Company Quick10K Filing
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Repro Med Systems
10-Q 2019-03-31 Quarter: 2019-03-31
S-1 2019-02-01 Public Filing
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-K 2017-02-28 Annual: 2017-02-28
10-Q 2016-11-30 Quarter: 2016-11-30
10-Q 2016-08-31 Quarter: 2016-08-31
10-Q 2016-05-31 Quarter: 2016-05-31
10-K 2016-02-29 Annual: 2016-02-29
10-Q 2015-11-30 Quarter: 2015-11-30
10-Q 2015-08-31 Quarter: 2015-08-31
10-Q 2015-05-31 Quarter: 2015-05-31
10-K 2015-02-28 Annual: 2015-02-28
10-Q 2014-11-30 Quarter: 2014-11-30
10-Q 2014-08-31 Quarter: 2014-08-31
10-Q 2014-05-31 Quarter: 2014-05-31
10-K 2014-02-28 Annual: 2014-02-28
10-Q 2013-11-30 Quarter: 2013-11-30
8-K 2019-05-07 Officers, Other Events, Exhibits
8-K 2019-04-23 Shareholder Vote
8-K 2019-02-12 Earnings, Exhibits
8-K 2019-02-01 Officers, Other Events, Exhibits
8-K 2018-12-20 Officers, Exhibits
8-K 2018-12-17 Enter Agreement, Officers, Regulation FD, Exhibits
8-K 2018-12-05 Officers, Amend Bylaw, Other Events, Exhibits
8-K 2018-10-24 Regulation FD, Exhibits
8-K 2018-10-23 Earnings, Exhibits
8-K 2018-10-12 Officers, Exhibits
8-K 2018-09-25 Regulation FD
8-K 2018-09-04 Officers, Exhibits
8-K 2018-08-06 Earnings, Exhibits
8-K 2018-07-25 Earnings, Officers, Other Events, Exhibits
8-K 2018-05-03 Amend Bylaw, Exhibits
8-K 2018-04-23 Shareholder Vote
8-K 2018-04-09 Other Events, Exhibits
8-K 2018-02-13 Other Events, Exhibits
8-K 2018-01-17 Other Events
IPHI Inphi 2,280
NWN Northwest Natural Holding Company 1,950
FORM Formfactor 1,250
REX Rex American Resources 541
UTI Universal Technical Institute 83
FAT FAT Brands 54
BMRA Biomerica 22
CTRV Contravir Pharmaceuticals 3
SMDM Singing Machine 0
VDH Vigilant Diversified Holdings 0
REPR 2019-03-31
Part I - Financial Information
Item 1. Financial Statements
Note 1 Nature of Operations and Summary of Significant Accounting Policies
Note 2 Related Party Transactions
Note 3 Property and Equipment
Note 4 Legal Proceedings
Note 5 Stock-Based Compensation
Note 6 Debt Obligations
Note 7 Leases
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Part I - Item 3. Quantitative and Qualitative Disclosures About Market Risk
Part I - Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Part II - Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Part II - Item 6. Exhibits.
EX-4 ex_4-1.htm
EX-31 ex_31-1.htm
EX-31 ex_31-2.htm
EX-32 ex_32-1.htm
EX-32 ex_32-2.htm

Repro Med Systems Earnings 2019-03-31

REPR 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 form_10-q.htm FORM 10-Q QUARTERLY REPORT FOR 03-31-2019

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 March 31, 2019


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)


N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)


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


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


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


 

Large accelerated filer [  ]

Accelerated filer [  ]

 

Non-accelerated filer   [  ]

Smaller reporting company [X]

 

 

Emerging growth company [  ]


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  [  ] Yes  [X] No


Securities registered pursuant to Section 12(b) of the Act:


Title of each class

Trading symbol(s)

Name of each exchange on which registered

common stock, $0.01 par value

REPR

OTCQX


As of May 7, 2019, 38,316,634 shares of common stock, $0.01 par value per share, were outstanding, which excludes 2,737,231 shares of treasury stock.




REPRO MED SYSTEMS, INC.

TABLE OF CONTENTS


 

 

PAGE

 

 

 

PART I FINANCIAL INFORMATION

 

 

 

ITEM 1.

Financial Statements

 

 

 

 

 

Balance Sheets as of March 31, 2019 (Unaudited) and December 31, 2018

3

 

 

 

 

Statements of Operations (Unaudited) for the three months ended March 31, 2019 and 2018

4

 

 

 

 

Statements of Cash Flows (Unaudited) for the three months ended March 31, 2019 and 2018

5

 

 

 

 

Notes to Financial Statements

6

 

 

 

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

14

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

18

 

 

 

ITEM 4.

Controls and Procedures

18

 

 

 

PART II OTHER INFORMATION

 

 

 

ITEM 1.

Legal Proceedings

19

 

 

 

ITEM 1A.

Risk Factors

20

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

20

 

 

 

ITEM 6.

Exhibits

21


- 2 -



PART I – FINANCIAL INFORMATION


Item 1.  Financial Statements


REPRO MED SYSTEMS, INC.

BALANCE SHEETS


 

 

March 31,

 

 

 

 

 

2019

 

December 31,

 

 

 

(Unaudited)

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,592,889

 

$

3,738,803

 

Certificates of deposit

 

 

1,524,416

 

 

1,517,927

 

Accounts receivable less allowance for doubtful accounts of $37,500 at March 31, 2019 and December 31, 2018

 

 

2,655,273

 

 

1,425,854

 

Inventory  

 

 

2,508,684

 

 

2,103,879

 

Prepaid expenses

 

 

286,615

 

 

246,591

 

TOTAL CURRENT ASSETS

 

 

9,567,877

 

 

9,033,054

 

Property and equipment, net

 

 

833,015

 

 

858,781

 

Patents, net of accumulated amortization of $249,716 and $239,581 at March 31, 2019 and December 31, 2018, respectively

 

 

670,738

 

 

632,156

 

Right of use assets, net

 

 

472,224

 

 

 

Deferred tax asset

 

 

 

 

1,466

 

Other assets

 

 

19,582

 

 

19,582

 

TOTAL ASSETS

 

$

11,563,436

 

$

10,545,039

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

Deferred capital gain - current

 

$

 

$

3,763

 

Accounts payable

 

 

943,091

 

 

453,498

 

Accrued expenses

 

 

699,887

 

 

688,649

 

Accrued payroll and related taxes

 

 

248,049

 

 

421,714

 

Accrued tax liability

 

 

 

 

16,608

 

Finance lease liability - current

 

 

4,241

 

 

 

Operating lease liability - current

 

 

131,845

 

 

 

TOTAL CURRENT LIABILITIES

 

 

2,027,113

 

 

1,584,232

 

Deferred tax liability

 

 

24,128

 

 

 

Finance lease liability, net of current portion

 

 

1,094

 

 

 

Operating lease liability, net of current portion

 

 

340,379

 

 

 

TOTAL LIABILITIES

 

 

2,392,714

 

 

1,584,232

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Common stock, $0.01 par value; 75,000,000 shares authorized, 40,939,825 and 40,932,911 shares issued, 38,202,594 and 38,195,680 shares outstanding at March 31, 2019 and December 31, 2018, respectively

 

 

409,398

 

 

409,329

 

Additional paid-in capital

 

 

4,890,450

 

 

4,595,214

 

Retained earnings

 

 

4,215,078

 

 

4,300,468

 

 

 

 

9,514,926

 

 

9,305,011

 

Less: Treasury stock, 2,737,231 shares at March 31, 2019 and December 31, 2018, respectively, at cost

 

 

(344,204

)

 

(344,204

)

TOTAL STOCKHOLDERS’ EQUITY

 

 

9,170,722

 

 

8,960,807

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

11,563,436

 

$

10,545,039

 


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

 

 

 

March 31,

 

 

 

2019

 

2018

 

 

 

 

 

 

 

 

 

NET SALES

 

$

4,974,278

 

$

4,033,224

 

Cost of goods sold

 

 

1,926,324

 

 

1,567,400

 

Gross Profit

 

 

3,047,954

 

 

2,465,824

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

 

 

Selling, general and administrative

 

 

2,977,383

 

 

1,880,269

 

Research and development

 

 

101,959

 

 

9,848

 

Depreciation and amortization

 

 

83,651

 

 

74,578

 

Total Operating Expenses

 

 

3,162,993

 

 

1,964,695

 

 

 

 

 

 

 

 

 

Net Operating (Loss)/Profit

 

 

(115,039

)

 

501,129

 

 

 

 

 

 

 

 

 

Non-Operating Income

 

 

 

 

 

 

 

(Loss)/Gain on currency exchange

 

 

(9,690

)

 

9,424

 

(Loss) on disposal of fixed asset

 

 

(240

)

 

 

Interest, net and other income

 

 

17,480

 

 

615

 

TOTAL OTHER INCOME

 

 

7,550

 

 

10,039

 

 

 

 

 

 

 

 

 

(LOSS)/INCOME BEFORE TAXES

 

 

(107,489

)

 

511,168

 

 

 

 

 

 

 

 

 

Income Tax Benefit/(Expense)

 

 

22,099

 

 

(107,741

)

 

 

 

 

 

 

 

 

NET (LOSS)/INCOME

 

$

(85,390

)

$

403,427

 

 

 

 

 

 

 

 

 

NET (LOSS)/INCOME PER SHARE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.00

 

$

0.01

 

Diluted

 

$

0.00

 

$

0.01

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

38,203,606

 

 

38,016,498

 

Diluted

 

 

39,033,623

 

 

38,781,445

 


The accompanying notes are an integral part of these financial statements


- 4 -



REPRO MED SYSTEMS, INC.

STATEMENTS OF CASH FLOWS

(UNAUDITED)


 

 

For the
Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

2018

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

Net (Loss)/Income

 

$

(85,390

)

$

403,427

 

Adjustments to reconcile net (loss)/income to net cash used in operating activities:

 

 

 

 

 

 

 

Stock based compensation expense

 

 

298,125

 

 

45,933

 

Depreciation and amortization

 

 

83,651

 

 

74,578

 

Deferred capital gain - building lease

 

 

(3,763

)

 

(5,620

)

Deferred taxes

 

 

25,594

 

 

2,329

 

Loss on disposal of fixed asset

 

 

240

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

(Increase)/Decrease in accounts receivable

 

 

(1,229,419

)

 

7,307

 

Increase in inventory

 

 

(404,805

)

 

(141,868

)

Increase in prepaid expense and other assets

 

 

(40,024

)

 

(32,563

)

Increase in accounts payable

 

 

489,593

 

 

95,366

 

Decrease in accrued payroll and related taxes

 

 

(173,665

)

 

(138,275

)

Increase/(Decrease) in accrued expense

 

 

11,238

 

 

(319,139

)

Decrease in accrued tax liability

 

 

(16,608

)

 

(4,589

)

NET CASH USED IN OPERATING ACTIVITIES

 

 

(1,045,233

)

 

(13,114

)

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

Payments for capital expenditures

 

 

(41,626

)

 

(4,145

)

(Purchase)/proceeds from certificate of deposit

 

 

(6,489

)

 

104,360

 

Payments for patents

 

 

(48,718

)

 

(28,482

)

NET CASH (USED IN)/PROVIDED BY INVESTING ACTIVITIES

 

 

(96,833

)

 

71,733

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

Payment for cancelled shares

 

 

(2,820

)

 

 

Finance lease

 

 

(1,028

)

 

 

NET CASH USED IN FINANCING ACTIVITIES

 

 

(3,848

)

 

 

 

 

 

 

 

 

 

 

NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS

 

 

(1,145,914

)

 

58,619

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

 

3,738,803

 

 

3,974,536

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

2,592,889

 

$

4,033,155

 

 

 

 

 

 

 

 

 

Supplemental Information

 

 

 

 

 

 

 

Cash paid during the periods for:

 

 

 

 

 

 

 

Interest

 

$

174

 

$

 

Taxes

 

$

 

$

110,000

 

 

 

 

 

 

 

 

 

NON-CASH FINANCING AND INVESTING ACTIVITIES

 

 

 

 

 

 

 

Issuance of common stock as compensation

 

$

176,250

 

$

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 portable and innovative medical devices primarily for the ambulatory infusion market as governed by the United States Food and Drug Administration (the “FDA”) quality and regulatory system and international standards for quality system management.  The Company operates as one segment.


FISCAL YEAR END


The Company’s fiscal year end is December 31.


BASIS OF PRESENTATION


The accompanying unaudited financial statements as of March 31, 2019, have been prepared in accordance with generally accepted accounting principles and with instructions to SEC regulation S-X for interim financial statements.


In the opinion of the Company’s management, the financial statements contain all adjustments consisting of normal recurring accruals necessary to present fairly the Company’s financial position as of March 31, 2019, and the results of operations and cash flow for the three months periods ended March 31, 2019, and 2018.


The results of operations for the three months ended March 31, 2019 and 2018 are not necessarily indicative of the results to be expected for the full year.  These interim financial statements should be read in conjunction with the financial statements and notes thereto of the Company and management’s discussion and analysis of financial condition and results of operations included in the Company’s  Annual Report for the twelve months ended December 31, 2018, as filed with the Securities and Exchange Commission on Form 10-K.


CASH AND CASH EQUIVALENTS


For purposes of the statement of cash flows, the Company considers all short-term investments with an original maturity of three months or less to be cash equivalents.   The Company holds cash in excess of $250,000 at its depository, which exceeds the FDIC insurance limits and is, therefore, uninsured.


CERTIFICATES OF DEPOSIT


The certificate of deposit is recorded at cost plus accrued interest. The certificate of deposit earns interest at a rate of 1.73% and matures in May 2019.


INVENTORY


Inventories of raw materials are stated at the lower of standard cost, which approximates average cost, or market value including allocable overhead. Work-in-process and finished goods are stated at the lower of standard cost or market value and include direct labor and allocable overhead.


PATENTS


Costs incurred in obtaining patents have been capitalized and are being amortized over the legal life of the patents.


INCOME TAXES


Deferred income taxes are provided using the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences.


- 6 -



The Company believes that it has no uncertain tax positions requiring disclosure or adjustment.  Generally, tax years starting with 2016 are subject to examination by income tax authorities.


PROPERTY, EQUIPMENT, AND DEPRECIATION


Property and equipment is stated at cost and is depreciated using the straight-line method over the estimated useful lives of the respective assets.


STOCK-BASED COMPENSATION


The Company maintains a stock option plan under which it grants stock options and has issued stock to certain executives, key employees and consultants.  The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model. All options are charged against income at their fair value.  The entire compensation expense of the award is recognized over the vesting period. Shares of stock granted are recorded at the fair value of the shares at the grant date.


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.


REVENUE RECOGNITION


The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09—Revenue from Contracts with Customers, which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers.  We adopted this ASU effective January 1, 2018 on a full retrospective basis.  Adoption of this standard did not result in significant changes to our accounting policies, business processes, systems or controls, or have a material impact on our financial position, results of operations and cash flows or related disclosures.  As such, prior period financial statements were not recast.


The Company’s revenues result from the sale of assembled products.  We recognize revenues when shipment occurs and at which point the customer obtains control and ownership of the goods.  Shipping costs generally are billed to customers and are included in sales.


The Company generally does not accept return of goods shipped unless it is a Company error.  The only credits provided to customers are for defective merchandise.  The Company warrants the syringe driver from defects in materials and workmanship under normal use and the warranty does not include a performance obligation.  The costs under the warranty are expensed as incurred.


Provisions for distributor pricing and annual customer volume rebates are variable consideration and are recorded as a reduction of revenue in the same period the related sales are recorded or when it’s probable the annual growth target will be achieved.  Rebates are provided to distributors for the difference in selling price to distributor and pricing specified to select customers.


LEASES


In February 2016, the FASB issued a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet.  Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by the Company for those leases classified as operating leases under current U.S. GAAP, while our accounting for capital leases remains substantially unchanged.   Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.  The standard became effective for us January 1, 2019.  The standard had a material impact on our balance sheets, but did not have a material impact on our income statements.  See NOTE 7 LEASES.


- 7 -



RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS


In June 2016, the 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 August 2018, the FASB issued ASU No. 2018-13 Fair Value Measurement (Topic 820):  Disclosure Framework – Changes to the Disclosure for Fair Value Measurement.  The amendments in this ASU modify the disclosure requirements on fair value measurements in Topic 820 based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of this ASU. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date.  The Company is assessing the impact of the adoption of the ASU on its financial statements, disclosure requirements and methods of adoption.


In August 2018, the FASB issued ASU No. 2018-15 Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.  The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU.  The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption of the amendments in this ASU is permitted, including adoption in any interim period, for all entities.  The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.  The Company is assessing the impact of the adoption of the ASU on its financial statements, disclosure requirements and methods of adoption.


The Company considers the applicability and impact of all recently issued accounting pronouncements. Recent accounting pronouncements not specifically identified in our disclosures are either not applicable to the Company or are not expected to have a material effect on our financial condition or results of operations.


FAIR VALUE OF FINANCIAL INSTRUMENTS


The carrying amounts reported in the balance sheet for cash, trade receivables, accounts payable and accrued expenses approximate fair value based on the short-term maturity of these instruments.


ACCOUNTING FOR LONG-LIVED ASSETS


The Company reviews its long-lived assets for impairment at least annually or whenever the circumstances and situations change such that there is an indication that the carrying amounts may not be recoverable. As of March 31, 2019, the Company does not believe that any of its assets are impaired.


RECLASSIFICATION


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


- 8 -



NOTE 2  RELATED PARTY TRANSACTIONS


LEASED AIRCRAFT


From 1992 to 2018, we leased an aircraft from AMI Aviation, Inc., of which our former President and Chief Executive Officer, Andrew Sealfon, was a majority shareholder. The lease payments were $0 and $3,876 for the three months ended March 31, 2019 and 2018, respectively.  Upon the termination of Mr. Sealfon as President and Chief Executive Officer on July 25, 2018, the Company ceased leasing this aircraft.


BUILDING LEASE


Mr. Pastreich, our former board of director, is a principal in the entity that owns the building leased by us for our corporate headquarters and manufacturing facility at 24 Carpenter Road, Chester, New York 10918.  On February 28, 2019, we completed year twenty of a twenty year lease with monthly lease payments of $11,042.  On November 14, 2017, we executed a lease extension, which calls for six month extensions beginning March 1, 2019 with the option to renew six times at a monthly lease amount of $12,088.  The lease payments were $34,172 for the three months ended March 31, 2019, and $33,126 for the three months ended March 31, 2018. The Company also paid property taxes for the three months ended March 31, 2019 in the amount of $12,427 and $12,712 for the three months ended March 31, 2018.   


NOTE 3  PROPERTY AND EQUIPMENT


Property and equipment consists of the following at:


 

 

March 31, 2019

 

December 31, 2018

 

 

 

 

 

 

 

 

 

Land

 

$

54,030

 

$

54,030

 

Building

 

 

171,094

 

 

171,094

 

Furniture, office equipment, and leasehold improvements

 

 

1,085,234

 

 

1,058,507

 

Manufacturing equipment and tooling

 

 

1,282,303

 

 

1,279,865

 

 

 

 

2,592,661

 

 

2,563,496

 

Less: accumulated depreciation

 

 

(1,759,646

)

 

(1,704,715

)

Property and equipment, net

 

$

833,015

 

$

858,781

 


Depreciation expense was $73,515 and $66,480 for the three months ended March 31, 2019 and March 31, 2018, respectively.


NOTE 4  LEGAL PROCEEDINGS


We are involved in several lawsuits with our principal competitor, EMED Technologies Corporation (“EMED”).  EMED has alleged that our needle sets infringe various patents controlled by EMED.  Certain of these lawsuits also allege antitrust violations, unfair business practices, and various other claims.  We are vigorously defending against all of the lawsuits brought by EMED. Although no assurances can be given, we believe we have meritorious defenses to all of EMED’s claims.


The initial case involving EMED was filed by us in the United States District Court for the Eastern District of California on September 20, 2013 (the “California case”), in response to a letter from EMED claiming patent infringement by us, and seeking a declaratory judgment establishing the invalidity of the patent referenced in the letter – EMED’s US patent 8,500,703 – “‘703.”  EMED answered the complaint and asserted patent infringement of the ‘703 patent and several counterclaims relating generally to claims of unfair business practices against us. We responded by adding several claims against EMED, generally relating to claims of unfair business practices on EMED’s part.  Both parties have requested injunctive relief and monetary damages in unspecified amounts.


On September 11, 2015, we requested an ex parte reexamination of the ‘703 patent by the US Patent and Trademark Office (“USPTO”). The ex parte reexamination resulted in a Final Office Action dated July 19, 2017 rejecting all of EMED’s claims in the patent.  On January 25, 2018 EMED filed an Appeal Brief with a Petition for Revival, which was accepted.  On April 9, 2018, the USPTO denied EMED’s request for reconsideration of the order rejecting all claims in the ‘703 patent.  Both the California case and EMED’s appeal of the USPTO rejections are pending.


The second court case was filed by EMED in the United States District Court for the Eastern District of Texas on June 25, 2015, claiming patent infringement on another of its patents (US 8,961,476 – “‘476”), by our needle sets, and seeking unspecified monetary damages (“ED Texas ‘476 matter”). This ‘476 patent is related to the now rejected EMED ‘703 patent.


- 9 -



On September 17, 2015, we requested an inter partes review (“IPR”) of the ‘476 patent, and in response to our request, the Court entered an order staying the ED Texas ‘476 matter until after the Patent Trial and Appeal Board (“PTAB”) of the USPTO made a decision regarding the validity of the patent.  On January 12, 2017, the PTAB issued its Final Written Decision in our favor, invalidating all but one (“dependent Claim 9”) of the claims in the ‘476 patent.   EMED appealed the PTAB’s ruling to the United States Court of Appeals for the Federal Circuit, which affirmed the PTAB’s Final Written Decision in our favor on April 3, 2018.  On April 18, 2018, EMED filed a petition for en banc rehearing, which was denied.  On August 16, 2018, EMED petitioned the United States Supreme Court for a Writ of Certiorari to review the Federal Circuit’s upholding the PTAB’s Final Written Decision.  On October 29, 2018 the United States Supreme Court denied EMED’s Petition for a Writ of Certiorari, thus finally affirming the PTAB’s invalidation of ‘476, save for one dependent claim.


Following the PTAB’s Final Written Decision in the IPR regarding the ‘476 patent, EMED filed a new patent application claiming priority back to the application that issued as ‘703, which is the patent at issue in the California case.  Submitted for accelerated examination, this new application issued as US 9,808,576 – “‘576” on November 7, 2017.  On this same date, EMED filed a new case (the “third case”) in the United States District Court for the Eastern District of Texas claiming patent infringement of ‘576, also directed to our needle sets, and seeking unspecified damages and a preliminary injunction against our marketing of its needle sets.  We filed a Motion to Dismiss or Transfer Venue to the United States District Court for the Southern District of New York (“SDNY”), which has resulted in the transfer of the third case to SDNY (“SDNY ‘576 matter”).


The SDNY ‘576 matter is proceeding with preliminary matters and although neither a discovery schedule nor a fixed trial date has not been set, a trial is expected to be scheduled sometime in 2020.


On April 23, 2018, EMED filed a new civil case (the “fourth case”) against us in the United States District Court for the Eastern District of Texas asserting antitrust, defamation and unfair business practice claims, and seeking unspecified damages, similar to those previously presented in the California case, described above.  As the result of a hearing on November 14, 2018, on December 7, 2018 the Court entered an order transferring the fourth case to the United States District Court for the Eastern District of California (the “California Court”).  The fourth case is expected to be consolidated with the California case, or dismissed, as the California Court sees fit.


At the same hearing on November 14, 2018, the Texas Court granted EMED leave to amend its infringement contentions, following the IPR decision invalidating all but one claim of the ‘476 patent, in order to assert infringement of that sole remaining claim, namely dependent Claim 9.  The Texas Court’s order allowing EMED’s amendment of its infringement contentions against us was entered on December 7, 2018.


The ED Texas ‘476 matter is now proceeding under EMED’s amended infringement contention to incorporate the surviving dependent Claim 9, which incorporates Claims 1 and 8 of the ‘476 patent, meaning that, to prove infringement on the part of us, EMED must prove more elements of infringement than it originally charged against us.  The Texas Court has set a trial date of August 19, 2019 for the trial of the ED Texas ‘476 matter.


As is required by the respective Courts in both the SDNY ‘576 matter and the ED Texas ‘476 matter, the parties are engaging in settlement discussions and have conducted a court-sponsored mediation session, which did not result in settlement.


Although we believe RMS has meritorious claims and defenses in all of the above-described actions and proceedings, their outcomes cannot be predicted with any certainty. If any of these actions against us are successful, they could have a material adverse effect on our business, results of operations, financial condition and cash flows.


NOTE 5  STOCK-BASED COMPENSATION


On June 29, 2016, the Board of Directors amended the 2015 Stock Option Plan (the “Plan”)  authorizing the Company to grant awards to certain executives, key employees, and consultants under the Plan, which was approved by shareholders at the Annual Meeting held on September 6, 2016.  Currently, the total number of shares of Common Stock, with respect to which awards may be granted pursuant to the Plan, may not exceed 4,000,000.  On February 20, 2019, our Board of Directors approved an increase to the number of shares authorized under the Plan to 6,000,000, subject to shareholder approval at the 2019 Annual Meeting of Shareholders.


As of March 31, 2019, the Company had 3,469,000 options outstanding to certain executives, key employees and consultants under the Plan, of which 1,050,000 were issued during the three months ended March 31, 2019.


- 10 -



On February 20, 2019, the Board of Directors of the Company approved an increase in compensation for each non-employee director from $25,000 to $50,000 annually effective January 1, 2019 and an additional $10,000 annually for the chair of each Board committee effective February 20, 2019, in each case to be paid quarterly half in cash and half in common stock at the end of each fiscal quarter.


Pursuant to Daniel S. Goldberger’s employment agreement dated October 12, 2018, on February 1, 2019, when Donald B. Pettigrew was appointed to President and Chief Executive Officer, Mr. Goldberger was awarded a performance bonus in the amount of $270,000 to be paid half in cash and half in stock on April 1, 2019.  The number of shares to be issued is based upon the closing price of the Common Stock of the Company on February 1, 2019 as reported by the OTCQX.


The per share weighted average fair value of stock options granted during the three months ended March 31, 2019 and March 31, 2018 was $1.10 and zero, respectively.  The fair value of each award is estimated on the grant date using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in the three months ended March 31, 2019 and March 31, 2018. Historical information was the primary basis for the selection of the expected volatility, expected dividend yield and the expected lives of the options.  The risk-free interest rate was selected based upon yields of the U.S. Treasury issues with a term equal to the expected life of the option being valued.


 

 

March 31,

 

 

 

2019

 

2018

 

 

 

 

 

 

 

 

 

Dividend yield

 

 

0.00%

 

 

 

Expected Volatility

 

 

59.4-60.3%

 

 

 

Weighted-average volatility

 

 

 

 

 

Expected dividends

 

 

 

 

 

Expected term (in years)

 

 

10

 

 

 

Risk-free rate

 

 

2.64-2.72%

 

 

 



The following table summarizes the status of the Plan:


 

 

Three Months Ended March 31,

 

 

 

2019

 

2018

 

 

 

Shares

 

Weighted
Average
Exercise
Price

 

Shares

 

Weighted
Average
Exercise
Price

 

 

 

 

 

 

 

 

 

 

 

Outstanding at January 1

 

2,419,000

 

$

1.00

 

 

1,038,000

 

$

0.41

 

Granted

 

1,050,000

 

$

1.57

 

 

 

$

 

Exercised

 

 

$

 

 

 

$

 

Forfeited

 

 

$

 

 

 

$

 

Outstanding at March 31

 

3,469,000

 

$

1.17

 

 

1,038,000

 

$

0.41

 

Options exercisable at March 31

 

828,219

 

$

0.58

 

 

756,385

 

$

0.39

 

Weighted average fair value of options granted during the period

 

 

$

1.10

 

 

 

$

 

Stock-based compensation expense

 

 

 

$

121,875

 

 

 

 

$

12,183

 


Total stock-based compensation expense was $121,875 and $12,183 for the three months ended March 31, 2019 and March 31, 2018, respectively.


The weighted-average grant-date fair value of options granted during the three months ended March 31, 2019 and March 31, 2018, was $1.2 million and zero, respectively.  There were no options exercised during the three months ended March 31, 2019 and March 31, 2018.


- 11 -



The following table presents information pertaining to options outstanding at March 31, 2019:


Range of Exercise Price

 

Number
Outstanding

 

Weighted
Average
Remaining
Contractual
Life

 

Weighted
Average
Exercise
Price

 

Number
Exercisable

 

Weighted
Average
Exercise
Price

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$0.36-$1.57

 

3,469,000

 

5.5 years

 

$

1.17

 

828,219

 

$

0.58

 


As of March 31, 2019, there was $2.1 million 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 38 months. The total fair value of shares vested as of March 31, 2019 and March 31, 2018, was $293,373 and $156,425, respectively.


NOTE 6  DEBT OBLIGATIONS


On February 8, 2018, the Company executed a Promissory Note with KeyBank National Association (“KeyBank”) in the amount of $1.5 million as a variable rate revolving line of credit loan due on demand with an interest rate of LIBOR plus 2.25%, collateralized with a certificate of deposit in the amount of $1.5 million.  The Company entered into this arrangement to establish a credit lending history and, in the event needed, to have additional cash on hand for future expansion.  On September 25, 2018, KeyBank released the certificate of deposit as collateral for the loan and the Company executed a Commercial Security Agreement as collateral for the loan.  As of March 31, 2019, the Company has no outstanding amounts against the line of credit.


NOTE 7  LEASES


We have finance and operating leases for our corporate office and certain office and computer equipment.  Our leases have remaining lease terms of 1 to 3 years, some of which include options to extend the leases annually and some with options to terminate the leases within 1 year.


The components of lease expense were as follows:


 

 

Three Months Ended
March 31, 2019

 

 

 

 

 

 

Operating lease cost

 

$

35,829

 

 

 

 

 

 

Finance lease cost:

 

 

 

 

Amortization of right-of-use assets

 

$

1,060

 

Interest on lease liabilities

 

 

72

 

Total finance lease cost

 

$

1,132

 



Supplemental cash flow information related to leases was as follows:


 

 

Three Months Ended
March 31, 2019

 

 

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

Finance cash flows from finance leases

 

$

1,028

 

Finance lease cost:

 

 

 

 

Amortization of right-of-use assets

 

$

1,060

 

Interest on lease liabilities

 

 

72

 

Total finance lease cost

 

$

1,132

 


- 12 -



Supplemental balance sheet information related to leases was as follows:


 

 

Three Months Ended
March 31, 2019

 

Operating Leases

 

 

 

 

Operating lease right-of-use assets

 

$

472,224

 

 

 

 

 

 

Operating lease current liabilities

 

 

131,845

 

Operating lease long term liabilities

 

 

340,379

 

Total operating lease liabilities

 

$

472,224

 

 

 

 

 

 

Finance Leases

 

 

 

 

Property and equipment, at cost

 

$

6,363

 

Accumulated depreciation

 

 

1,060

 

Property and equipment, net

 

$

5,303

 

 

 

 

 

 

Finance lease current liabilities

 

 

4,241

 

Finance lease long term liabilities

 

 

1,094

 

Total finance lease liabilities

 

$

5,335

 



 

 

Three Months Ended
March 31, 2019

 

Weighted Average Remaining Lease Term

 

 

 

Operating leases

 

3 Years

 

Finance leases

 

1 Year

 

 

 

 

 

Weighted Average Discount Rate

 

 

 

Operating leases

 

4.75%

 

Finance leases

 

4.75%

 



Maturities of lease liabilities are as follows:


Year Ending December 31,

 

 

Operating Leases

 

 

Finance Leases

 

2019

 

$

113,764

 

$

3,300

 

2020

 

 

151,685

 

 

2,206

 

2021

 

 

149,476

 

 

 

2022

 

 

97,256

 

 

 

Total lease payments

 

 

512,181

 

 

5,506

 

Less imputed interest

 

 

(39,957

)

 

(171

)

Total

 

$

472,224

 

$

5,335

 


- 13 -



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, acceptance of and demand for new and existing products, ability to penetrate new markets, success in enforcing and obtaining patents, reimbursement related risks, government regulation of the home health care industry, success of the research and development effort, expanding the market of FREEDOM60® demand in the SCIg market, availability of sufficient capital if or when needed, dependence on key personnel and the outcome of 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.  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


We ended the first quarter of 2019 with record net sales results of $5.0 million, an increase of 23% compared with the same period last year, driven by needle sales and the fulfillment of open orders from December 31, 2018 totaling $0.2 million.  We believe the growth was a result of our national account focus, growth in diagnosis of primary immunodeficiency diseases (“PIDD”) and expansion into the neurology market with expanded Hizentra® indication for chronic inflammatory demyelinating polyneuropathy (“CIDP”).   Our gross margin percentage was the same for both periods.  We had a net loss for the period ended March 31, 2019, compared with net income for the previous year mostly due to increased legal fees for litigation activity and for the resale registration statement and previously announced executive management changes, higher salary and related expenses resulting from the executive management changes, as well as a performance bonus payment to our former interim Chief Executive Officer.


RESULTS OF OPERATIONS


Three months ended March 31, 2019 compared to March 31, 2018


Net Sales


The following table summarizes our net sales for the three months ended March 31, 2019 and 2018:


 

 

Three Months Ended March 31,

 

Change from Prior Year

 

% of Sales

 

 

 

2019

 

2018

 

$

 

%

 

2019

 

2018

 

Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

$

3,883,565

 

$

3,375,208

 

$

508,357

 

15.1%

 

78.1%

 

83.7%

 

International

 

 

1,090,713

 

 

658,016

 

 

432,697

 

65.8%

 

21.9%

 

16.3%

 

Total

 

$

4,974,278

 

$

4,033,224

 

$

941,054

 

23.3%

 

 

 

 

 


Total net sales increased $0.9 million or 23.3% for the three months ended March 31, 2019 compared with the same period last year. This growth was driven mostly by increased volume in needle sales and the fulfillment of open orders from December 31, 2018 totaling $0.2 million.  We believe the growth was a result of our national account focus, growth in the diagnosis of PIDD and expansion into the neurology market with expanded Hizentra® indication for CIDP.


- 14 -



Gross Profit


Our gross profit for the three months ended March 31, 2019 and 2018 is as follows:


 

 

Three Months Ended March 31,

 

Change from Prior Year

 

 

 

2019

 

2018

 

$

 

%

 

Gross Profit

 

$

3,047,954

 

$

2,465,824

 

$

582,130

 

23.6%

 

Stated as a Percentage of Net Sales

 

 

61.3%

 

 

61.1%

 

 

 

 

 

 


Gross profit increased $0.6 million or 23.6% in the three months ended March 31, 2019, compared to the same period in 2018. This increase in the quarter was mostly driven by the increase in net sales of $0.9 million.


Selling, general and administrative and Research and development


Our selling, general and administrative expenses and research and development costs for the three months ended March 31, 2019 and 2018 are as follows:


 

 

Three Months Ended March 31

 

Change from Prior Year

 

 

 

2019

 

2018

 

$

 

%

 

Selling, general and administrative

 

$

2,977,383

 

$

1,880,269

 

$

1,097,114

 

58.3%

 

Research and development

 

 

101,959

 

 

9,848

 

 

92,111

 

935.3%

 

 

 

$

3,079,342

 

$

1,890,117

 

$

1,189,225

 

62.9%

 

Stated as a Percentage of Net Sales

 

 

61.9%

 

 

46.9%

 

 

 

 

 

 


Selling, general and administrative expenses increased $1.1 million, or 58.3%, during the three months ended March 31, 2019 compared to the same period last year partially due to increased litigation activity including the engagement of new counsel and legal support for the filing of the resale registration statement and executive management changes matters totaling $0.5 million.  Executive salary and related benefits increased $0.5 million due to the addition of the Executive Chairman of the Board, our new President and Chief Executive Officer and other executive changes, including a performance bonus payment to our former interim Chief Executive Officer in the amount of $0.3 million.  We also added a Vice President of Medical Affairs to the team, adding $0.1 million year over year.  Higher investor relation expenses and director fees also contributed $0.1 million to the increase.  Offsetting these increases was attrition in regulatory salary and related benefit expense in the amount of $0.1 million.  


Research and development expenses increased $0.1 million during the three months ended March 31, 2019 compared with the same period last year due to increased headcount and expanded product development initiatives compared to last year.


Depreciation and amortization


Depreciation and amortization expense increased by 12.2 % to $83,651 in the three months ended March 31, 2019 compared with $74,578 in the three months ended March 31, 2018.  We continued to invest in capital assets, mostly related to computer equipment and leasehold improvements, and in patent applications and their maintenance.


Net Income


 

 

Three Months Ended March 31,

 

Change from Prior Year

 

 

 

2019

 

2018

 

$

 

%

 

Net Income

 

$

(85,390

)

$

403,427

 

$

(488,817

)

-121.2%

 

Stated as a Percentage of Net Sales

 

 

-1.7%

 

 

10.0%

 

 

 

 

 

 


Our net loss for the three months ended March 31, 2019 was $0.1 million compared to $0.4 million in net income for the three months ended March 31, 2018, driven by increased selling, general and administrative expenses, as described above.


LIQUIDITY AND CAPITAL RESOURCES


Our principal source of liquidity is our cash of $2.6 million as of March 31, 2019.  Additionally, we have a $1.5 million certificate of deposit that matures in May 2019 and a $1.5 million line of credit with no outstanding amounts against it.  Our principal source of operating cash inflows is from sales of our products to customers.  Our principal cash outflows relate to the purchase and production of inventory and related costs, selling, general and administrative expenses and professional fees.


- 15 -



We believe that as of March 31, 2019, cash on hand and cash expected to be generated from future operating activities will be sufficient to fund our operations, including further research and development and capital expenditures, for the next 12 months.  We believe RMS’s home infusion products continue to find a solid following in the subcutaneous immunoglobulin (“SCIg”) market, as well as, into new markets like neurology where Hizentra® received an expanded indication for CIDP.


We continue to be in litigation with a competitor, EMED Technologies Corp. (“EMED”) and have incurred a significant amount of legal fees in connection with that process.  Although the Company believes it has meritorious claims and defenses in the actions and proceedings, their outcomes cannot be predicted with any certainty. If any of these actions against the Company are successful, they could have a material adverse effect on the Company’s business, results of operations, financial condition and cash flows.


Cash Flows


The following table summarizes our cash flows:


 

 

Three Months Ended
March 31, 2019

 

Three Months Ended
March 31, 2018

 

Net cash used in operating activities

 

$

(1,045,233

)

$

(13,114

)

Net cash (used in)/ provided by investing activities

 

$

(96,833

)

$

71,733

 

Net cash used in financing activities

 

$

(3,848

)

$

 


Operating Activities


Net cash used in operating activities of $1.0 million for the three months ended March 31, 2019 was mostly attributable to increased accounts receivable of $1.2 million as one of our major customer’s payment terms changed on January 1, 2019 from net 30 to net 60 days and increased inventory of $0.4 million as we look to build stock to keep pace with sales growth.  Partially offsetting these was an increase in accounts payable of $0.5 million and non-cash charges for stock based compensation of $0.3 million.


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, 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.


Investing Activities


Net cash used in investing activities of $0.1 million for the three months ending March 31, 2019 was for capital expenditures for computer equipment and leasehold improvements, as well as continued investment in patents.  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.


Financing Activities


The $3,848 used in financing activities for the three months ended March 31, 2019 is related to payments for cancelled shares and leased office equipment.  There were no financing activities for the three months ended March 31, 2018.


RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS


In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13—Financial Instruments – Credit Losses (Topic 326); Measurement of Credit Losses on Financial Instruments, which amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities.  For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected.  For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down.  This ASU affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash.  The amendments in this update are effective for fiscal years beginning after December 15, 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.


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In August 2018, the FASB issued ASU No. 2018-13 Fair Value Measurement (Topic 820):  Disclosure Framework – Changes to the Disclosure for Fair Value Measurement.  The amendments in this ASU modify the disclosure requirements on fair value measurements in Topic 820 based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of this ASU. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date.  The Company is assessing the impact of the adoption of the ASU on its financial statements, disclosure requirements and methods of adoption.


In August 2018, the FASB issued ASU No. 2018-15 Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.  The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU.  The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption of the amendments in this ASU is permitted, including adoption in any interim period, for all entities.  The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.  The Company is assessing the impact of the adoption of the ASU on its financial statements, disclosure requirements and methods of adoption.


The Company considers the applicability and impact of all recently issued accounting pronouncements. Recent accounting pronouncements not specifically identified in our disclosures are either not applicable to the Company or are not expected to have a material effect on our financial condition or results of operations.


NON-GAAP FINANCIAL MEASURES


Management of the Company believes that investors’ understanding of the Company’s performance is enhanced by disclosing non-GAAP financial measures as a reasonable basis for comparison of the Company’s ongoing results of operations. These non-GAAP measures should not be considered a substitute for GAAP-basis measures and results. Our non-GAAP measures may not be comparable to non-GAAP measures of other companies. The table below provides a disclosure of these non-GAAP financial measures to the most closely analogous measure determined in accordance with GAAP.


Non-GAAP financial measures should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP.  They are limited in value because they exclude charges that have a material effect on our reported results and, therefore, should not be relied upon as the sole financial measures to evaluate our financial results.  The non-GAAP financial measures are meant to supplement, and to be viewed in conjunction with, GAAP financial results.


We disclose and discuss Adjusted EBITDA as a non-GAAP financial measure in our public releases, including quarterly earnings releases, and other filings with the Securities and Exchange Commission. We define Adjusted EBITDA as earnings (net income) before interest, income taxes, depreciation and amortization, reorganization charges, litigation and stock compensation expenses. We believe that Adjusted EBITDA is used by investors and other users of our financial statements as a supplemental financial measure that, when viewed with our GAAP results and the accompanying reconciliation, we believe provides additional information that is useful to gain an understanding of the factors and trends affecting our business. We also believe the disclosure of Adjusted EBITDA helps investors meaningfully evaluate and compare our cash flow generating capacity from quarter to quarter and year to year. Adjusted EBITDA is used by management as a supplemental internal measure for planning and forecasting overall expectations and for evaluating actual results against such expectations. Because management uses Adjusted EBITDA for such purposes, the Company uses Adjusted EBITDA as a significant criterion for determining the amount of annual cash incentive compensation paid to our executive officers and employees. We have historically found that Adjusted EBITDA is superior to other metrics for our company-wide cash incentive program, as it is more easily explained and understood by our typical employee.


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.


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A reconciliation of our non-GAAP measures is below:


 

 

Three Months Ended

 

Reconciliation of GAAP Net (Loss)/Income

 

March 31,

 

to Non-GAAP Adjusted EBITDA:

 

2019

 

2018

 

GAAP Net (Loss)/Income

 

$

(85,390

)

$

403,427

 

Tax (Benefit)/Expense

 

 

(22,099

)

 

107,741

 

Depreciation/Amortization

 

 

83,651

 

 

74,578

 

Interest Income, Net

 

 

(17,480

)

 

(615

)

Reorganization Charges

 

 

354,926

 

 

72,551

 

Litigation

 

 

492,515

 

 

155,800

 

Stock Compensation Expense

 

 

121,875

 

 

27,183

 

Non-GAAP Adjusted EBITDA   

 

$

927,998

 

$

840,665

 



 

 

Three Months Ended

 

Reconciliation of GAAP Net (Loss)/Income

 

March 31,

 

To Non-GAAP Normalized Net Income:

 

2019

 

2018

 

GAAP Net (Loss)/Income

 

$

(85,390

)

$

403,427

 

Reorganization Charges

 

 

354,926

 

 

72,551

 

Litigation

 

 

492,515

 

 

155,800

 

Stock Compensation Expense

 

 

121,875

 

 

27,183

 

Tax (Expense) adjustment

 

 

(203,556

)

 

(53,662

)

Non-GAAP Normalized Net Income

 

$

680,370

 

$

605,299

 


Reorganization Charges.  We have excluded the effect of Reorganization Charges in calculating our non-GAAP Adjusted EBITDA and non-GAAP Normalized Net Income measures.  We incurred significant expenses in connection with the recent termination and replacement of C-suite executives and senior management which we would not otherwise incur in periods presented as part of our continuing operations.  Reorganization charges include costs related to the replacement of C-suite executives including a transition bonus and recruiting fees.


Litigation. We have excluded litigation expenses in calculating our non-GAAP Adjusted EBITDA and non-GAAP Normalized Net Income measures.  We continue to evaluate our business performance excluding litigation fees and we expect them to continue and/or increase in future periods.


Stock Compensation Expense.  We have excluded the effect of stock-based compensation expenses in calculating our non-GAAP Adjusted EBITDA and non-GAAP Normalized Net Income measures. Although stock based compensation is a key incentive offered to our employees, we continue to evaluate our business performance excluding stock-based compensation expenses. We record non-cash compensation expense related to grants of options and depending upon the size, timing and the terms of the grants, the non-cash compensation expense may vary significantly but will recur in future periods.


PART I – 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, has evaluated the effectiveness of the Company’s disclosure controls and procedures as such is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Based upon their evaluations, the Principal Executive Officer and Principal Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) is accumulated and communicated to the Company’s management, including its Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.


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There have been no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2019, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


PART II – OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS


We are involved in several lawsuits with our principal competitor, EMED Technologies Corporation (“EMED”).  EMED has alleged that our needle sets infringe various patents controlled by EMED.  Certain of these lawsuits also allege antitrust violations, unfair business practices, and various other claims.  We are vigorously defending against all of the lawsuits brought by EMED. Although no assurances can be given, we believe we have meritorious defenses to all of EMED’s claims.


The initial case involving EMED was filed by us in the United States District Court for the Eastern District of California on September 20, 2013 (the “California case”), in response to a letter from EMED claiming patent infringement by us, and seeking a declaratory judgment establishing the invalidity of the patent referenced in the letter – EMED’s US patent 8,500,703 – “‘703.”  EMED answered the complaint and asserted patent infringement of the ‘703 patent and several counterclaims relating generally to claims of unfair business practices against us. We responded by adding several claims against EMED, generally relating to claims of unfair business practices on EMED’s part.  Both parties have requested injunctive relief and monetary damages in unspecified amounts.


On September 11, 2015, we requested an ex parte reexamination of the ‘703 patent by the US Patent and Trademark Office (“USPTO”). The ex parte reexamination resulted in a Final Office Action dated July 19, 2017 rejecting all of EMED’s claims in the patent.  On January 25, 2018 EMED filed an Appeal Brief with a Petition for Revival, which was accepted.  On April 9, 2018, the USPTO denied EMED’s request for reconsideration of the order rejecting all claims in the ‘703 patent.  Both the California case and EMED’s appeal of the USPTO rejections are pending.


The second court case was filed by EMED in the United States District Court for the Eastern District of Texas on June 25, 2015, claiming patent infringement on another of its patents (US 8,961,476 – “‘476”), by our needle sets, and seeking unspecified monetary damages (“ED Texas ‘476 matter”). This ‘476 patent is related to the now rejected EMED ‘703 patent.


On September 17, 2015, we requested an inter partes review (“IPR”) of the ‘476 patent, and in response to our request, the Court entered an order staying the ED Texas ‘476 matter until after the Patent Trial and Appeal Board (“PTAB”) of the USPTO made a decision regarding the validity of the patent.  On January 12, 2017, the PTAB issued its Final Written Decision in our favor, invalidating all but one (“dependent Claim 9”) of the claims in the ‘476 patent.   EMED appealed the PTAB’s ruling to the United States Court of Appeals for the Federal Circuit, which affirmed the PTAB’s Final Written Decision in our favor on April 3, 2018.  On April 18, 2018, EMED filed a petition for en banc rehearing, which was denied.  On August 16, 2018, EMED petitioned the United States Supreme Court for a Writ of Certiorari to review the Federal Circuit’s upholding the PTAB’s Final Written Decision.  On October 29, 2018 the United States Supreme Court denied EMED’s Petition for a Writ of Certiorari, thus finally affirming the PTAB’s invalidation of ‘476, save for one dependent claim.


Following the PTAB’s Final Written Decision in the IPR regarding the ‘476 patent, EMED filed a new patent application claiming priority back to the application that issued as ‘703, which is the patent at issue in the California case.  Submitted for accelerated examination, this new application issued as US 9,808,576 – “‘576” on November 7, 2017.  On this same date, EMED filed a new case (the “third case”) in the United States District Court for the Eastern District of Texas claiming patent infringement of ‘576, also directed to our needle sets, and seeking unspecified damages and a preliminary injunction against our marketing of its needle sets.  We filed a Motion to Dismiss or Transfer Venue to the United States District Court for the Southern District of New York (“SDNY”), which has resulted in the transfer of the third case to SDNY (“SDNY ‘576 matter”).


The SDNY ‘576 matter is proceeding with preliminary matters and although neither a discovery schedule nor a fixed trial date has not been set, a trial is expected to be scheduled sometime in 2020.


On April 23, 2018, EMED filed a new civil case (the “fourth case”) against us in the United States District Court for the Eastern District of Texas asserting antitrust, defamation and unfair business practice claims, and seeking unspecified damages, similar to those previously presented in the California case, described above.  As the result of a hearing on November 14, 2018, on December 7, 2018 the Court entered an order transferring the fourth case to the United States District Court for the Eastern District of California (the “California Court”).  The fourth case is expected to be consolidated with the California case, or dismissed, as the California Court sees fit.


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At the same hearing on November 14, 2018, the Texas Court granted EMED leave to amend its infringement contentions, following the IPR decision invalidating all but one claim of the ‘476 patent, in order to assert infringement of that sole remaining claim, namely dependent Claim 9.  The Texas Court’s order allowing EMED’s amendment of its infringement contentions against us was entered on December 7, 2018.


The ED Texas ‘476 matter is now proceeding under EMED’s amended infringement contention to incorporate the surviving dependent Claim 9, which incorporates Claims 1 and 8 of the ‘476 patent, meaning that, to prove infringement on the part of us, EMED must prove more elements of infringement than it originally charged against us.  The Texas Court has set a trial date of August 19, 2019 for the trial of the ED Texas ‘476 matter.


As is required by the respective Courts in both the SDNY ‘576 matter and the ED Texas ‘476 matter, the parties are engaging in settlement discussions and have conducted a court-sponsored mediation session, which did not result in settlement.


Although we believe RMS has meritorious claims and defenses in all of the above-described actions and proceedings, their outcomes cannot be predicted with any certainty. If any of these actions against us are successful, they could have a material adverse effect on our business, results of operations, financial condition and cash flows.


ITEM 1A.  RISK FACTORS


Our operations and financial results are subject to various risks and uncertainties, including those described in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common and capital stock. There have been no material changes to our risk factors since our Annual Report on Form 10-K for the year ended December 31, 2018.


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.  On February 20, 2019, the Board of Directors of the Company approved an increase in compensation for each non-employee director from $25,000 to $50,000 annually effective January 1, 2019, and an additional $10,000 annually for the chair of each Board committee effective February 20, 2019, in each case to be paid quarterly half in cash and half in common stock at the end of each fiscal quarter.  The Company issued 25,782 and 25,962 shares of common stock to its non-employee directors during the three month period ended March 31, 2019 and March 31, 2018, respectively.


Pursuant to Daniel S. Goldberger’s employment agreement dated October 12, 2018, on February 1, 2019, when Donald B. Pettigrew was appointed to President and Chief Executive Officer, Mr. Goldberger was awarded a performance bonus in the amount of $270,000 to be paid half in cash and half in stock on April 1, 2019.  The number of shares issued was 90,604 based upon the closing price of the Common Stock of the Company on February 1, 2019 as reported by the OTCQX.


On June 29, 2016, the Board of Directors amended the 2015 Stock Option Plan authorizing the Company to grant awards to certain employees under the plan, which was approved by shareholders at the Annual Meeting held on September 6, 2016.  The total number of shares of Common Stock, with respect to which awards may be granted pursuant to the Plan, shall not exceed 4,000,000 shares.  On February 20, 2019, our Board of Directors approved an increase to the number of shares authorized under the plan to 6,000,000, subject to stockholder approval at the 2019 Annual Meeting of Stockholders.  As of March 31, 2019, the Company had 3,469,000 options outstanding to certain executives, key employees and consultants under the plan, of which 1,050,000 were issued during the three months ended March 31, 2019.


All of the securities issued by the Company as described in this Item were issued in reliance on the exemption from registration under Section 4(2) under the Securities Act of 1933, as amended.


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PART II – ITEM 6.  EXHIBITS.


4.1

Form of Incentive Stock Option Award Agreement pursuant to the Company’s 2015 Stock Option Plan, as amended.

 

 

31.1

Certification of Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act 2002

 

 

31.2

Certification of Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act 2002

 

 

32.1

Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act 2002

 

 

32.2

Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act 2002

 

 

101*

Interactive Data Files of Financial Statements and Notes.


* In accordance with Regulation S-T, the Interactive Data Files in Exhibit 101 to the Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed”.


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SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



 

REPRO MED SYSTEMS, INC.

 

 

May 7, 2019

/s/ Donald B. Pettigrew

 

Donald B. Pettigrew, President and Chief Executive Officer

 

 

May 7, 2019

/s/ Karen Fisher

 

Karen Fisher, Chief Financial Officer and Treasurer


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