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 September 30, 2020
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)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
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
KRMD
The Nasdaq Stock Market
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 such files). [X] Yes [ ] 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 [X]
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
As of November 12, 2020, 43,942,888 shares of common stock, $0.01 par value per share, were outstanding, which excludes 2,737,231 shares of treasury stock.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1.
Financial Statements (Unaudited)
Balance Sheets as of September 30, 2020 and December 31, 2019
3
Statements of Operations for the three and nine months ended September 30, 2020 and 2019
4
Statements of Cash Flows for the nine months ended September 30, 2020 and 2019
5
Statements of Stockholders’ Equity for the three and nine months ended September 30, 2020 and 2019
6-7
Notes to Financial Statements
8
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
18
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
24
ITEM 4.
Controls and Procedures
PART II. OTHER INFORMATION
Legal Proceedings
25
ITEM 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
26
ITEM 6.
Exhibits
Signatures
27
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
BALANCE SHEETS
(Unaudited)
September 30,
December 31,
2020
2019
ASSETS
CURRENT ASSETS
Cash and cash equivalents
$
32,433,811
5,870,929
Accounts receivable less allowance for doubtful accounts of $24,676 and $32,645 at September 30, 2020 and December 31, 2019, respectively
3,736,596
3,234,521
Inventory
5,633,139
2,388,477
Prepaid expenses
844,496
387,396
TOTAL CURRENT ASSETS
42,648,042
11,881,323
Property and equipment, net
1,260,675
611,846
Patents, net of accumulated amortization of $335,686 and $288,967 at September 30, 2020 and December 31, 2019, respectively
884,635
807,135
Right of use assets, net
271,679
373,734
Deferred tax asset
349,609
188,241
Other assets
19,812
19,582
TOTAL ASSETS
45,434,452
13,881,861
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable
1,363,070
572,656
Accrued expenses
3,051,582
1,296,612
Accrued payroll and related taxes
440,144
190,265
Accrued tax liability
363,158
204,572
Finance lease liability – current
3,026
5,296
Operating lease liability – current
140,450
136,888
TOTAL CURRENT LIABILITIES
5,361,430
2,406,289
Finance lease liability, net of current portion
414
2,646
Operating lease liability, net of current portion
131,229
236,846
TOTAL LIABILITIES
5,493,073
2,645,781
Commitments and contingencies (Refer to Note 3)
STOCKHOLDERS’ EQUITY
Common stock, $0.01 par value; 75,000,000 shares authorized, 46,671,807 and 42,239,788 shares issued, 43,934,576 and 39,502,557 shares outstanding at September 30, 2020 and December 31, 2019, respectively
466,718
422,398
Additional paid-in capital
35,331,483
6,293,069
Treasury stock, 2,737,231 shares at September 30, 2020 and December 31, 2019, respectively, at cost
(344,204
)
Retained earnings
4,487,382
4,864,817
TOTAL STOCKHOLDERS’ EQUITY
39,941,379
11,236,080
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
See accompanying Notes to Financial Statements.
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STATEMENTS OF OPERATIONS
Three Months Ended
Nine Months Ended
NET SALES
6,080,315
6,617,397
20,119,228
16,940,487
Cost of goods sold
2,139,592
2,234,489
7,480,415
6,033,961
Gross Profit
3,940,723
4,382,908
12,638,813
10,906,526
OPERATING EXPENSES
Selling, general and administrative
3,075,169
2,441,381
9,039,980
6,976,684
Litigation
675
864,009
2,446,747
2,481,471
Research and development
390,416
170,260
944,637
450,454
Depreciation and amortization
115,637
82,774
297,801
252,594
Total Operating Expenses
3,581,897
3,558,424
12,729,165
10,161,203
Net Operating Profit/(Loss)
358,826
824,484
(90,352
745,323
Non-Operating Income/(Expense)
Gain/(Loss) on currency exchange
1,927
(9,358
(11,164
(20,283
Gain on disposal of fixed assets, net
22,113
—
16,591
49,740
Interest income, net
9,662
23,368
23,690
59,091
TOTAL OTHER INCOME/(EXPENSE)
33,702
14,010
29,117
88,548
INCOME/(LOSS) BEFORE INCOME TAXES
392,528
838,494
(61,235
833,871
Income Tax Expense
(143,353
(186,681
(316,200
(189,265
NET INCOME/(LOSS)
249,175
651,813
(377,435
644,606
NET INCOME/(LOSS) PER SHARE
Basic
0.01
0.02
(0.01
Diluted
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
43,914,542
39,022,298
41,326,815
38,534,021
44,119,511
39,298,408
38,734,083
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STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Net (Loss)/Income
Adjustments to reconcile net (loss)/income to net cash provided by/(used in) operating activities:
Stock-based compensation expense
1,191,146
897,300
Stock-based litigation settlement expense
1,285,102
Deferred capital gain - building lease
(3,763
Deferred taxes
(161,368
134,563
Gain on disposal of fixed assets
(16,591
(49,740
Changes in operating assets and liabilities:
Increase in accounts receivable
(502,075
(2,120,780
Increase in inventory
(3,244,662
(634,803
Increase in prepaid expenses and other assets
(457,330
(206,560
Increase in accounts payable
790,414
421,479
Increase/(Decrease) in accrued payroll and related taxes
249,879
(310,355
Increase in accrued expenses
1,754,970
490,053
Increase/(Decrease) in accrued tax liability
158,586
(16,608
NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES
968,437
(502,014
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment
(908,323
(158,193
Purchases of patents
(124,216
(188,274
Proceeds from disposal of property and equipment
25,000
217,821
Proceeds from certificate of deposit
1,517,927
NET CASH (USED IN)/PROVIDED BY INVESTING ACTIVITIES
(1,007,539
1,389,281
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of equity
26,606,486
508,900
Payments for cancelled shares
(2,820
Borrowings from indebtedness
4,976,508
Payments on indebtedness
(4,976,508
Payments on finance lease liability
(4,502
(3,122
NET CASH PROVIDED BY FINANCING ACTIVITIES
26,601,984
502,958
NET INCREASE IN CASH AND CASH EQUIVALENTS
26,562,882
1,390,225
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
3,738,803
CASH AND CASH EQUIVALENTS, END OF PERIOD
5,129,028
Supplemental Information
Cash paid during the periods for:
Interest
27,698
280
Income taxes
318,983
103,465
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STATEMENTS OF STOCKHOLDERS’ EQUITY
Additional
Total
Common Stock
Paid-in
Retained
Treasury
Stockholders’
Shares
Amount
Capital
Earnings
Stock
Equity
Three and Nine Months Ended September 30, 2020
BALANCE, DECEMBER 31, 2019
42,239,788
Issuance of stock-based compensation
9,189
92
59,910
60,002
Compensation expense related to stock options
300,966
Cancellation of common stock
Issuance upon options exercised
175,000
1,750
83,750
85,500
Net income
449,428
BALANCE, MARCH 31, 2020
42,423,977
424,240
6,737,695
5,314,245
12,131,976
7,999
80
59,922
363,851
Litigation settlement options
347,008
Litigation settlement share issuance
95,238
952
937,142
938,094
519,156
5,192
5,189
10,381
Capital raise
3,593,750
35,937
26,436,043
26,471,980
Net loss
(1,076,038
BALANCE, JUNE 30, 2020
46,640,120
466,401
34,886,850
4,238,207
39,247,254
6,681
67
59,935
346,323
25,006
250
(250
38,625
BALANCE, SEPTEMBER 30, 2020
46,671,807
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Three and Nine Months Ended September 30, 2019
BALANCE, DECEMBER 31, 2018
40,932,911
409,329
4,595,214
4,300,468
8,960,807
8,914
89
176,161
176,250
121,875
Repurchase of shares
(2,000
(20
(2,800
(85,390
BALANCE, MARCH 31, 2019
40,939,825
409,398
4,890,450
4,215,078
9,170,722
116,386
1,164
35,484
36,648
194,765
65,000
650
24,050
24,700
78,183
BALANCE, JUNE 30, 2019
41,121,211
411,212
5,144,749
4,293,261
9,505,018
12,447
124
43,502
43,626
324,135
Issuance upon warrants exercised
1,000,000
10,000
440,000
450,000
95,000
950
33,250
34,200
BALANCE, SEPTEMBER 30, 2019
42,228,658
422,286
5,985,636
4,945,074
11,008,792
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NOTES TO FINANCIAL STATEMENTS
NOTE 1 — NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
REPRO MED SYSTEMS, INC. (the “Company,” “KORU Medical,” “we,” “us” or “our”) 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.
BASIS OF PRESENTATION
The accompanying financial statements should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2019 (“Annual Report”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with United States generally accepted accounting principles (“GAAP”) have been condensed or omitted from the accompanying financial statements. The accompanying year-end balance sheet was derived from the audited financial statements included in the Annual Report. The accompanying interim financial statements are unaudited and reflect all adjustments which are in the opinion of management necessary for a fair statement of the Company’s financial position, results of operations, and cash flows for the periods presented. All such adjustments are of a normal, recurring nature. The Company’s results of operations and cash flows for the interim periods are not necessarily indicative of the results of operations and cash flows that it may achieve in future periods.
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.
CERTIFICATE OF DEPOSIT
The certificate of deposit was recorded at cost plus accrued interest. The certificate of deposit earned interest at a rate of 1.73% and matured in May 2019.
INVENTORY
Inventories of raw materials are stated at the lower of standard cost, which approximates average cost, or market value including allocable overhead. Work-in-process and finished goods are stated at the lower of standard cost or market value and include direct labor and allocable overhead.
PATENTS
Costs incurred in obtaining patents have been capitalized and are being amortized over the legal life of the patents.
INCOME TAXES
Deferred income taxes are provided using the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences.
The Company believes that it has no uncertain tax positions requiring disclosure or adjustment. Generally, tax years starting with 2017 are subject to examination by income tax authorities.
PROPERTY, EQUIPMENT, AND DEPRECIATION
Property and equipment is stated at cost and is depreciated using the straight-line method over the estimated useful lives of the respective assets.
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STOCK-BASED COMPENSATION
The Company maintains a stock option plan under which it grants stock options 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 for director fees are recorded at the fair value of the shares at the grant date.
NET INCOME PER COMMON SHARE
Basic earnings per share are computed on the weighted average of common shares outstanding during each year. Diluted earnings per share include only an increase in the weighted average shares by the common shares issuable upon exercise of employee and consultant stock options. See “NOTE 4 — STOCK-BASED COMPENSATION” for further detail.
September 30, 2020
September 30, 2019
Weighted Average Outstanding Shares:
Outstanding shares
Option shares includable
204,969
276,110
Net income per share
Net (loss)/income
(a)
200,062
__________
(a) Option shares of 203,121 were not included as the impact is anti-dilutive.
USE OF ESTIMATES IN THE FINANCIAL STATEMENTS
The preparation of financial statements in conformity with 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 valuation, 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.
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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 growth rebates are variable consideration and are recorded as a reduction of revenue in the same period the related sales are recorded or when it is 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.
The following table summarizes net sales by geography for the three and nine months ended September 30, 2020 and 2019:
Three Months Ended September 30,
Nine Months Ended September 30,
Sales
Domestic
5,372,536
5,856,203
17,459,212
14,308,994
International
707,779
761,194
2,660,016
2,631,493
LEASES
In February 2016, the FASB issued a 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 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 on January 1, 2019. The standard had a material impact on our balance sheets but did not have a material impact on our statements of operations. See “NOTE 6 — LEASES” for further detail.
ACCOUNTING PRONOUNCEMENTS RECENTLY ADOPTED
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 adopted this standard on January 1, 2020 and it had no impact on our financial statement disclosures.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption of the amendments in this ASU is permitted, including adoption in any interim period, for all entities. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company adopted this new accounting guidance on January 1, 2020, on a prospective basis. The implementation of this standard did not have a material impact on the Company’s operating results, cash flows, financial condition or related disclosures.
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ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
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, 2022, including interim periods within those fiscal years. The Company is assessing the impact of the adoption of the ASU on its financial statements, disclosure requirements and methods of adoption.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing several exceptions including the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company is assessing the impact of the adoption of the ASU on its financial statements, disclosure requirements and methods of adoption.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform, which provided elective amendments for entities that have contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments may be applied to impacted contracts and hedges prospectively through December 31, 2022. The Company is currently evaluating the impact this guidance will have on its financial statements.
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 MEASUREMENTS
Fair value is the exit price that would be received to sell an asset or paid to transfer a liability. Fair value is a market-based measurement that should be determined using assumptions that market participants would use in pricing an asset or liability. Valuation techniques used to measure fair value should maximize the use of observable inputs and minimize the use of unobservable inputs. To measure fair value, the Company uses the following fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable:
•
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data by correlation or other means.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Value is determined using pricing models, discounted cash flow methodologies, or similar techniques and includes instruments for which the determination of fair value requires significant judgment or estimation.
The carrying amounts of cash and cash equivalents, accounts receivable, prepaid expenses, accounts payable and accrued expenses are considered to be representative of their fair values because of the short-term nature of those instruments. There were no transfers between levels in the fair value hierarchy during the nine months ended September 30, 2020.
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IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than the carrying amount. The impairment loss, if recognized, would be based on the excess of the carrying value of the impaired asset over its respective fair value. No impairment losses have been recorded through September 30, 2020.
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 — PROPERTY AND EQUIPMENT
Property and equipment consists of the following at:
December 31, 2019
Furniture, office equipment, and leasehold improvements
1,291,985
1,135,107
Manufacturing equipment and tooling
1,856,881
1,295,978
Total property and equipment
3,148,866
2,431,085
Less: accumulated depreciation
(1,888,191
(1,819,239
Depreciation expense was $99,071 and $69,740 for the three months ended September 30, 2020 and 2019, respectively, and $251,084 and $218,328 for the nine months ended September 30, 2020 and 2019, respectively.
NOTE 3 — COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
The Company has been and may again become involved in legal proceedings, claims and litigation arising in the ordinary course of business. Except as described below, KORU Medical is not presently a party to any litigation or other legal proceeding that is believed to be material to its financial condition.
Refer to Form 10-Q for the quarterly period ended June 30, 2020 regarding the dismissed case with our principal competitor, EMED Technologies Corporation (“EMED”).
NOTE 4 — STOCK-BASED COMPENSATION
On June 29, 2016, the Board of Directors amended the Company’s 2015 Stock Option Plan (as amended, the “Plan”) authorizing the Company to grant awards to certain executives, key employees, and consultants under the Plan, which was approved by shareholders at the Annual Meeting of Shareholders held on September 6, 2016. The total number of shares of Common Stock, with respect to which awards may be granted pursuant to the Plan, may not exceed 6,000,000 pursuant to an amendment to the Plan approved by shareholders on April 23, 2019, at the 2019 Annual Meeting of Shareholders.
On May 20, 2020, the Company entered into a Settlement Agreement related to its litigation with EMED as described above in “NOTE 3 — COMMITMENTS AND CONTINGENCIES.” Pursuant to the Settlement Agreement, the Company issued to EMED (i) 95,238 restricted stock units, which vested on May 21, 2020 and 95,238 restricted stock units vesting on January 1, 2021, and (ii) an option to purchase up to 400,000 shares of the Company’s common stock at an exercise price of $11.21 per share prior to February 1, 2021, which can be settled in cash in lieu of common stock at the Company’s sole discretion, provided that the number of shares of common stock and/or amount of cash paid by the Company upon exercise will be capped at a value of $16.21 per share. The option was recorded at $347,008, the estimated fair value of the option using the Black-Scholes option pricing model with a volatility rate of 52.68% and a risk-free rate of 0.17%. The Settlement Agreement includes mutual releases and covenants not to sue for any claim arising before May 20, 2020 and the Company covenants not to challenge any EMED patents that were the subject of the Claims unless EMED asserts them in the future against Company products. This was a non-cash settlement from which we recognized expense in the amount of $2.2 million in the second quarter of 2020.
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On February 20, 2019, the Board of Directors of the Company approved an increase in compensation for each non-employee director from $25,000 to $50,000 annually effective January 1, 2019, and an additional $10,000 annually for the chair of each Board committee effective February 20, 2019, in each case to be paid quarterly half in cash and half in common stock at the end of each fiscal quarter. On September 30, 2019, the Board of Directors of the Company named R. John Fletcher, a current KORU Medical director, as Chairman, replacing Executive Chairman, Daniel S. Goldberger, who remains a non-executive member of KORU Medical’s Board of Directors. In Mr. Fletcher’s role as Chairman, he receives an additional $50,000 in annual compensation, to be paid quarterly in shares of KORU Medical common stock based on the closing price of the stock on the last day of each quarter.
Pursuant to Daniel S. Goldberger’s employment agreement dated October 12, 2018, on February 1, 2019, when Donald B. Pettigrew was appointed to President and Chief Executive Officer, Mr. Goldberger was awarded a performance bonus in the amount of $270,000 to be paid half in cash and half in stock. The number of shares that were issued totaled 90,604 and was based upon the closing price of the Common Stock of the Company on February 1, 2019, as reported by the OTCQX. These shares were issued on April 3, 2019.
2015 STOCK OPTION PLAN, as amended
Time Based Stock Options
The per share weighted average fair value of stock options granted during the nine months ended September 30, 2020 and September 30, 2019 was $6.53 and $1.33, 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 nine months ended September 30, 2020 and September 30, 2019. 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.
Dividend yield
0.00%
Expected Volatility
62.11 – 62.18%
56.10 – 60.70%
Weighted-average volatility
Expected dividends
Expected term (in years)
10 Years
Risk-free rate
0.63 – 0.64%
1.60 – 2.72%
The following table summarizes the status of the Plan with respect to time based stock options:
WeightedAverageExercisePrice
Outstanding at January 1
3,647,000
1.32
2,419,000
1.00
Granted
360,000
9.54
1,650,000
1.92
Exercised
747,006
0.65
160,000
0.37
Forfeited
200,000
2.09
12,000
0.87
Outstanding at September 30
3,059,994
2.40
3,897,000
1.41
Options exercisable at September 30
1,009,629
1.36
1,037,885
0.81
Weighted average fair value of options granted during the period
6.53
1.33
572,775
473,139
Total stock-based compensation expense totaled $572,775 and $473,139 for the nine months ended September 30, 2020 and 2019, respectively. Cash received from option exercises for the nine months ended September 30, 2020 and 2019 was $95,880 and $58,900, respectively.
The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2020 and 2019 was $6.53 and $1.33, respectively. The total intrinsic value of options exercised during the nine months ended September 30, 2020 and 2019 was $296,226 and $30,022, respectively.
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The following table presents information pertaining to options outstanding at September 30, 2020:
Range of Exercise Price
NumberOutstanding
WeightedAverageRemainingContractualLife
NumberExercisable
$0.50 – 9.76
7.5 years
As of September 30, 2020, there was $3,679,084 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 48 months. The total fair value of shares vested as of September 30, 2020 and 2019, was $874,041 and $506,729, respectively.
Performance Based Stock Options
The per share weighted average fair value of stock options granted during the nine months ended September 30, 2020 and 2019 was zero and $1.16, 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 nine months ended September 30, 2020 and September 30, 2019. 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.
58.90%
2.07%
The following table summarizes the status of the Plan with respect to performance based stock options:
1.70
333,333
1.16
438,365
167,636
Total performance stock-based compensation expense totaled $438,365 and $167,636 for the nine months ended September 30, 2020 and 2019, respectively.
The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2020 and 2019, was zero and $1.16, respectively.
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The following table presents information pertaining to performance based options outstanding at September 30, 2020.
$1.70
8.7 years
As of September 30, 2020, there was $430,833 of total unrecognized compensation cost related to non-vested performance share option based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 31 months. The total fair value of shares vested as of September 30, 2020 and 2019 was $387,520 and zero, respectively.
NOTE 5 — DEBT OBLIGATIONS
On February 8, 2018, the Company issued a promissory note (the “Original Note”) to KeyBank National Association (“KeyBank”) in the amount of $1.5 million as a variable rate revolving line of credit loan due on demand with an interest rate of LIBOR plus 2.25%, collateralized with a certificate of deposit in the amount of $1.5 million. 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.
On April 14, 2020, the Company issued a promissory note to KeyBank in the aggregate principal amount of $3.5 million (the “Note”) as an extension of its line of credit, replacing its current line of credit agreement and Original Note. The Company drew on the additional $2.0 million on April 23, 2020. The Original Note was in the form of a variable rate revolving line of credit with an interest rate of LIBOR plus 2.25%. The $3.5 million Note is in the form of a variable rate non-disclosable revolving line of credit with an interest rate of Prime Rate announced by the Bank minus 0.75%. Interest is due monthly, and all principal and unpaid interest is due on June 1, 2021. The $3.5 million Note may be prepaid at any time prior to maturity with no prepayment penalties. The $3.5 million Note contains events of default and other provisions customary for a loan of this type.
In connection with the Note, the Company entered into a Commercial Security Agreement with the Bank dated April 14, 2020 (the “Security Agreement”), pursuant to which the Company granted a security interest in substantially all assets of the Company to secure the obligations of the Company under the Note. The Security Agreement contains terms and conditions typical for the granting of security interests of this kind.
The Company had no amount outstanding against the line of credit as of September 30, 2020.
On April 20, 2020, the Company entered into a Loan Agreement with the Bank (the “PPP Loan Agreement”) pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), providing for a loan in the principal amount of $1,476,508 (the “PPP Loan”). The PPP Loan was funded on April 27, 2020. On May 13, 2020, the Company returned the funds it received.
On April 27, 2020, the Company entered into a Progress Payment Loan and Security Agreement (“PPLSA”) and a Master Security Agreement (the “MSA”), each dated as of April 20, 2020, with Key Equipment Finance, a division of the Bank (“KEF”), to provide up to $2.5 million in financing for equipment purchases from third party vendors. The PPLSA allows the Company to make draws with KEF to make certain payments to the equipment suppliers prior to the commencement of periodic payments under a term loan. Each draw under the PPLSA will bear interest at a variable rate equal to the then-current Prime Rate and will be secured by the financed equipment under the MSA. At the end of each calendar quarter or year, the advances made under the PPLSA will be converted to term loans, subject to KEF’s approval of the equipment and certain other closing conditions being met. Once the draws under the PPLSA are converted into a term loan, each promissory note will bear interest at a fixed rate of 4.07% per annum, subject to adjustment based on KEF’s cost of funds, with principal and interest payable in 84 equal consecutive monthly installments. Each fixed rate installment promissory note may be prepaid, subject to a penalty if prepaid before the fifth anniversary of its issuance. As of September 30, 2020, the Company had no amount outstanding against the PPLSA.
NOTE 6 — LEASES
We have finance and operating leases for our corporate office and certain office and computer equipment. Our leases have remaining lease terms of 1 to 3 years, some of which include options to extend the leases annually and some with options to terminate the leases within 1 year.
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The components of lease expense were as follows:
Operating lease cost
37,921
37,922
113,764
111,672
Short-term lease cost
19,846
5,535
33,535
18,196
Total lease cost
57,767
43,457
147,299
129,868
Finance lease cost:
Amortization of right-of-use assets
791
1,061
4,502
3,182
Interest on lease liabilities
47
199
178
Total finance lease cost
838
1,108
4,701
3,360
Supplemental cash flow information related to leases was as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Financing cash flows from finance leases
3,122
Supplemental balance sheet information related to leases was as follows:
September 30,2020
December 31,2019
Operating Leases
Operating lease right-of-use assets
Operating lease current liabilities
Operating lease long term liabilities
Total operating lease liabilities
Finance Leases
Property and equipment, at cost
12,725
Accumulated depreciation
(9,344
(4,837
3,381
7,888
Finance lease current liabilities
Finance lease long term liabilities
Total finance lease liabilities
3,440
7,942
Weighted Average Remaining Lease Term
Operating leases
1.6 Years
2.4 Years
Finance leases
1 Year
1.3 Years
Weighted Average Discount Rate
4.75%
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Maturities of lease liabilities are as follows:
Year Ending December 31,
2020 (excluding the nine months ended September 30, 2020)
832
2021
149,476
2,705
2022
97,256
2023
2024
2025
Thereafter
Total undiscounted lease payments
284,654
3,537
Less: imputed interest
(12,975
(97
Total lease liabilities
NOTE 7 — RELATED PARTY TRANSACTIONS
BUILDING LEASE
Mark Pastreich, a former director through April 2019, is a principal in the entity that owns the building leased by us for our corporate headquarters and manufacturing facility at 24 Carpenter Road, Chester, New York 10918. On February 28, 2019, we completed year twenty of a twenty-year lease with monthly lease payments of $11,042. On November 14, 2017, we executed a lease extension, which calls for six-month extensions beginning March 1, 2019 with the option to renew six times at a monthly lease amount of $12,088. The Company exercised four of the six additional renewal options for September 1, 2019 through August 31, 2021.
The lease payments were $36,264 for both three months ended September 30, 2020 and 2019, and $108,792 and $106,700 for the nine months ended September 30, 2020 and 2019, respectively. The Company also paid property taxes in the amount of $12,546 and $13,749 for three months ended September 30, 2020 and 2019, respectively and $39,205 and $39,165 for the nine months ended September 30, 2020 and 2019, respectively.
NOTE 8 — EQUITY
On June 18, 2020, the Company entered into a Purchase Agreement with Piper Sandler & Co. and Canaccord Genuity LLC, as representatives of the several underwriters named therein (the “Underwriters”), pursuant to which the Company agreed to issue and sell 3,125,000 shares of its common stock. Under the terms of the Purchase Agreement, the Company granted to the Underwriters an option, exercisable for a period of 30 days, to purchase up to an additional 468,750 shares of the Company’s common stock, which the Underwriters exercised in full on June 19, 2020. The Underwriters purchased the shares pursuant to the Purchase Agreement, including the shares subject to the option, at a price of $7.52 per share. Proceeds to the Company, net of discounts, commissions, fees and expenses, were $26.5 million.
NOTE 9 — SUBSEQUENT EVENT
On November 11, 2020, the Company entered into a Manufacturing and Supply Agreement with Command Medical Products, Inc. (“Command”), pursuant to which Command has agreed to manufacture and supply the Company’s subassemblies, needle sets and tubing products pursuant to the Company’s specifications and purchase orders. The first binding purchase order pursuant to the Manufacturing and Supply Agreement is expected to be made within the next ten days (the “Effective Date”).
The Manufacturing and Supply Agreement provides for a term of five years from the Effective Date. Either party may terminate the Manufacturing and Supply Agreement upon a material breach by the other Party that has not been cured within 90 days, upon the bankruptcy or insolvency of the other Party or as expressly set forth elsewhere in the Agreement. If the Company terminates the Manufacturing and Supply Agreement other than for those reasons within the first three years from the Effective Date, the Company is obligated to pay an early termination fee to Command.
The Manufacturing and Supply Agreement also includes customary provisions relating to, among other things, delivery, inspection procedures, warranties, quality management, business continuity plans, handling and transport, intellectual property, confidentiality and indemnification.
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PART I — ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains certain “forward-looking” statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) and information relating to us that are based on the beliefs of the management, as well as assumptions made and information currently available.
Our actual results may vary materially from the forward-looking statements made in this report due to important factors such as uncertainties associated with COVID-19, future operating results, 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 impact of recent accounting pronouncements. 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, the “Company,” “KORU Medical,” “we,” “us” or “our” refers to Repro Med Systems, Inc.
OVERVIEW
The Company 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 following discussion and analysis for the three and nine months ended September 30, 2020 should be read in conjunction with the financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited financial statements for the year ended December 31, 2019 included in our 2019 Annual Report on Form 10-K.
KORU Medical continues to monitor its operations and government recommendations and has made modifications to its normal operations because of the COVID-19 outbreak, including requiring most of its non-production related team members to work remotely or on a staggered work shift. The Company has continued to maintain a manufacturing operational capacity at its manufacturing facility located in Chester, New York, and has instituted heightened cleaning and sanitization standards and several health and safety protocols and procedures to safeguard its team members who do continue to report in person. Until the ultimate extent and duration of the pandemic is known, we cannot predict the ultimate effects the pandemic may have on our business, in particular with respect to demand for our products, our strategy, and our prospects, the effects on our customers, or the impact on our financial results. For example, our future net sales growth may be impacted due to fewer new prescriptions for individuals with Primary Immune Deficiency Disease (“PIDD”) and Chronic Inflammatory Demyelinating Polyneuropathy (“CIDP”) as a result of the pandemic. Refer to “PART II – OTHER INFORMATION, ITEM 1A. RISK FACTORS” of this Quarterly Report on Form 10-Q for further discussion of the potential impact of the COVID-19 pandemic on our business.
We ended the third quarter of 2020 with net sales of $6.1 million, down 8.1% versus the prior year’s third quarter. Our net sales were negatively impacted principally by reduced U.S. clinical trial activity and higher allowances consisting of pricing and growth rebates related to certain customers and payment discounts and distribution fees at our largest distributor under new contract terms. The third quarter of 2019 included two unusually large orders, and the third quarter of 2020 included a significant order from our largest distributor placed early in exchange for a nominal discount, which may impact our net sales for the fourth quarter of 2020.
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RESULTS OF OPERATIONS
Three months ended September 30, 2020 compared to September 30, 2019
Net Sales
The following table summarizes our net sales for the three months ended September 30, 2020 and 2019:
Change from Prior Year
% of Sales
%
(483,667
(8.3%
88.4%
88.5%
(53,415
(7.0%
11.6%
11.5%
(537,082
(8.1%
Total net sales decreased $0.5 million or 8.1% to $6.1 million for the three months ended September 30, 2020 compared with the same period last year. Net sales decreased primarily due to reduced U.S. clinical trial activity ($0.4 million). Higher allowances consisting of pricing and growth rebates related to certain customers and payment discounts and distribution fees at our largest distributor under new contract terms and lower international sales also contributed to lower net sales in the three months ended September 30, 2020. There were two unusually large orders in the third quarter of 2019, one domestic from our largest distributor and one international. Sales in the third quarter of 2020 included a $1.0 million order from our largest distributor placed early in exchange for a nominal discount, which may impact our net sales for the fourth quarter of 2020.
Our gross profit for the three months ended September 30, 2020 and 2019 is as follows:
(442,185
(10.1%
Stated as a Percentage of Net Sales
64.8%
66.2%
Gross profit decreased $0.4 million or 10.1% in the three months ended September 30, 2020, compared to the same period in 2019, driven by lower net sales as described above, partially offset by favorable production variances.
Selling, general and administrative, Litigation and Research and development
Our selling, general and administrative expenses, litigation and research and development costs for the three months ended September 30, 2020 and 2019 are as follows:
633,788
26.0%
(863,334
(99.9%
220,156
129.3%
3,466,260
3,475,650
(9,390
(0.3%
57.0%
52.5%
Selling, general and administrative expenses increased $0.6 million, or 26.0%, during the three months ended September 30, 2020 compared to the same period last year, mostly due to higher salary, related benefits and recruiting fees of $0.4 million resulting from new hires in the 2020 period. Higher consulting fees related to marketing and regulatory initiatives of $0.1 million also added to the increase, as well as higher directors and officer’s insurance premiums and other miscellaneous expenses totaling $0.2 million. Offsetting these increases were lower trade show and travel expenses of $0.1 million as a result of COVID-19 related travel restrictions.
Litigation fees decreased $0.9 million during the three months ended September 30, 2020 compared to the same period last year primarily due to the negotiation of and entry into a litigation settlement agreement with EMED in May 2020.
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Research and development expenses increased $0.2 million during the three months ended September 30, 2020 compared with the same period last year mostly due to higher consulting services and additional testing related to development initiatives.
Depreciation and amortization expense increased by 39.7% to $115,637 in the three months ended September 30, 2020 compared with $82,774 in the three months ended September 30, 2019. We continue to invest in capital assets, mostly related to manufacturing and computer equipment.
Net Income
(402,638
(61.8%
4.1%
9.9%
Our net income for the three months ended September 30, 2020 was $0.2 million, compared to net income of $0.7 million for the three months ended September 30, 2019, primarily due to lower net sales of $0.5 million with total operating expenses remaining flat for the same periods.
Nine months ended September 30, 2020 compared to September 30, 2019
The following table summarizes our net sales for the nine months ended September 30, 2020 and 2019:
3,150,218
22.0%
86.8%
84.5%
28,523
1.1%
13.2%
15.5%
3,178,741
18.8%
Total net sales increased $3.2 million or 18.8% for the nine months ended September 30, 2020 as compared to the prior year period. The increase was due principally to an increase in product sales volume, as well as higher U.S. clinical trial activity ($1.0 million). We believe the increase in product sales volume reflects an increase in continued growth in diagnosis of PIDD and CIDP. Also contributing to the increase in product sales volume was a $1.0 million order from our largest distributor placed early in exchange for a nominal discount, which may impact our net sales for the fourth quarter of 2020. Partially offsetting net sales were higher allowances consisting of pricing and growth rebates related to certain customers and payment discounts at our largest distributor under new contract terms.
Our gross profit for the nine months ended September 30, 2020 and 2019 is as follows:
1,732,287
15.9%
62.8%
64.4%
Gross profit increased $1.7 million or 15.9% in the nine months ended September 30, 2020, compared to the same period last year, reflecting net sales growth described above as well as favorable production variances in the third quarter of 2020. Gross profit for the nine months was negatively impacted by overtime costs related to COVID-19 absenteeism and an obsolescence reserve resulting from a discontinued product line, partially offset by favorable production variances in the third quarter of 2020.
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Our selling, general and administrative expenses, litigation and research and development costs for the nine months ended September 30, 2020 and 2019 are as follows:
2,063,296
29.6%
(34,724
(1.4%
494,183
109.7%
12,431,364
9,908,609
2,522,755
25.5%
61.8%
58.5%
Selling, general and administrative expenses increased $2.1 million, or 29.6%, during the nine months ended September 30, 2020 compared to the same period last year, mostly due to higher salary and related benefits, severance, bonus and recruiting fees in aggregate totaling $1.4 million. Also contributing to the increase were consulting fees of $0.5 million related to marketing, regulatory and strategic initiatives, as well as increased director fees and higher insurance premiums related to our directors and officers’ insurance policy in aggregate totaling $0.3 million, and miscellaneous expenses of $0.3 million. Offsetting the increase were lower trade show and travel expenses of $0.4 million as a result of COVID-19 related travel restrictions.
Litigation fees decreased $34,724 compared to the same period last year due primarily to the negotiation of and entry into a litigation settlement agreement reached with EMED in May 2020 resulting in a non-cash expense of $2.2 million.
Research and development expenses increased $0.5 million during the nine months ended September 30, 2020 compared with the same period last year mostly due to increased salary and related benefits due to higher headcount and additional testing as we continue our development initiatives.
Depreciation and amortization expense increased by 17.9% to $297,801 in the nine months ended September 30, 2020 compared with $252,594 in the nine months ended September 30, 2019. We continued to invest in capital assets, mostly related to manufacturing and computer equipment.
(1,022,041
(158.6%
(1.9%
3.8%
Our net loss for the nine months ended September 30, 2020 was $0.4 million compared to net income of $0.6 million for the nine months ended September 30, 2019, driven by the EMED settlement charge and higher selling, general and administrative expenses, partially offset by higher sales as described above.
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of liquidity is our cash on hand of $32.4 million as of September 30, 2020, which includes the net proceeds from the recent capital raise totaling $26.5 million. In response to concerns about the potential impact of COVID-19, the Company elected to draw $3.5 million during the three months ended June 30, 2020, the full amount available on its line of credit, and paid it back during the three months ended September 30, 2020. 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.
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Cash Flows
The following table summarizes our cash flows:
Nine Months EndedSeptember 30, 2020
Nine Months EndedSeptember 30, 2019
Net cash provided by/(used in) operating activities
Net cash (used in)/provided by investing activities
Net cash provided by financing activities
Operating Activities
Net cash provided by operating activities of $1.0 million for the nine months ended September 30, 2020 was mostly attributable to non-cash charges for stock-based compensation and litigation settlement expense of $2.5 million, an increase in accounts payable, accrued expenses and accrued payroll of $2.8 million, driven by the litigation settlement with EMED, the capital raise and customer rebates. Further adding to the increase was an increase in depreciation and amortization of $0.3 million and an increase in the accrued tax liability of $0.2 million, resulting from book to tax differences related to stock option expense. Offsetting these were primarily working capital changes which include an increase in inventory of $3.2 million as we built inventory to keep pace with sales growth and to insure timely order fulfillment, an increase in accounts receivable of $0.5 million due to timing of collections, and an increase in prepaid expenses and other assets of $0.5 million relating to increased insurance premiums.
Net cash used in operating activities of $0.5 million for the nine months ended September 30, 2019 was mostly attributable to increased accounts receivable of $2.1 million as one of our major customer’s payment terms changed on January 1, 2019 from net 30 to net 60 days, increased inventory of $0.6 million as we build stock to keep pace with sales growth, as well as severance payments and payments for insurance renewals. Partially offsetting these were our non-cash charges for stock based compensation of $0.9 million and depreciation and amortization of long lived tangible and intangible asset of $0.3 million, as well as increases in accounts payable of $0.4 million primarily for major supplier invoices and accrued expenses of $0.5 million primarily due to legal fees and bonus accruals.
Investing Activities
Net cash used in investing activities of $1.0 million for the nine months ended September 30, 2020 was primarily for capital expenditures for research and development and strategic initiatives. Our net cash provided by investing activities of $1.4 million for the nine months ended September 30, 2019 was mostly the result of the maturation of a certificate of deposit for $1.5 million and the sale of the house the Company owned for $0.2 million, offset by capital expenditures of $0.2 million, and patent applications and maintenance of existing applications of $0.2 million.
Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2020 of $26.6 million is from the $26.5 million capital raise, net of expenses and $0.1 million from options exercised. The $0.5 million provided by financing activities for the nine months ended September 30, 2019 is a result of warrants and options exercised during the period.
See “NOTE 5 — DEBT OBLIGATIONS” for further detail regarding the promissory note and loan agreement, and “NOTE 8 — EQUITY” regarding the equity offering.
We believe that as of September 30, 2020, 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, as well as accelerate execution of our strategic initiatives. We believe KORU Medical’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.
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.
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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/(loss)) before interest, income tax expense, depreciation and amortization, discontinued product expense, reorganization charges, litigation expenses including stock-based settlement expense, manufacturing initiative and stock option expenses. Prior to January 1, 2020, discontinued product expense and manufacturing initiative expenses were not included in our definition of Adjusted EBITDA. We believe that Adjusted EBITDA is used by investors and other users of our financial statements as a supplemental financial measure that, when viewed with our GAAP results and the accompanying reconciliation, we believe provides additional information that is useful to gain an understanding of the factors and trends affecting our business. We also believe the disclosure of Adjusted EBITDA helps investors meaningfully evaluate and compare our cash flow generating capacity from quarter to quarter and year to year. Adjusted EBITDA is used by management as a supplemental internal measure for planning and forecasting overall expectations and for evaluating actual results against such expectations. Because management uses Adjusted EBITDA for such purposes, the Company uses Adjusted EBITDA as a significant criterion for determining the amount of annual cash incentive compensation paid to our executive officers and employees. We have historically found that Adjusted EBITDA is superior to other metrics for our company-wide cash incentive program, as it is more easily explained and understood by our typical employee.
A reconciliation of our non-GAAP measures is below:
Reconciliation of GAAP Net Income/(Loss)
to Non-GAAP Adjusted EBITDA:
GAAP Net Income/(Loss)
143,353
186,681
316,200
189,265
Depreciation and Amortization
Interest Income, Net
(9,662
(23,368
(23,690
(59,091
Reorganization Charges
354,926
Discontinued Product Expense
(6,659
71,318
Manufacturing Initiative Expenses
59,045
120,386
194,804
Stock Option Expense
1,011,140
640,775
Non-GAAP Adjusted EBITDA
897,887
2,206,430
3,936,885
4,624,932
Discontinued Product Expense. We have excluded the effect of expenses related to a discontinued product line in calculating our non-GAAP Adjusted EBITDA measure. We expected to retire our Res-Q-Vac product line towards the end of 2020, but due to the failure of equipment used to manufacture the product, the discontinuation and resulting expense was accelerated into the first quarter of 2020 which we would not otherwise incur in periods presented as part of our continuing operations. Subsequently, in the second and third quarter of 2020, we sold off a portion of the discontinued inventory previously reserved. We do not expect to incur any significant related expenses in the future.
Reorganization Charges. We have excluded the effect of reorganization charges in calculating our non-GAAP Adjusted EBITDA measure. We incurred significant expenses in connection with the termination and replacement of C-suite executives and senior management which we would not otherwise incur in periods presented as part of our continuing operations. Reorganization charges include costs related to the replacement of C-suite executives including a transition bonus and recruiting fees, prior to March 31, 2019.
Litigation. We have excluded litigation expenses in calculating our non-GAAP Adjusted EBITDA measure. Litigation expenses include stock-based litigation settlement expense of $2.2 million related to the settlement agreement entered into with EMED on May 20, 2020. We continue to evaluate our business performance excluding litigation fees; however, we expect these expenses related to the EMED litigation to discontinue soon because of the settlement.
Manufacturing Initiative Expenses. We have excluded the effect of expenses related to the implementation of those portions of our strategic plan related to creating manufacturing efficiencies, in calculating our non-GAAP Adjusted EBITDA measure. We incurred expenses in connection with executing on these initiatives which we would not otherwise incur in periods presented as part of our continuing operations. We expect to incur related expenses for the next twelve to eighteen months as we continue to execute on our strategic plan.
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Stock Option Expense. We have excluded the effect of stock option expenses in calculating our non-GAAP Adjusted EBITDA measure. Although stock option compensation is a key incentive offered to our employees, we continue to evaluate our business performance excluding stock option compensation expenses. We record non-cash compensation expense related to grants of options and depending upon the size, timing and the terms of the grants, the non-cash compensation expense may vary significantly but will recur in future periods.
Refer to “NOTE 1 — NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” in the accompanying financial statements, which is incorporated herein by reference.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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.
There have been no changes in the Company’s internal control over financial reporting during the three months ended September 30, 2020, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
On November 11, 2020, Repro Med Systems, Inc. d/b/a KORU Medical Systems (the “Company”) entered into a Manufacturing and Supply Agreement with Command Medical Products, Inc. (“Command”), pursuant to which Command has agreed to manufacture and supply the Company’s subassemblies, needle sets and tubing products pursuant to the Company’s specifications and purchase orders. The first binding purchase order pursuant to the Manufacturing and Supply Agreement is expected to be made within the next ten days (the “Effective Date”).
The foregoing description of the Manufacturing and Supply Agreement is not complete and is qualified in its entirety by reference to the full text of the Manufacturing and Supply Agreement, a copy of which is attached as an exhibit to this Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2020.
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ITEM 1. LEGAL PROCEEDINGS
ITEM 1A. RISK FACTORS
Our operations and financial results are subject to various risks and uncertainties, including those described in “PART 1, ITEM 1A. RISK FACTORS” in our Annual Report on Form 10-K for the year ended December 31, 2019, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common stock. The following are material changes to our risk factors since our Annual Report on Form 10-K for the year ended December 31, 2019:
Our business has been and could continue to be adversely affected by the COVID-19 pandemic.
The COVID-19 pandemic has and will continue affecting economies and businesses around the world. We are closely monitoring the impact of COVID-19 on all aspects of our business, including how it may impact our employees and business operations. While we did not incur significant manufacturing disruptions during the quarter ended September 30, 2020 from the COVID-19 pandemic, customer purchasing patterns and clinical trial activity have been less predictable as a result of the pandemic. We may experience disruptions that could severely impact our results of operations and financial condition. We are unable to predict the impact that COVID-19 will have on our future operating results and financial condition due to numerous uncertainties. These uncertainties include the geographic spread of the pandemic, the severity of the virus, the impact of the virus directly on our employees or those of our suppliers, the duration of the outbreak, governmental actions, travel restrictions and social distancing, business closures or business disruptions (including those impacting our supply chain), delays in clinical trials, the effectiveness of actions taken in the United States and other countries to contain and treat the disease, the availability of plasma and drugs that are administered by our products, the number of new prescriptions for PIDD and CIDP, purchasing patterns of customers in response to the pandemic, changes to our operations, or whether the United States and additional countries are required to move to complete lock-down status, among others. Our sales representatives are unable to hold in-person meetings with customers and health care providers to discuss our products, which may further impact our sales. As local jurisdictions continue to put restrictions in place, our ability to continue to manufacture our products may also be limited. Such events may result in a period of business and manufacturing disruption, and in reduced operations, any of which could materially affect our business, financial condition and results of operations. The health of our workforce and our ability to meet staffing needs at our facility cannot be predicted and is vital to our operations. We will continue to monitor the COVID-19 situation closely and intend to follow health and safety guidelines as they evolve. Further, the spread of COVID-19, which has caused a broad impact globally, may materially affect us economically. While the potential economic impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, it has resulted in significant disruption of global financial markets, which could reduce our ability to access capital, negatively affecting our liquidity. In addition, the recession resulting from the spread of COVID-19 could materially affect our business and the value of our common stock. The ultimate long-term impact of COVID-19 is highly uncertain and cannot be predicted with confidence.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Each non-employee director of the Company is eligible to receive of $50,000 annually (effective January 1, 2019) plus $10,000 for chairing a Board committee (effective February 20, 2019), all to be paid quarterly half in cash and half in common stock and pro-rated for partial service. The Chairman of the Board is eligible to receive an additional $50,000 annually (effective October 1, 2019), all to be paid in common stock. The Company issued an aggregate of 6,681 and 23,869 shares of common stock to its non-employee directors for the three and nine months ended September 30, 2020, respectively.
On January 7, 2020, Manuel Marques, the Company’s Chief Operating Officer, exercised options held by him for an aggregate 175,000 shares of common stock for an aggregate exercise price of $85,500.
On May 9, 2020, Karen Fisher, the Company’s Chief Financial Officer, exercised options held by her for an aggregate 535,000 shares of common stock through delivery of previously owned shares having an aggregate fair market value of $322,294.
On May 20, 2020, the Company entered into a Settlement Agreement with EMED Technologies Corporation (“EMED”) to settle all claims in connection with all pending litigation matters between them (the “Claims”). Pursuant to the Settlement Agreement, the Company issued to EMED (i) 95,238 restricted stock units, which vested on May 21, 2020 and 95,238 restricted stock units vesting on January 1, 2021, and (ii) an option to purchase up to 400,000 shares of the Company’s common stock at an exercise price of $11.21 per share prior to February 1, 2021, which can be settled in cash in lieu of common stock at the Company’s sole discretion, provided that the number of shares of common stock and/or amount of cash paid by the Company upon exercise will be capped at a value of $16.21 per share. The Settlement Agreement includes mutual releases and covenants not to sue for any claim arising before May 20, 2020 and the Company covenants not to challenge any EMED patents that were the subject of the Claims unless EMED asserts them in the future against Company products.
All of the securities issued by the Company as described in this Item were issued in reliance on the exemption from registration under Section 4(2) under the Securities Act of 1933, as amended.
ITEM 6. EXHIBITS.
10.1
Manufacturing and Supply Agreement dated as of November 11, 2020 between Repro Med Systems, Inc. and Command Medical Products. Certain information has been excluded from this exhibit because it is both (i) not material and (ii) would be competitively harmful if publicly disclosed.
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.
November 12, 2020
/s/ Donald B. Pettigrew
Donald B. Pettigrew, President and Chief Executive Officer(Principal Executive Officer)
/s/ Karen Fisher
Karen Fisher, Chief Financial Officer and Treasurer(Principal Financial Officer)
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