount internationally, as well as initiatives for our website redesign, an aggregate increase of approximately $0.1 million. These costs were all offset by lower payroll and related benefits in general and administrative support due to lower bonus expense versus last year of $0.1 million.
Research and development expenses increased by $39,557 in the nine months ended November 30, 2016 compared to the same period last year mostly due to the addition of engineering employees and consultants.
Depreciation and amortization
Depreciation and amortization expense increased by 11.3%, up to $227,109 in the nine months ended November 30, 2016 compared with $204,087 in the nine months ended November 30, 2015 as a result of continued investment in capital assets mostly related to production and for newproduction requirements, patent applications and maintenance of existing patents.
Net IncomeIncome/(Loss)
|
| Nine Months Ended November 30, |
| Change from Prior Year |
|
| Four Months Ended June 30, |
| Change from Prior Year |
| ||||||||||||
|
| 2016 |
| 2015 |
| $ |
| % |
|
| 2017 |
| 2016 |
| $ |
| ||||||
Net (Loss) Income |
| $ | (420,204 | ) | $ | 438,126 |
| $ | (858,330 | ) | (195.9 | )% | ||||||||||
Net Income/(Loss) |
| $ | 360,833 |
| $ | (205,882 | ) | $ | 566,715 |
| ||||||||||||
Stated as a Percentage of Net Sales |
|
| (4.5 | )% |
| 4.9 | % |
|
|
|
|
|
|
| 6.8% |
|
| (5.1% | ) |
|
|
|
Our net lossincome for the ninefour months ended NovemberJune 30, 20162017 was $0.4 million compared withto a net incomeloss of $0.4$0.2 million for the ninefour months ended NovemberJune 30, 2015.2016. This decrease of $0.9$0.6 million isincrease was mostly thea result of the increase in sales and reduced selling, general and administrative expenses of $1.6 millionas described above, partially offset by increased sales.above. Additionally, the Company recognized a $54,659 foreign exchange gain for the period.
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of liquidity is our cash of $3.4$3.0 million as of NovemberJune 30, 2016,2017, and cash flows from operations. Our principal source of operating cash inflows is from sales of our products to customers. Our principal cash outflows relate to the purchase and production of inventory and related costs, selling, general and administrative expenses, research and development costs, capital expenditures and patent costs.
We believe that as of NovemberJune 30, 2016,2017, cash on hand and cash expected to be generated from future operating activities will be sufficient to fund our operations, including further research and development and capital expenditures for the next 12 months. We believe the FREEDOM60FREEDOM System continues to find a solid following in the subcutaneous immune globulinSCIg market, and expect this market is expected to continue to increase both domestically and internationally. In addition, we expect many of the SCIg providers, and others, will see benefit in using the FREEDOM System for additional uses such as antibiotics, chemotherapeutics, and pain medications.
We continue to be in litigation with a competitor, EMED Technologies Corp. (“EMED”) and have incurred a significant amount of legal fees in connection with that process. Although the Company believes it has meritorious claims and defenses in the actions and proceedings, their outcomes cannot be predicted with any certainty. If any of these actions against the Company are successful, they could have a material adverse effect on the Company’s business, results of operations, financial condition and cash flows.
- 14 -
On September 30, 2015, RMS’s Board of Directors authorized a stock repurchase program pursuant to which the Company has and expects to continue to make open market purchases of up to 2,000,000 shares of the Company’s Outstanding Common Stock. The Board of Directors initially authorized such purchases up to 1,000,000 shares. On June 29, 2016, the Board of Directors approved the amendment to the stock repurchase program increasing the authorized to be repurchased to 2,000,000 shares. The purchases will beare made through a broker to be designated by the Company, with price, timing and volume restrictions based on average daily trading volume, consistent with the safe harbor rules of the Securities and Exchange Commission for such repurchases. As of NovemberJune 30, 2016,2017, the Company had repurchased 395,356396,606 shares at an average price of $0.45 under the program. The management of the Company decided to discontinue repurchasing its outstanding common stock under the program for an undetermined period of time to utilize cash for capital investments needed to expand the business.
Cash Flows
The following table summarizes our cash flows:
|
| Nine Months Ended |
| Nine Months Ended |
|
| Four Months Ended |
| Four Months Ended |
| ||||
Net cash (used in) provided by operating activities |
| $ | (314,411 | ) | $ | 913,999 |
| |||||||
Net cash used in operating activities |
| $ | (236,636 | ) | $ | (544,137 | ) | |||||||
Net cash used in investing activities |
| $ | (307,123 | ) | $ | (131,703 | ) |
| $ | (74,761 | ) | $ | (103,634 | ) |
Net cash used in financing activities |
| $ | (140,255 | ) | $ | — |
|
| $ | (19,360 | ) | $ | (1,105 | ) |
- 15 -
Operating Activities
Net cash used in operating activities of $0.3$0.2 million for the ninefour months ended NovemberJune 30, 2016,2017 was primarily attributable to our increase in accounts receivable of $0.4 millionand a decrease in accounts payable of $0.5 million mostly due to the payment of legal fees accrued for at February 28, 2017. Partially offsetting these items were the net lossincome of $0.4 million, higher inventory levels due to anticipated sales and higher accounts receivable mostly due to a single customer. Offsetting these were the increase in accounts payable mostly due to professional fees and the purchase of raw materials, non-cash charges of $0.2$0.1 million for depreciation and amortization of long lived tangible and intangible assets $21,000and a decrease in income tax receivable of deferred compensation costs and stock based compensation expense of $0.1$0.2 million.
Net cash provided byused in operating activities of $0.9$0.6 million for the ninefour months ended NovemberJune 30, 2015,2016 was primarily attributable to our net incomethe operating loss of $0.2 million, an increase in accounts receivable of $0.4 million, an increase in prepaid expense of $0.1 million mostly due to an income tax receivable of $0.1 million due to the loss in the period, all partially offset by non-cash charges of $0.2$0.1 million for depreciation and amortization of long lived tangible and intangible assets, $21,000 of deferred compensation costs, $38,360 of stock based compensation expense of $69,714 and an increase in accounts payable of $0.2 million mostly due to raw material purchases and accrued expense of $0.4 million, offset by an increase of accounts receivable of $0.1 million.legal fees.
Investing Activities
Our net cash used in investing activities of $0.3 million and $0.1 million for the ninefour months ended NovemberJune 30, 2017 and June 30, 2016 and November 30, 2015, respectively, werewas primarily attributable to our continued investment in capital assets mostly related to production and for new patent applications and maintenance of existing patents.
Financing Activities
Our net cash used in financing activities of $0.1 millionwas $19,360 and $1,105 for the ninefour months ended NovemberJune 30, 2017 and June 30, 2016, was attributable to stock repurchases underrespectively, both the Company’s repurchase program.
NON-GAAP FINANCIAL MEASURES
Managementresult of the Company believes that investors’ understandingrepurchase of shares 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 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 EBITDA as earnings (net income) before interest, income taxes, depreciation and amortization. We believe that 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 EBITDA helps investors meaningfully evaluate and compare our cash flow generating capacity from quarter to quarter and year to year. 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 EBITDA for such purposes, the Company uses EBITDA, adjusted for certain items, 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 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.
We also include the use of non-GAAP normalized net income in our earnings releases. RMS management evaluates its business and makes certain operating decisions (e.g., budgeting, forecasting, employee compensation, asset management and resource allocation) using normalized net income. Management believes that because this measure provides it with useful supplemental information for evaluating and operating the business, investors would find it beneficial to have the opportunity to view the business in the same manner. Normalized net income is a measure that focuses on the Company’s operations and facilitates comparison from period to period on a consistent basis. Management also believes it is appropriate in evaluating the Company’s operations to exclude professional fees related to litigation and regulatory items because these costs are not expected to continue in the long term.
- 16 -
A reconciliation of our non-GAAP measures is below:
Reconciliation of GAAP Net (Loss)/Income |
| Three Months Ended November 30 |
| Nine Months Ended November 30 |
| ||||||||
to Non-GAAP Normalized EBITDA: |
|
| 2016 |
|
| 2015 |
|
| 2016 |
|
| 2015 |
|
GAAP Net (Loss)/Income |
| $ | (104,275 | ) | $ | 167,552 |
| $ | (420,204 | ) | $ | 438,126 |
|
Tax (Benefit)/Expense |
|
| (53,216 | ) |
| 86,676 |
|
| (214,965 | ) |
| 227,067 |
|
Depreciation |
|
| 83,254 |
|
| 69,274 |
|
| 227,109 |
|
| 204,087 |
|
Professional Fees (1) |
|
| 583,547 |
|
| 280,156 |
|
| 1,503,722 |
|
| 518,028 |
|
Non-GAAP Normalized EBITDA |
| $ | 509,310 |
| $ | 603,658 |
| $ | 1,095,662 |
| $ | 1,387,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of GAAP Net (Loss)/Income |
|
| 2016 |
|
| 2015 |
|
| 2016 |
|
| 2015 |
|
GAAP Net (Loss)/Income |
| $ | (104,275 | ) | $ | 167,552 |
| $ | (420,204 | ) | $ | 438,126 |
|
Professional Fees (1) |
|
| 583,547 |
|
| 280,156 |
|
| 1,503,722 |
|
| 518,028 |
|
Tax Expense on Professional Fees |
|
| (198,075 | ) |
| (95,014 | ) |
| (510,273 | ) |
| (175,228 | ) |
Non-GAAP Normalized Net Income |
| $ | 281,197 |
| $ | 352,694 |
| $ | 573,245 |
| $ | 780,926 |
|
__________
(1) Includes consulting and professional fees related to regulatory and litigation.common stock.
FDA
OnRMS had an inspection by the FDA in June 2015, which included, among other items, a review of customer complaints, quality controls, quality assurance and documentation. The FDA inspection was then expanded as a consequence of an extensive “trade complaint” filed on behalf of a competitor which resulted in the issuance of an FDA FORM 483. Eight months later, on February 29, 2016 the Companywe received a Warning Letter. The Company responded and replied numerous times to the Warning Letter (WL NYK-2016-26) from March 18, 2016 on, and underwent a follow up inspection on November 29, 2016. On December 16, 2016, the FDA issued another FDA FORM 483, to which the Company provided a written response on January 9, 2017 and provided a supplemental response on March 17, 2017 and April 24, 2017. On April 25, 2017, RMS met with the FDA Center for Devices and Radiological Health (“CDRH”) Compliance team and the New York District Office to discuss the final resolution of U.S. FoodWarning Letter closure. On May 23, 2017, the Compliance Office of CDRH issued a letter to RMS to acknowledge that RMS had successfully addressed all quality and Drug Administration (“FDA”) (“regulatory issues cited in the Letter”) pursuantWarning Letter. Prior to observations arising from anclosing the Warning Letter, the FDA site inspectionalso needs to complete its review of our premarket submission (a pending 510(k)), which was accepted for review on May 17, 2017. On June 30, 2017, RMS received a written response regarding our pending 510(k) submission, and RMS is working with the Company’s manufacturing facility which occurred over a three week periodOffice for Device Evaluation of CDRH to address those questions in June 2015.order receive the 510(k) clearance as expeditiously as possible.
The Letter identified a variety of concerns and requested submission of a response to- 15 -
On April 19, 2017, the FDA renewed our Certificate to Foreign Government which the Company filed its initial responseis used to on March 18, 2016. The Company subsequently had further telephonic and written communications with the FDA. The Company underwent a site re-inspection which concluded on December 16, 2016 with the issuance of a Form 483 (Inspectional Observations)communicate to which the Company plans to respond within the fifteen business days deadline. There is no deadline for a reply byforeign governments that the FDA certified that RMS meets good manufacturing practices and the Company’s manufacturing and distribution continue without interruption.quality system regulations.
Although the Company is attempting to meet all of the FDA requirements, we cannot be certain that our actions will be deemed satisfactory by the FDA and this could have a material adverse effect on the Company’s business, results of operations, financial condition and cash flows.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2016,May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-19—Technical Corrections and Improvements2017-09—Compensation-Stock Compensation (Topic 718), which contains amendments that affect a wide variety of topics in the Accounting Standards Codification (“ASC”). The reason for each amendment is provided before each of the amendments forprovides clarity and ease of understanding. The amendments generally fall into one of the following types of categories; (a) Amendments related to differences between original guidancereduce both (1) diversity in practice and the ASC: these amendments arose because of differences between original guidance (for example, FASB Statements, Emerging Issues Task Force (“EITF”) Issues,(2) cost and so forth) and the ASC. These amendments principally carry forward pre-codification guidance or subsequent amendments into the ASC. Many times, either the writing style or phrasing of the original guidance did not directly translate into the ASC format and style. As a result, the meaning ofcomplexity when applying the guidance might have been unintentionally altered. Alternatively,in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments in this category may relateupdate affect any entity that changes the terms or conditions of a share-based payment award. The amendments in this update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this update should be applied prospectively to guidance that was codified without some text, reference,an award modified on or phrasing that, upon review, was deemed important toafter the guidance; (b) Guidance clarification and reference corrections: these amendments provide clarification through updating wording, correcting references, or a combination of both. In most cases, the feedback suggested that, without these enhancements, guidance may be misapplied; (c) Simplification: these amendments streamline or simplify the ASC through minor structural changes to headings or minor editing of text to improve the usefulness and understandability of the ASC; or (d) Minor improvements: these amendments improve the guidance and are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities.adoption date. The Company is assessing the impact of the adoption of the ASU on its financial statements, disclosure requirements and methods of adoption.
- 17 -
In June 2016, FASB issued ASU No. 2016-13—Financial Instruments – Credit Losses (Topic 326); Measurement of Credit Losses on Financial Instruments, which amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. This ASU affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is assessing the impact of the adoption of the ASU on its financial statements, disclosure requirements and methods of adoption.
In May 2016, FASB issued ASU No. 2016-12—Revenue from Contracts with Customers (Topic 606); Narrow-Scope Improvements and Practical Expedients, which is intended to not change the core principle of the guidance in Topic 606, but rather affect only the narrow aspects of Topic 606 by reducing the potential for diversity in practice at initial application and by reducing the cost and complexity of applying Topic 606 both at transition and on an ongoing basis. The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by update 2014-09). The Company is assessing the impact of the adoption of the ASU on its financial statements, disclosure requirements and methods of adoption.
In May 2016, the FASB issued ASU No. 2016-11 Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815); Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 Emerging Issues Task Force (“EITF”) Meeting, which is rescinding certain SEC Staff Observer comments that are codified in Topic 605, Revenue Recognition, and Topic 932, Extractive Activities—Oil and Gas, effective upon adoption of Topic 606. The Company does not expect the adoption of the ASU to have any impact on its financial statements.
In May 2014, the FASB issued ASU No. 2014-09—Revenue from Contracts with Customers. The ASU clarifies the principles for recognizing revenue and develops a common revenue standard for U.S. GAAP and International Financial Reporting Standards (“IFRS”) that removes inconsistencies and weaknesses in revenue requirements, provides a more robust framework for addressing revenue issues, improves comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets, provides more useful information to users of the financial statements through improved disclosure requirements and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. The amendments in this update are effective for the annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Full or modified retrospective adoption is required and early application is not permitted. On July 9, 2015, the FASB issued ASU No. 2015-14 Revenue from Contracts with Customers (Topic 606); Deferral of the Effective Date, which (a) delays the effective date of ASU 2014-09, Revenue from Contracts with Customers (Topic 606), by one year to annual periods beginning after December 15, 2017 and (b) allows early adoption of the ASU by all entities as of the original effective date for public entities. We currently anticipate adopting the new standard using the modified retrospective method beginning January 1, 2018. In March 2016, the FASB issued ASU No. 2016-08 Revenue from Contracts with Customers (Topic 606); Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations and the effective date is the same as the requirements in ASU 2014-09. In April 2016, the FASB issued ASU No. 2016-10 Revenue from Contracts with Customers (Topic 606); Identifying Performance Obligations and Licensing, which is intended to clarify identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas and the effective date is the same as the requirements in ASU 2014-09. The CompanyIn May 2016, FASB issued ASU No. 2016-12—Revenue from Contracts with Customers (Topic 606); Narrow-Scope Improvements and Practical Expedients, which is assessingintended to not change the impactcore principle of the adoptionguidance in Topic 606, but rather affect only the narrow aspects of Topic 606 by reducing the ASUpotential for diversity in practice at initial application and by reducing the cost and complexity of applying Topic 606 both at transition and on its financial statements, disclosurean ongoing basis. The effective date and transition requirements and methods of adoption.for the amendments in
- 16 -
this update are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by update 2014-09). In MarchDecember 2016, the FASB issued ASU No. 2016-09 — Compensation – Stock Compensation (Topic 718):2016-20 Technical Corrections and Improvements to Employee Share-Based Payment Accounting. The ASU was issued as partTopic 606, Revenue from Contracts with Customers, which represents changes to make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. This update is the final, combined version of the FASB’s simplification initiativeProposed Accounting Standards Updates 2016-240 and under the ASU, the areas of simplification in the update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classifications of awards as either equity or liabilities,2016-320 (both entitled Technical Corrections and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. The amendment eliminates the guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004)Improvements), Share-Based Payment. This shouldwhich have been deleted. Based upon our initial evaluation, we do not result in a change in practice because the guidance that is being superseded was never effective. The amendment in this ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is assessing the impact ofexpect the adoption of the ASUstandard and related amendments to have a material effect on itsour financial statements, disclosure requirements and methodscondition or results of adoption.operations.
- 18 -
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The main difference between the current requirement under GAAP and this ASU is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases. This ASU requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases). Classification will be based on criteria that are largely similar to those applied in current lease accounting. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. This is effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. This ASU must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. We are currently assessing the potential impact of this ASU on our financial statements, disclosure requirements and expect it willmethods 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 impacteffect on our financial condition andor results of operations upon adoption.
In July 2015, the FASB issued ASU No. 2015-11—Simplifying the Measurement of Inventory. The ASU was issued as part of the FASB’s simplification initiative and under the ASU, inventory is measured at the lower of cost and net realizable value, which would eliminate the other two options that currently exist for the market: (1) replacement cost and (2) net realizable value less an approximately normal profit margin. This ASU is effective for interim and annual periods beginning after December 15, 2016. Early application is permitted and should be applied prospectively. The Company does not expect the adoption of the ASU to have any impact on its financial statements.operations.
PART I – ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
PART I – ITEM 4. CONTROLS AND PROCEDURES.
The Company’s management, including the Company’s Principal Executive Officer and Principal Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures as such is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluations, the Principal Executive Officer and Principal Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) is accumulated and communicated to the Company’s management, including its Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There have been no changes in the Company’s internal control over financial reporting during the quarter ended NovemberJune 30, 2016,2017, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
PART II – ITEM 1. LEGAL PROCEEDINGS.
On September 20, 2013, the Company commenced in the United States District Court for the Eastern District of California a declaratory judgment action against competitor, EMED Technologies Corp. (“EMED”) to establish the invalidity of one of EMED’s patents and non-infringement of the Company’s needle sets. EMED answered the complaint and asserted patent infringement and unfair business practice counterclaims. The Company responded by asserting its own unfair business practice claims against EMED. Both parties have requested injunctive relief and monetary damages. Discovery is ongoing.
On June 16, 2015, the Court issued what it termed a “narrow” preliminary injunction against the Company from making certain statements regarding some of EMED’s products. On June 23, 2016, EMED filed a motion seeking to have the Company held in contempt, claiming that certain language in the Company’s device labeling does not comply with the injunction. In response to a show cause order, the Company advised the Court that the language in the Company’s labeling that EMED challenged is language that the FDA directed the Company to use in its labeling. The Court discharged the show cause order, effectively rejecting EMED’s contempt argument.
- 19 -
On March 24, 2016, EMED filed a motion seeking a second preliminary injunction prohibiting RMS from selling three of its products in California. The Company opposed that motion on April 19, 2016. A decision on the motion is still pending.
On June 25, 2015, EMED filed a claim of patent infringement for the second of its patents, also directed to the Company’s needle sets, in the United States District Court for the Eastern District of Texas. This second patent is related to the one concerning the Company’s declaratory judgment action. Given the close relationship between the two patents, the Company requested that the Texas suit be transferred to California. Also, based on a validity review of the patent in the U.S. Patent and Trademark Office (“USPTO”), discussed below, the Company requested the Texas suit be stayed. On May 12, 2016, the Court entered an order staying the case until after the Patent Trial and Appeal Board at the USPTO issues a final written decision regarding the validity of the patent.
On September 11, 2015, the Company requested an ex parte reexamination of the patent in the first filed case, and on September 17, 2015 the Company requested an inter partes review (“IPR”) of the patent in the second filed case. On November 20, 2015, the USPTO instituted the ex parte reexamination request having found a substantial new question of patentability concerning EMED’s patent in the first filed case. The ex parte reexamination is ongoing. A decision to institute the IPR for EMED’s patent in the second filed case was ordered by the USPTO on February 19, 2016 having determined a reasonable likelihood all claims of the patent may be found to be unpatentable. Oral argument for the IPR was held on November 22, 2016 and a final ruling is due on or before February 19, 2017.
Although the Company believes it has meritorious claims and defenses in these 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.
PART II – ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On October 21, 2015, the Board of Directors of the Company approved non-employee director compensation of $25,000 each annually, to be paid quarterly half in cash and half in common stock, beginning September 1, 2015. The number of shares to be issued each quarter is calculated based upon the closing price of the common stock on the last day of each fiscal quarter as reported by the OTCQX (except that the stock issued on February 29, 2016 was calculated based on the closing price of the common stock on February 9, 2016).OTCQX. The Company issued an aggregate of 94,07244,118 shares of common stock to its non-employee directors during the fiscal quarterfour month period ended NovemberJune 30, 2016.2017.
As of June 30, 2017, the Company issued an aggregate of 13,555 shares of common stock to Dr. Fred Ma, its Chief Medical Officer, under the terms of his employment agreement.
- 17 -
The following table provides information regarding repurchases by the Company of its common stock during the three month period ended NovemberJune 30, 2016:2017:
Issuer Purchases of Common Stock
|
|
|
|
|
| Total Number |
| Maximum |
| |
|
|
|
|
|
| of Shares |
| Number of |
| |
|
| Total |
|
|
| Purchased as |
| Shares that May |
| |
|
| Number of |
| Average |
| Part of Publicly |
| Yet Be |
| |
|
| Shares |
| Price Paid |
| Announced |
| Purchased |
| |
Period (1) |
| Purchased |
| Per Share |
| Plan (2) |
| Under the Plan (2) |
| |
September 1, 2016 – September 30, 2016 |
| — |
|
| — |
| — |
| 1,649,544 |
|
October 1, 2016 – October 31, 2016 |
| 23,300 |
| $ | 0.44 |
| 23,300 |
| 1,626,244 |
|
November 1, 2016 - November 30, 2016 |
| 21,600 |
| $ | 0.44 |
| 21,600 |
| 1,604,644 |
|
Total |
| 44,900 |
| $ | 0.44 |
| 44,900 |
|
|
|
|
|
|
|
|
| Total Number |
| Maximum |
| |
|
|
|
|
|
| of Shares |
| Number of |
| |
|
| Total |
|
|
| Purchased as |
| Shares that May |
| |
|
| Number of |
| Average |
| Part of Publicly |
| Yet Be |
| |
|
| Shares |
| Price Paid |
| Announced |
| Purchased |
| |
Period (1) |
| Purchased (2) |
| Per Share |
| Plan (3) |
| Under the Plan (3) |
| |
March 1, 2017 – March 31, 2017 |
| — |
|
| — |
| — |
| 1,603,394 |
|
April 1, 2017 – April 30, 2017 |
| — |
|
| — |
| — |
| 1,603,394 |
|
May 1, 2017 – May 31, 2017 |
| 44,000 |
| $ | 0.44 |
| — |
| 1,603,394 |
|
June 1, 2017 – June 30, 2017 |
| — |
|
| — |
| — |
| 1,603,394 |
|
Total |
| 44,000 |
| $ | 0.44 |
| — |
|
|
|
__________
(1) | Monthly information is presented by reference to the Company’s fiscal months |
|
|
(2) | In May 2017, the Company repurchased 44,000 shares of the Company’s common stock owned by two terminated employees at an aggregate purchase price of $19,360. |
(3) | On September 30, 2015, RMS’s Board of Directors authorized |
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On September 30, 2015, the Company announced the approvalBoard of Directors approved the 2015 Stock Option Plan (the “Plan”) authorizing the Company to grant awards to certain employees under the plan at fair market value, subject to shareholder approval. On June 29, 2016,which was approved by shareholders at the Board of Directors approved the amendment to the Plan authorizing theAnnual Meeting held on September 6, 2016. The total number of shares of common stock authorizedCommon Stock, with respect to which awards may be granted underpursuant to the Plan, be amended from 2,000,000 shares toshall not exceed 4,000,000 shares. On September 6, 2016, at the Annual Shareholder Meeting, shareholders approved the Plan as amended. As of NovemberJune 30, 2016, the Company had awarded 0.92017, there were outstanding 1.1 million options awarded to certain executives, and key employees and advisory board members under the Plan.
All of the securities issued by the Company as described in this Item were issued in reliance on the exemption from registration under Section 4(2) under the Securities Act of 1933, as amended.
PART II – ITEM 6. EXHIBITS.
* In accordance with Regulation S-T, the Interactive Data Files in Exhibit 101 to the Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed”.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| REPRO MED SYSTEMS, INC. |
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| /s/ Andrew I. Sealfon |
| Andrew I. Sealfon, President, Chairman of the Board, Director, Chief Executive Officer |
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| /s/ Karen Fisher |
| Karen Fisher, Chief Financial Officer and Treasurer |
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