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 November 30, 2016March 31, 2018
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
Commission File Number:0-12305
REPRO MED SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
New York | 13-3044880 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
|
|
24 Carpenter Road, Chester, New York | 10918 |
(Address of Principal Executive Offices) | (Zip Code) |
(845) 469-2042
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, 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] |
|
(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, 2017, 37,749,081May 7, 2018, 38,047,260 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
|
| PAGE |
|
|
|
PART I– FINANCIAL INFORMATION | ||
|
|
|
ITEM 1. | Financial Statements |
|
|
|
|
| Balance Sheets as of | 3 |
|
|
|
| Statements of Operations (Unaudited) for the | 4 |
|
|
|
| Statements of Cash Flows (Unaudited) for the | 5 |
|
|
|
| Notes to Financial Statements |
|
|
|
|
ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
|
|
|
ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk |
|
|
|
|
ITEM 4. | Controls and Procedures |
|
|
|
|
PART II– OTHER INFORMATION | ||
|
|
|
ITEM |
|
|
| Unregistered Sales of Equity Securities and Use of Proceeds |
|
|
|
|
ITEM 6. | Exhibits |
|
- 2 -
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
REPRO MED SYSTEMS, INC.
BALANCE SHEETS
|
| November 30, |
|
|
|
| March 31, |
| December 31, |
| ||||
|
| 2016 |
| February 29, |
|
| 2018 |
| 2017 |
| ||||
|
| (Unaudited) |
| 2016 |
|
| (Unaudited) |
|
|
| ||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| �� |
|
|
|
|
|
|
|
| |
CURRENT ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents |
| $ | 3,440,160 |
| $ | 4,201,949 |
|
| $ | 4,033,155 |
| $ | 3,974,536 |
|
Certificates of deposit |
|
| 261,118 |
|
| 261,118 |
|
| 158,909 |
|
| 263,269 |
| |
Accounts receivable less allowance for doubtful accounts and returns of $20,519 at November 30, 2016 and $37,486 at February 29, 2016 |
|
| 1,661,214 |
|
| 1,350,180 |
| |||||||
Accounts receivable less allowance for doubtful accounts of $77,067 at March 31, 2018 and December 31, 2017 |
| 1,854,642 |
|
| 1,861,949 |
| ||||||||
Inventory |
|
| 1,299,411 |
|
| 1,040,277 |
|
| 1,800,549 |
|
| 1,658,681 |
| |
Prepaid expenses |
|
| 456,934 |
|
| 265,123 |
|
|
| 203,302 |
|
| 170,739 |
|
TOTAL CURRENT ASSETS |
|
| 7,118,837 |
|
| 7,118,647 |
|
| 8,050,557 |
|
| 7,929,174 |
| |
Property and equipment, net |
|
| 933,947 |
|
| 996,822 |
|
| 773,948 |
|
| 836,283 |
| |
Patents, net of accumulated amortization of $174,434 and $147,380 at November 30, 2016 and February 29, 2016, respectively |
|
| 390,578 |
|
| 247,691 |
| |||||||
Patents, net of accumulated amortization of $211,865 and $203,768 at March 31, 2018 and December 31, 2017, respectively |
| 504,205 |
|
| 483,821 |
| ||||||||
Other assets |
|
| 31,490 |
|
| 31,140 |
|
|
| 31,582 |
|
| 31,582 |
|
TOTAL ASSETS |
| $ | 8,474,852 |
| $ | 8,394,300 |
|
| $ | 9,360,292 |
| $ | 9,280,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Deferred capital gain - current portion |
| $ | 22,481 |
| $ | 22,481 |
| |||||||
Deferred capital gain - current |
| $ | 20,624 |
| $ | 22,481 |
| |||||||
Accounts payable |
|
| 910,763 |
|
| 307,764 |
|
| 549,763 |
|
| 454,398 |
| |
Accrued expenses |
|
| 582,998 |
|
| 499,406 |
|
| 338,921 |
|
| 658,060 |
| |
Accrued payroll and related taxes |
|
| 112,213 |
|
| 148,766 |
|
| 196,628 |
|
| 334,903 |
| |
Accrued tax liability |
|
| — |
|
| 129,497 |
|
| 111,265 |
|
| 115,854 |
| |
TOTAL CURRENT LIABILITIES |
|
| 1,628,455 |
|
| 1,107,914 |
|
|
| 1,217,201 |
|
| 1,585,696 |
|
Deferred capital gain - less current portion |
|
| 28,116 |
|
| 44,976 |
| |||||||
Deferred capital gain – long term |
| — |
|
| 3,762 |
| ||||||||
Deferred tax liability |
|
| 82,196 |
|
| 123,111 |
|
|
| 24,004 |
|
| 21,675 |
|
TOTAL LIABILITIES |
| $ | 1,738,767 |
| $ | 1,276,001 |
|
|
| 1,241,205 |
|
| 1,611,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
| |
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 |
|
| 404,851 |
|
| 404,875 |
| |||||||
Common stock, $0.01 par value; 75,000,000 shares authorized, 40,758,529 and 40,731,529 shares issued, 38,021,298 and 37,994,298 shares outstanding at March 31, 2018 and December 31, 2017, respectively |
| 407,585 |
|
| 407,315 |
| ||||||||
Additional paid-in capital |
|
| 4,082,218 |
|
| 3,968,342 |
|
| 4,262,381 |
|
| 4,216,718 |
| |
Retained earnings |
|
| 2,599,736 |
|
| 3,019,940 |
|
|
| 3,793,325 |
|
| 3,389,898 |
|
|
|
| 7,086,805 |
|
| 7,393,157 |
|
| 8,463,291 |
|
| 8,013,931 |
| |
Less: Treasury stock at cost, 2,735,981 shares at November 30, 2016 and 2,521,031 at February 29, 2016 |
|
| (343,720 | ) |
| (246,858 | ) | |||||||
Less: Deferred compensation cost |
|
| (7,000 | ) |
| (28,000 | ) | |||||||
Less: Treasury stock, 2,737,231 shares at March 31, 2018 and December 31, 2017 |
|
| (344,204 | ) |
| (344,204 | ) | |||||||
TOTAL STOCKHOLDERS’ EQUITY |
|
| 6,736,085 |
|
| 7,118,299 |
|
|
| 8,119,087 |
|
| 7,669,727 |
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
| $ | 8,474,852 |
| $ | 8,394,300 |
|
| $ | 9,360,292 |
| $ | 9,280,860 |
|
The accompanying notes are an integral part of these financial statements
- 3 -
REPRO MED SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
|
| For the Three Months Ended |
| For the Nine Months Ended |
|
| For the |
| ||||||||||||
|
| November 30 |
| November 30 |
|
| March 31, |
| ||||||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
|
| 2018 |
| 2017 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
NET SALES |
| $ | 3,193,113 |
| $ | 3,144,954 |
| $ | 9,331,208 |
| $ | 8,941,676 |
|
| $ | 4,033,224 |
| $ | 3,638,436 |
|
Cost of goods sold |
|
| 1,129,170 |
|
| 1,035,675 |
|
| 3,375,862 |
|
| 3,307,808 |
|
|
| 1,567,400 |
|
| 1,536,482 |
|
Gross Profit |
| 2,063,943 |
|
| 2,109,279 |
|
| 5,955,346 |
|
| 5,633,868 |
|
|
| 2,465,824 |
|
| 2,101,954 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Selling, general and administrative |
| 2,034,016 |
|
| 1,698,226 |
|
| 6,145,769 |
|
| 4,567,709 |
|
|
| 1,880,269 |
|
| 1,775,109 |
| |
Research and development |
| 59,142 |
|
| 51,564 |
|
| 183,497 |
|
| 143,940 |
|
|
| 9,848 |
|
| 45,906 |
| |
Depreciation and amortization |
|
| 83,254 |
|
| 69,274 |
|
| 227,109 |
|
| 204,087 |
|
|
| 74,578 |
|
| 74,880 |
|
Total Operating Expenses |
|
| 2,176,412 |
|
| 1,819,064 |
|
| 6,556,375 |
|
| 4,915,736 |
|
|
| 1,964,695 |
|
| 1,895,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net Operating (Loss)/Profit |
| (112,469 | ) |
| 290,215 |
|
| (601,029 | ) |
| 718,132 |
| ||||||||
Net Operating Profit |
|
| 501,129 |
|
| 206,059 |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Non-Operating (Expense)/Income |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Loss on currency exchange |
| (43,546 | ) |
| (36,663 | ) |
| (33,802 | ) |
| (42,420 | ) | ||||||||
Loss on disposal of fixed assets |
| — |
|
| (253 | ) |
| (1 | ) |
| (13,577 | ) | ||||||||
Interest expense |
| (1,930 | ) |
| — |
|
| (1,886 | ) |
| — |
| ||||||||
Non-Operating Income |
|
|
|
|
|
|
| |||||||||||||
Gain on currency exchange |
|
| 9,424 |
|
| 17,074 |
| |||||||||||||
Interest and other income |
|
| 454 |
|
| 929 |
|
| 1,549 |
|
| 3,058 |
|
|
| 615 |
|
| 1,644 |
|
TOTAL OTHER (EXPENSES) INCOME |
|
| (45,022 | ) |
| (35,987 | ) |
| (34,140 | ) |
| (52,939 | ) | |||||||
TOTAL OTHER INCOME |
|
| 10,039 |
|
| 18,718 |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(LOSS) INCOME BEFORE TAXES |
| (157,491 | ) |
| 254,228 |
|
| (635,169 | ) |
| 665,193 |
| ||||||||
PROFIT BEFORE TAXES |
|
| 511,168 |
|
| 224,777 |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income Tax Benefit (Expense) |
|
| 53,216 |
|
| (86,676 | ) |
| 214,965 |
|
| (227,067 | ) | |||||||
Income Tax Expense |
|
| (107,741 | ) |
| (97,826 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
NET (LOSS) INCOME |
| $ | (104,275 | ) | $ | 167,552 |
| $ | (420,204 | ) | $ | 438,126 |
| |||||||
NET INCOME |
| $ | 403,427 |
| $ | 126,951 |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
NET (LOSS)/INCOME PER SHARE |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
NET INCOME PER SHARE |
|
|
|
|
|
|
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic |
| $ | — |
| $ | — |
| $ | (0.01 | ) | $ | 0.01 |
|
| $ | 0.01 |
| $ | — |
|
Diluted |
| $ | — |
| $ | — |
| $ | (0.01 | ) | $ | 0.01 |
|
| $ | 0.01 |
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic |
|
| 37,746,731 |
|
| 38,006,667 |
|
| 37,857,074 |
|
| 38,006,667 |
|
|
| 38,016,498 |
|
| 37,774,473 |
|
Diluted |
|
| 37,794,350 |
|
| 38,006,667 |
|
| 37,904,693 |
|
| 38,006,667 |
|
|
| 38,781,445 |
|
| 37,831,079 |
|
The accompanying notes are an integral part of these financial statements
- 4 -
REPRO MED SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
| For the Nine Months Ended |
|
| For the |
| ||||||||
|
| November 30, |
|
| March 31, |
| ||||||||
|
| 2016 |
| 2015 |
|
| 2018 |
| 2017 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net (Loss) Income |
| $ | (420,204 | ) | $ | 438,126 |
| |||||||
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: |
|
|
|
|
|
| ||||||||
Net Income |
| $ | 403,427 |
| $ | 126,951 |
| |||||||
Adjustments to reconcile net income to net cash (used in)/provided by operating activities: |
|
|
|
|
|
|
| |||||||
Amortization of deferred compensation cost |
| 21,000 |
|
| 21,000 |
|
|
| — |
|
| 7,000 |
| |
Stock based compensation expense |
| 157,245 |
|
| 38,360 |
|
|
| 45,933 |
|
| 50,330 |
| |
Depreciation and amortization |
| 227,109 |
|
| 204,087 |
|
|
| 74,578 |
|
| 74,880 |
| |
Deferred capital gain - building lease |
| (16,860 | ) |
| (16,860 | ) |
|
| (5,620 | ) |
| (5,620 | ) | |
Deferred taxes |
| (40,914 | ) |
| (17,063 | ) |
|
| 2,329 |
|
| 226 |
| |
Loss on disposal of fixed assets |
| — |
|
| 13,577 |
| ||||||||
Provision for returns and doubtful accounts |
| (16,967 | ) |
| (70 | ) |
|
| — |
|
| (602 | ) | |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Increase in accounts receivable |
| (294,066 | ) |
| (134,196 | ) | ||||||||
Increase in inventory |
| (259,134 | ) |
| (32,165 | ) | ||||||||
Increase in prepaid expense |
| (192,161 | ) |
| (49,695 | ) | ||||||||
Increase in accounts payable |
| 602,998 |
|
| 279,122 |
| ||||||||
Decrease/(Increase) in accounts receivable |
|
| 7,307 |
|
| (336,305 | ) | |||||||
(Increase)/Decrease in inventory |
|
| (141,868 | ) |
| 66,908 |
| |||||||
(Increase)/Decrease in prepaid expense and other assets |
|
| (32,563 | ) |
| 99,936 |
| |||||||
Increase/(Decrease) in accounts payable |
|
| 95,366 |
|
| (156,791 | ) | |||||||
Decrease in accrued payroll and related taxes |
| (36,553 | ) |
| (3,724 | ) |
|
| (138,275 | ) |
| (21,490 | ) | |
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)/Increase in accrued expense |
|
| (319,139 | ) |
| 140,423 |
| |||||||
(Decrease)/Increase in accrued tax liability |
|
| (4,589 | ) |
| 97,600 |
| |||||||
NET CASH (USED IN)/PROVIDED BY OPERATING ACTIVITIES |
|
| (13,114 | ) |
| 143,446 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Payments for property and equipment |
| (137,182 | ) |
| (106,337 | ) |
|
| (4,145 | ) |
| (62,521 | ) | |
Proceeds on disposal of fixed assets |
| — |
|
| 13,550 |
| ||||||||
Proceeds from certificate of deposit |
|
| 104,360 |
|
| — |
| |||||||
Payments for patents |
| (169,941 | ) |
| (38,916 | ) |
|
| (28,482 | ) |
| (41,718 | ) | |
NET CASH USED IN INVESTING ACTIVITIES |
|
| (307,123 | ) |
| (131,703 | ) | |||||||
NET CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES |
|
| 71,733 |
|
| (104,239 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Purchase of Treasury Stock |
| (140,255 | ) |
| — |
| ||||||||
Purchase of treasury stock |
|
| — |
|
| (484 | ) | |||||||
NET CASH USED IN FINANCING ACTIVITIES |
|
| (140,255 | ) |
| — |
|
|
| — |
|
| (484 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
| (761,789 | ) |
| 782,296 |
| ||||||||
NET INCREASE IN CASH AND CASH EQUIVALENTS |
|
| 58,619 |
|
| 38,723 |
| |||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
| 4,201,949 |
|
| 2,557,235 |
|
|
| 3,974,536 |
|
| 3,417,183 |
|
CASH AND CASH EQUIVALENTS, END OF PERIOD |
| $ | 3,440,160 |
| $ | 3,339,531 |
|
| $ | 4,033,155 |
| $ | 3,455,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Supplemental Information |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cash paid during the periods for: |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest |
| $ | — |
| $ | — |
|
| $ | — |
| $ | — |
|
Taxes |
| $ | 99,342 |
| $ | 100,000 |
|
| $ | 110,000 |
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
NON-CASH FINANCING AND INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Issuance of common stock as compensation |
| $ | — |
| $ | — |
|
| $ | 33,750 |
| $ | 33,750 |
|
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
The Company’s fiscal year end is December 31.
BASIS OF PRESENTATION
The accompanying unaudited financial statements as of November 30, 2016,March 31, 2018, 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 November 30, 2016,March 31, 2018, and the results of operations and cash flow for the three month and nine monthmonths periods ended November 30, 2016,March 31, 2018, and 2015.2017.
The results of operations for the three and nine months ended November 30, 2016,March 31, 2018 and 20152017 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 Transition Annual Report for the yearten months ended February 29, 2016,December 31, 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 PRONOUNCEMENTSREVENUE RECOGNITION
In December 2016, theThe Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-19—Technical Corrections2014-09—Revenue from Contracts with Customers, which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. We adopted this ASU effective January 1, 2018 on a full retrospective basis. Adoption of this standard did not result in significant changes to our accounting policies, business processes, systems or controls, or have a material impact on our financial position, results of operations and Improvementscash flows or related disclosures. As such, prior period financial statements were not recast.
The Company’s revenues result from the sale of assembled products. We recognize revenues when shipment occurs and at which contains amendments that affectpoint the customer obtains control and ownership of the goods. Shipping costs generally are billed to customers and are included in sales.
The Company generally does not accept return of goods shipped unless it is a wide varietyCompany error. The only credits provided to customers are for defective merchandise. The Company warrants the syringe driver from defects in materials and workmanship under normal use and the warranty does not include a performance obligation. The costs under the warranty are expensed as incurred.
Provisions for distributor pricing and annual customer volume rebates are variable consideration and are recorded as a reduction of topicsrevenue in the Accounting Standards Codification (“ASC”).same period the related sales are recorded or when it’s probable the annual growth target will be achieved. The reasonrebates are provided to distributors for each amendment is provided before each of the amendments for claritydifference in selling price to distributor and ease of understanding. The amendments generally fall into one of the following types of categories; (a) Amendments relatedpricing specified to differences between original guidance and the ASC: these amendments arose because of differences between original guidance (for example, FASB Statements, Emerging Issues Task Force (“EITF”) Issues, 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 of the guidance might have been unintentionally altered. Alternatively, amendments in this category may relate to guidance that was codified without some text, reference, or phrasing that, upon review, was deemed important to 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. The Company is assessing the impact of the adoption of the ASU on its financial statements, disclosure requirements and methods of adoption.select customers.
- 6 -
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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. 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 Company is assessing the impact of the adoption of the ASU on its financial statements, disclosure requirements and methods of adoption.
In March 2016, the FASB issued ASU No. 2016-09 — Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU was issued as part of the FASB’s simplification initiative 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, 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), Share-Based Payment. This should 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 of the adoption of the ASU on its financial statements, disclosure requirements and methods of adoption.
- 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.
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 restricted stock granted are recorded at the fair value of the shares at the grant date and are recognized 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. Paul Mark Baker, to provide clinical research and support services related to new and enhanced applications for the FREEDOM60® Syringe InfusionFREEDOM System. Authorized by the Board of Directors, the agreement providesprovided for payment of 420,000 shares of common stock valued at $0.20 per share over a three-year period. Amortization amounted to $7,000 and $21,000was zero for the three and nine months ended November 30, 2016March 31, 2018 and November 30, 2015, respectively. was $7,000 for the three months ended March 31, 2017; the agreement is fully amortized.
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.- 7 -
On June 24, 2016, Cyril Narishkin, the Company’s former Chief Operating Officer, 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 $48,000 and $198,000$16,000 for the three and nine months ended November 30, 2016, respectively. In accordance withMarch 31, 2017 and $0 for 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.three months ended March 31, 2018.
- 8 -In January 2017, Brad Sealfon, the son of Andrew Sealfon, the Company’s President and Chief Executive Officer, consulted for the Company in its production and quality departments and was compensated $5,184. In March 2017, Mr. Sealfon provided additional consulting as a principal of Stokequest, LLC for the Company in its marketing department and was compensated $2,000.
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$3,876 and $16,125$5,375 for the three and nine months ended November 30, 2016March 31, 2018 and November 30, 2015,2017, 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 seventeentwenty 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 and $99,378 for the three and nine months ended March 31, 2017, and $33,126 for the three months ended March 31, 2017. The Company also paid property taxes for the three months ended March 31, 2018 in the amount of $12,712 and $12,167 for the three months ended March 31, 2017. On November 30, 2016 respectively.14, 2017, we executed a lease extension, which calls for six month extensions beginning March 1, 2019 with the option to renew six times at monthly lease amount of $12,088.
NOTE 3 PROPERTY AND EQUIPMENT
Property and equipment consists of the following at:
|
| November 30, 2016 |
| February 29, 2016 |
|
| March 31, 2018 |
| December 31, 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 |
|
|
| 1,052,108 |
|
| 1,052,501 |
| |
Manufacturing equipment and tooling |
|
| 966,080 |
|
| 961,486 |
|
|
| 1,075,471 |
|
| 1,075,471 |
|
|
| 2,194,454 |
|
| 2,110,004 |
|
|
| 2,352,703 |
|
| 2,353,096 |
| |
Less: accumulated depreciation |
|
| 1,260,507 |
|
| 1,113,182 |
|
|
| (1,578,755 | ) |
| (1,516,813 | ) |
Property and equipment, net |
| $ | 933,947 |
| $ | 996,822 |
|
| $ | 773,948 |
| $ | 836,283 |
|
Depreciation expense was $66,480 and $69,008 for the three months ended March 31, 2018 and March 31, 2017, respectively.
NOTE 4 LEGAL PROCEEDINGS
On September 20, 2013,The Company is involved in several lawsuits with its competitor, EMED Technologies Corp. (“EMED”), wherein EMED has alleged the Company’s needle sets infringe various patents controlled by EMED. Certain of these lawsuits also allege antitrust violations, unfair business practices and various other claims. Although no assurances can be given, the Company commencedbelieves it likely that each of EMED’s patents at issue in these cases will be deemed invalid and that the Company will succeed on the merits with respect to all of the other elements of the cases.
The initial case involving EMED was filed by the Company in the United States District Court for the Eastern District of California on September 20, 2013, in response to a declaratory judgment action against competitor,letter from EMED Technologies Corp. (“EMED”)claiming infringement by RMS, and sought to establish the invalidity of one of EMED’s patents and non-infringement of the Company’s needle sets.patent referenced in the letter – patent US 8,500,703 – or “’703.” EMED answered the complaint and asserted patent infringement of ’703 and unfair business practice counterclaims. The Company responded by asserting its ownadding 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 helddamages 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 at the USPTO issues a final written decision regarding the validity of the patent.unspecified amounts.
- 98 -
On August 22, 2017, the Company filed a motion in this California case seeking a Preliminary Injunction prohibiting EMED from making false statements and claims regarding the products of both companies. The motion has now been fully briefed, and the parties are awaiting action by the Court.
Earlier, on September 11, 2015, the Company requested an ex parte reexamination of the ’703 patent by the US Patent and Trademark Office (USPTO). The ex parte reexamination resulted in a Final Office Action dated July 19, 2017 rejecting all EMED claims of the patent. On January 25, 2018 EMED filed an Appeal Brief with a Petition for Revival, and the ex parte reexamination is ongoing.
The second court case was filed by EMED in the first filed case,United States District Court for the Eastern District of Texas on June 25, 2015, claiming patent infringement of another of its patents (US 8,961,476 – “’476”), by the Company’s needle sets, and onseeking unspecified monetary damages. This ‘476 patent is related to the ‘703 patent.
On September 17, 2015 the Company requested an inter partes review (“IPR”) of ‘476, and in response to the patentCompany’s request, the Court entered an order staying the second case until after the Patent Trial and Appeal Board (“PTAB”) of the USPTO made a decision regarding the validity of the patent. On January 12, 2017, the PTAB issued its Final Written Decision in RMS’s favor invalidating all but one of the claims in this patent. (The Company believes the remaining claim is not independently material to any of EMED’s litigation claims or RMS’s rights.) EMED appealed the PTAB’s ruling to the United States Court of Appeals for the Federal Circuit, which affirmed the PTAB’s Final Written Decision in the Company’s favor on April 3, 2018. On April 18, 2018, EMED filed a petition for en banc rehearing. The second court case in the Eastern District of Texas remains stayed pending EMED’s exhaustion of its rights of judicial review of the PTAB’s decision.
Following the PTAB’s Final Written Decision, EMED filed a new patent application claiming priority back to the application that issued as ‘703 at issue in the California case. Submitted for accelerated examination, this new application issued as US 9,808,576 – “‘576” on November 7, 2017. On November 20, 2015,this same date, EMED filed a new case in the USPTO institutedUnited States District Court for the ex parte reexamination request having foundEastern District of Texas claiming patent infringement of ‘576, also directed to the Company’s needle sets, and seeking unspecified damages and a substantialpreliminary injunction against the Company’s marketing of its needle sets. RMS has filed a Motion to Dismiss or Transfer Venue to the Southern District of New York, as RMS has no physical or direct presence in the Eastern District of Texas. RMS also filed an opposition to EMED’s preliminary injunction motion, to which EMED did not file a reply. Decisions by the Court on these pending motions is expected shortly.
On April 23, 2018, EMED filed a new questionCivil Case in the Eastern District of patentability concerning EMED’s patentTexas asserting antitrust, defamation and unfair business practice claims, and seeking unspecified damages, similar to those previously presented in the first filed case.case, described above. The ex parte reexaminationCompany is ongoing. A decision to institute the IPR for EMED’s patentreviewing this newest action and will respond 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.course.
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.
NOTE 5 STOCKHOLDERS’ EQUITY
On September 30, 2015,June 29, 2016, 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.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 November 30, 2016,March 31, 2018, the Company had repurchased 395,356396,606 shares at an average price of $0.45$0.45. The management of the Company has decided to discontinue repurchasing its outstanding common stock under the program.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,June 29, 2016, the Board of Directors approvedamended 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 approvalplan at fair market value, which was approved by shareholders 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”),Stock, with respect to which awards may be granted pursuant to the Plan, wasshall 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 November 30, 2016, the Company hadMarch 31, 2018, there were outstanding 1,038,000 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.
- 9 -
The per share weighted average fair value of stock options granted during the ninethree months ended November 30, 2016March 31, 2018 and November 30, 2015March 31, 2017 was zero and $0.19,$0.25, 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 ninethree months ended November 30, 2016.March 31, 2018 and March 31, 2017. 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, |
|
| March 31, |
| ||||||||
|
| 2016 |
| 2015 |
|
| 2018 |
| 2017 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Dividend yield |
|
| 0.00% |
|
| 0.00% |
|
| — |
|
| 0.00% |
| |
Expected Volatility |
|
| 59.00% |
|
| 59.00% |
|
| — |
|
| 70.90% |
| |
Weighted-average volatility |
|
| — |
|
| — |
|
| — |
|
| — |
| |
Expected dividends |
|
| — |
|
| — |
|
| — |
|
| — |
| |
Expected term (in years) |
|
| 5 Years |
|
| 5 Years |
|
| — |
|
| 5 Years |
| |
Risk-free rate |
|
| 2.17% |
|
| 2.17% |
|
| — |
|
| 2.48% |
|
- 10 -
The following table summarizes the status of the Plan:
|
| Nine Months Ended November 30, |
|
| Three Months Ended March 31, |
| ||||||||||||||||||
|
| 2016 |
| 2015 |
|
| 2018 |
| 2017 |
| ||||||||||||||
|
| Shares |
| Weighted |
| Shares |
| Weighted |
|
| Shares |
| Weighted |
| Shares |
| Weighted |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Outstanding at March 1 |
| 1,060,000 |
| $ | 0.36 - 0.38 |
|
| — |
| $ | — |
| ||||||||||||
Outstanding at January 1 |
| 1,038,000 |
| $ | 0.41 |
|
| 905,000 |
| $ | 0.37 |
| ||||||||||||
Granted |
| — |
| $ | — |
|
| 1,155,000 |
| $ | 0.36 - 0.38 |
|
| — |
| $ | — |
|
| 500,000 |
| $ | 0.41 |
|
Exercised |
| — |
| $ | — |
|
| — |
| $ | — |
|
| — |
| $ | — |
|
| — |
| $ | — |
|
Forfeited |
| 155,000 |
| $ | 0.36 - 0.38 |
|
| — |
| $ | — |
|
| — |
|
| — |
|
| 60,000 |
| $ | 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 March 31 |
| 1,038,000 |
| $ | 0.41 |
|
| 1,345,000 |
| $ | 0.39 |
| ||||||||||||
Options exercisable at March 31 |
| 756,385 |
| $ | 0.39 |
|
| 500,000 |
| $ | 0.38 |
| ||||||||||||
Weighted average fair value of options granted during the period |
| — |
| $ | — |
|
| — |
| $ | — |
|
| — |
| $ | — |
|
| — |
| $ | 0.25 |
|
Stock-based compensation expense |
| — |
| $ | 101,337 |
|
| — |
| $ | 10,717 |
|
| — |
| $ | 12,183 |
|
| — |
| $ | 16,580 |
|
Total stock-based compensation expense, net of estimated forfeitures for stock option awards totaled $101,337$12,183 and $10,717$16,580 for the ninethree months ended November 30, 2016March 31, 2018 and November 30, 2015,March 31, 2017, respectively.
The weighted-average grant-date fair value of options granted during the ninethree months ended November 30, 2016March 31, 2018 and November 30, 2015March 31, 2017, was zero for both periods. The total intrinsic value ofand $122,656, respectively. There were no options exercised during the ninethree months ended November 30, 2016March 31, 2018 and November 30, 2015, was zero for both periods.March 31, 2017.
The following table presents information pertaining to options outstanding at November 30, 2016:March 31, 2018:
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 - $0.50 |
| 1,038,000 |
| 5 years |
| $ | 0.41 |
| 756,385 |
| $ | 0.39 |
|
As of November 30, 2016,March 31, 2018, there was $35,958$65,437 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 nine months ended November 30, 2016as of March 31, 2018 and November 30, 2015,March 31, 2017, was $98,432$156,425 and zero,$98,432, respectively.
- 1110 -
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,acceptance of and demand for new and existing products, ability to penetrate new markets, success in enforcing and obtaining patents, reimbursement related risks, government regulation of the home health care industry, success of the research and development effort, expanding the market of FREEDOM60®,demand in the SCIg market, availability of sufficient capital to continue operations,if or when needed, dependence on key personnel and the outcome of litigation and regulatory investigation.litigation. 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
OurThe results of this year’s first quarter are an increase in net sales results for the three and nine months ended November 30, 2016 increased 1.5% and 4.4%, respectively, versus the same periods last year. The increase is driven by new customers in our international regionof 10.9% as well as organic growth with our existing customers both domestically and internationally. We have increased our sales force internationally, which has resulted in gaining two new accounts and we expect to bring on more new customers in the future. Our selling, general and administrative costs are 19.8% and 34.5% higher for the three and nine months ended November 30, 2016 compared with the same period last year. We continueyear, which included some variability due to have high professional fees relateda one-time back order issue. For 2018, we anticipate growth in our needle set sales including an updated Super 26g High Flo administration set, and general organic growth supported by a comprehensive updated new FDA clearance per the RMS “Integrated Catch-Up Freedom Syringe Drive Infusion System” which became effective on August 31, 2017. The expanded clearance includes specifications for use with Cuvitru® and Hizentra®, as well as intravenous antibiotics. The Super 26g High Flo administration set was developed specifically to our litigationsupport recent approval of immunoglobulins for the neurological treatment of Chronic Inflammatory Demyelinating Polyneuropathy (“CIDP”). Our gross margin percentage increased from 57.7% to 61.1% quarter over quarter, driven by ongoing operational efficiencies. With improved sales, better margins and regulatory effortslevel operating expenses, net income improved significantly. In addition, we expect many of the SCIg providers, and although we are making every effort to resolveothers, will see benefit in using the litigationFREEDOM System for additional uses such as neurology, antibiotics, chemotherapeutics, and close out our FDA Warning Letter, we cannot predict the timing of either of these efforts, nor can we predict the outcome. We have hired a Chief Medical Officer and plan to increase headcount to facilitate 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.pain medications.
RESULTS OF OPERATIONS
Three Months Ended November 30, 2016months ended March 31, 2018 compared to November 30, 2015March 31, 2017
Net Sales
The following table summarizes our net sales for the three months ended November 30, 2016March 31, 2018 and 2015:2017:
|
| Three Months Ended November 30, |
| Change from Prior Year |
| % of Sales |
|
| Three Months Ended March 31, |
| Change from Prior Year |
| % of Sales |
| ||||||||||||||||||
|
| 2016 |
| 2015 |
| $ |
| % |
| 2016 |
| 2015 |
|
| 2018 |
| 2017 |
| $ |
| % |
| 2018 |
| 2017 |
| ||||||
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
| $ | 2,652,107 |
| $ | 2,645,241 |
| $ | 6,866 |
| 0.3 | % | 83.1% |
| 84.1 | % |
| $ | 3,375,208 |
| $ | 2,995,447 |
| $ | 379,761 |
| 12.7% |
| 83.7% |
| 82.3% |
|
International |
|
| 541,006 |
|
| 499,713 |
|
| 41,293 |
| 8.3 | % | 16.9% |
| 15.9 | % |
|
| 658,016 |
|
| 642,989 |
|
| 15,027 |
| 2.3% |
| 16.3% |
| 17.7% |
|
Total |
| $ | 3,193,113 |
| $ | 3,144,954 |
| $ | 48,159 |
| 1.5 | % |
|
|
|
|
| $ | 4,033,224 |
| $ | 3,638,436 |
| $ | 394,788 |
| 10.9% |
|
|
|
|
|
- 12 -
Total net sales increased $48,159$0.4 million or 1.5%10.9% for the quarterthree months ended November 30, 2016March 31, 2018 compared with the same period last year. This growth was driven mostly by increased volume in domestic needle sales, we believe due to the quarter ended November 30, 2015. While domestic sales were nearly even with last year,launch of a new drug and our international market increased $41,293 or 8.3% mostly due to new customers. 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 and new countries, continue to develop and as we work on new enhancements to the FREEDOM60 that we believe will expand markets even further. For example, our efforts to reenter into the antibiotic market resulted in a large home care hospital system selecting the FREEDOM60 for all patients receiving this therapy.510(k) clearance described above.
- 11 -
Gross Profit
Our gross profit for the three months ended November 30, 2016March 31, 2018 and 20152017 is as follows:
|
| Three Months Ended November 30, |
| Change from Prior Year |
|
| Three Months Ended March 31, |
| Change from Prior Year |
| ||||||||||||||
|
| 2016 |
| 2015 |
| $ |
| % |
|
| 2018 |
| 2017 |
| $ |
| % |
| ||||||
Gross Profit |
| $ | 2,063,943 |
| $ | 2,109,279 |
| $ | (45,336 | ) | (2.1 | )% |
| $ | 2,465,824 |
| $ | 2,101,954 |
| $ | 363,870 |
| 17.3% |
|
Stated as a Percentage of Net Sales |
|
| 64.6 | % |
| 67.1 | % |
|
|
|
|
|
|
| 61.1% |
|
| 57.8% |
|
|
|
|
|
|
Gross profit decreased $45,336increased $0.4 million or 2.1%17.3% in the three months ended November 30, 2016, asMarch 31, 2018, compared to the same period in 2015.2017. This decreaseincrease in the quarter was mostly driven by the increasesincrease in net sales rebates relatedof $0.4 million. In addition to higher sales, the increase in gross profit was driven by the positive results of implementing a specific customer contract renewal in the quarter comparednondestructive testing protocol which reduced scrap, and lower sterilization costs due to the same period last year, as well as an increase in salary and related costs associated with higher headcount in our quality departmentconsolidation of loads going to ensure compliance with our quality management system.the sterilizer.
Selling, general and administrative and Research and development
Our selling, general and administrative expenses and research and development costs for the three months ended November 30, 2016March 31, 2018 and 20152017 are as follows:
|
| Three Months Ended November 30, |
| Change from Prior Year |
|
| Three Months Ended March 31 |
| Change from Prior Year |
| ||||||||||||||
|
| 2016 |
| 2015 |
| $ |
| % |
|
| 2018 |
| 2017 |
| $ |
| % |
| ||||||
Selling, general and administrative |
| $ | 2,034,016 |
| $ | 1,698,226 |
| $ | 335,790 |
| 19.8 | % |
| $ | 1,880,269 |
| $ | 1,775,109 |
| $ | 105,160 |
| 5.9% |
|
Research and development |
|
| 59,142 |
|
| 51,564 |
|
| 7,578 |
| 14.7 | % |
|
| 9,848 |
|
| 45,906 |
|
| (36,058 | ) | (78.5%) |
|
|
| $ | 2,093,158 |
| $ | 1,749,790 |
| $ | 343,368 |
| 19.6 | % |
| $ | 1,890,117 |
| $ | 1,821,015 |
| $ | 69,102 |
| 3.8% |
|
Stated as a Percentage of Net Sales |
|
| 65.6 | % |
| 55.6 | % |
|
|
|
|
|
|
| 46.9% |
|
| 50.0% |
|
|
|
|
|
|
Selling, general and administrative expenses increased $0.3$0.1 million, or 5.9%, during the three months ended November 30, 2016March 31, 2018 compared to the same period last year. The increase came primarily from professional fees and consultants relatedyear, driven mostly by increased headcount to litigation,support our regulatory compliance requirements 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 marketinglegal fees due to lower headcount domestically and lower annual bonus expensea credit as we transitioned to new counsel in the quarter versus last year.three months ended March 31, 2017.
Research and development expenses increased by 14.7%, primarilydecreased due to additional engineering employeesattrition during the three months ended March 31, 2018 compared with the same period last year. We hired a new engineer in April 2018 and consultants. We continueare committed 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.activities.
Depreciation and amortization
Depreciation and amortization expense increaseddecreased by 20.2% up0.4 % to $83,254$74,578 in the three months ended November 30, 2016March 31, 2018 compared with $69,274$74,880 in the three months ended November 30, 2015 as a result of continuedMarch 31, 2017, primarily driven by 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 loss 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 new patent applications and maintenance of existing patents.
Net Income
|
| Nine Months Ended November 30, |
| Change from Prior Year |
|
| Three Months Ended March 31 |
| Change from Prior Year |
| ||||||||||||
|
| 2016 |
| 2015 |
| $ |
| % |
|
| 2018 |
| 2017 |
| $ |
| ||||||
Net (Loss) Income |
| $ | (420,204 | ) | $ | 438,126 |
| $ | (858,330 | ) | (195.9 | )% | ||||||||||
Net Income |
| $ | 403,427 |
| $ | 126,951 |
| $ | 276,476 |
| ||||||||||||
Stated as a Percentage of Net Sales |
|
| (4.5 | )% |
| 4.9 | % |
|
|
|
|
|
|
| 10.0% |
|
| 3.5% |
|
|
|
|
Our net lossincome for the ninethree months ended November 30, 2016March 31, 2018 was $0.4 million compared with net income of $0.4to $0.1 million for the ninethree months ended November 30, 2015. This decrease of $0.9 million is mostlyMarch 31, 2017, driven by higher net sales, improved gross margin, level operating expenses and the resultimpact of the increase in selling, general and administrative expenses of $1.6 million described above, partially offset by increased sales.new lower tax rate.
- 12 -
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of liquidity is our cash of $3.4$4.0 million as of November 30, 2016, and cash flows from operations.March 31, 2018. 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 November 30, 2016,March 31, 2018, 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.
On September 30, 2015, RMS’s Board of Directors authorized a stock repurchase program pursuant to which the Company has and expects toWe continue to make open market purchasesbe in litigation with a competitor, EMED Technologies Corp. (“EMED”) and have incurred a significant amount 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 be made through a broker to be designated by the Companylegal fees in connection 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 November 30, 2016, the Company had repurchased 395,356 shares at an average price of $0.45 under the program.
Cash Flows
The following table summarizes our cash flows:
|
| Nine Months Ended |
| Nine Months Ended |
| ||
Net cash (used in) provided by operating activities |
| $ | (314,411 | ) | $ | 913,999 |
|
Net cash used in investing activities |
| $ | (307,123 | ) | $ | (131,703 | ) |
Net cash used in financing activities |
| $ | (140,255 | ) | $ | — |
|
- 15 -
Operating Activities
Net cash used in operating activities of $0.3 million for the nine months ended November 30, 2016, was primarily attributable to our net loss 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 million for depreciation and amortization of long lived tangible and intangible assets, $21,000 of deferred compensation costs and stock based compensation expense of $0.1 million.
Net cash provided by operating activities of $0.9 million for the nine months ended November 30, 2015, was primarily attributable to our net income of $0.4 million, non-cash charges of $0.2 million for depreciation and amortization of long lived tangible and intangible assets, $21,000 of deferred compensation costs, $38,360 of stock based compensation, and an increase in accounts payable and accrued expense of $0.4 million, offset by an increase of accounts receivable of $0.1 million.
Investing Activities
Our net cash used in investing activities of $0.3 million and $0.1 million for the nine months ended November 30, 2016 and November 30, 2015, respectively, were 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 million for the nine months ended November 30, 2016 was attributable to stock repurchases under the Company’s repurchase program.
NON-GAAP FINANCIAL MEASURES
Management ofthat process. Although the Company believes that investors’ understanding ofit has meritorious claims and defenses in 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 notactions and proceedings, their outcomes cannot 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 disclosurepredicted with any certainty. If any 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 resultsactions 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.
FDA
On February 29, 2016, the Company received a Warning Letter (WL NYK-2016-26) from the New York District Office of U.S. Food and Drug Administration (“FDA”) (“the Letter”) pursuant to observations arising from an FDA site inspection of the Company’s manufacturing facility which occurred over a three week period in June 2015.
The Letter identified a variety of concerns and requested submission of a response to the FDA to which the Company filed its initial response 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) to which the Company plans to respond within the fifteen business days deadline. There is no deadline for a reply by the FDA, and the Company’s manufacturing and distribution continue without interruption.
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 thissuccessful, they could have a material adverse effect on the Company’s business, results of operations, financial condition and cash flows.
Cash Flows
The following table summarizes our cash flows:
|
| Three Months Ended |
| Three Months Ended |
| ||
Net cash (used in)/provided by operating activities |
| $ | (13,114 | ) |
| 143,446 |
|
Net cash provided by/(used in) investing activities |
| $ | 71,733 |
|
| (104,239 | ) |
Net cash used in financing activities |
| $ | — |
|
| (484 | ) |
Operating Activities
Net cash used in operating activities of $13,114 for the three months ended March 31, 2018 was primarily the result of increased inventory of $0.1 million as we build inventory to meet demand, and the pay out of bonuses, commissions and severance accrued for at December 31, 2017 totaling $0.6 million in aggregate. Mostly offsetting these decreases were higher net income of $0.4 million and non-cash charges of $0.1 million for depreciation and amortization of long lived tangible and intangible assets, stock based compensation of $45,933, as well as an increase in accounts payable of $0.1 million.
Net cash provided by operating activities of $0.1 million for the three months ended March 31, 2017 was primarily attributable to net income of $0.1 million, an increase in accrued expense and tax liability of $0.2 million, decreases in inventory and prepaids of $0.2 million, as well as non-cash charges of $0.1 million for depreciation and amortization of long lived tangible and intangible assets and stock based compensation of $50,330. Partially offsetting these increases were the increase in accounts receivable of $0.3 million and the decrease in accounts payable of $0.2 million.
Investing Activities
Our net cash provided by investing activities of $0.1 million for the three months ended March 31, 2018 was mostly the result of the maturity of a certificate of deposit. Net cash used in investing activities of $0.1 million for the three months ended March 31, 2017 was primarily attributable to our investment in capital assets, mostly related to production and computer equipment, and for new patent applications and maintenance of existing patents.
Financing Activities
There were no financing activities for the three months ended March 31, 2018 and we repurchased shares of the Company’s common stock in the amount of $484 for the three months ended March 31, 2017.
- 13 -
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In DecemberJune 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-19—Technical Corrections and Improvements 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 for clarity and ease of understanding. The amendments generally fall into one of the following types of categories; (a) Amendments related to differences between original guidance and the ASC: these amendments arose because of differences between original guidance (for example, FASB Statements, Emerging Issues Task Force (“EITF”) Issues, 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 of the guidance might have been unintentionally altered. Alternatively, amendments in this category may relate to guidance that was codified without some text, reference, or phrasing that, upon review, was deemed important to 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. 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. 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 Company is assessing the impact of the adoption of the ASU on its financial statements, disclosure requirements and methods of adoption.
In March 2016, the FASB issued ASU No. 2016-09 — Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU was issued as part of the FASB’s simplification initiative 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, 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), Share-Based Payment. This should 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 of the adoption of the ASU on its financial statements, disclosure requirements and methods of adoption.
- 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 November 30, 2016,March 31, 2018, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
- 14 -
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 94,07215,000 and 40,758 shares of common stock to its non-employee directors during the fiscal quarterthree months period ended November 30, 2016.March 31, 2018, and March 31, 2017, respectively.
The following table provides information regarding repurchasesCompany issued 12,000 and 32,609 shares of common stock to Dr. Fred Ma, its Chief Medical Officer, under the terms of his employment agreement, during the three months ended March 31, 2018, and March 31, 2017 respectively.
On June 29, 2016, RMS’s Board of Directors authorized the Company to make open market purchases of up to 2,000,000 shares of the Company’s outstanding Common Stock. The purchases are made through a broker designated by the Company, with price, timing and volume restrictions based on average daily trading volume, consistent with the rules of itsthe Securities and Exchange Commission for such repurchases. As of March 31, 2018, the Company had repurchased 396,606 shares at an average price of $0.45. There were no repurchases of common stock by the Company during the three monthquarter ended March 31, 2018. The management of the Company has decided to discontinue repurchasing its outstanding Common Stock for an undetermined period ended November 30, 2016:of time to utilize cash for capital investments needed to expand the business. There is no expiration date to the repurchase plan.
Issuer PurchasesOn June 29, 2016, the Board 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 |
|
|
|
__________
|
|
|
|
- 20 -
On September 30, 2015, the Company announced the approval ofDirectors amended 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 November 30, 2016, the Company hadMarch 31, 2018, there were outstanding 1,038,000 options awarded 0.9 million options 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”.
- 15 -
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. |
|
|
| /s/ Andrew I. Sealfon |
| Andrew I. Sealfon, President, Chairman of the Board, Director, Chief Executive Officer |
|
|
| /s/ Karen Fisher |
| Karen Fisher, Chief Financial Officer and Treasurer |
- 2116 -