U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON,
D.C. 20549
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended November 30, 2008
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 (IRS Employer Identification No.)
incorporation or organization)
24 Carpenter Road, Chester New York 10918
----------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (845) 469-2042
(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 is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
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 30, 2008, 34,829,286 shares of common stock, $.01 par value per
share, were outstanding.
REPRO-MED SYSTEMS, INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE
---------------------------- ----
ITEM 1. Financial Statements
Balance Sheet - November 30, 2008 (Unaudited) and
February 29, 2008 ................................................. 3
Statements of Operations (Unaudited) - for the Three-Months &
Nine-Months Ended November 30, 2008 and November 30, 2007 ......... 4
Statements of Cash Flows (Unaudited) - for the Nine-Months
Ended November 30, 2008 and November 30, 2007 ..................... 5
Notes to Financial Statements ..................................... 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ..................... 13
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk ........ 19
ITEM 4. Controls and Procedures ........................................... 19
PART II OTHER INFORMATION
--------------------------
ITEM 1. Legal Proceedings ................................................. 20
ITEM 1A. Risk Factors ...................................................... 20
ITEM 2. Changes in Securities and Use of Proceeds ......................... 20
ITEM 3. Defaults Upon Senior Securities ................................... 20
ITEM 4. Submission of Matters to a Vote of Security Holders ............... 20
ITEM 5. Other Information ................................................. 20
ITEM 6. Exhibits .......................................................... 20
2
PART 1 - FINANCIAL INFORMATION
REPRO-MED SYSTEMS, INC.
BALANCE SHEETS
NOVEMBER 30, FEBRUARY 29,
2008 2008
(UNAUDITED)
----------- -----------
ASSETS
CURRENT ASSETS:
Cash ............................................................... $ 348,533 $ 95,561
Accounts receivable less allowance for doubtful accounts of
$27,035 and $26,115 for November 30, 2008 and February 29, 2008
respectively ..................................................... 414,232 297,206
Inventory .......................................................... 562,306 551,032
Prepaid expenses ................................................... 67,691 44,392
----------- -----------
Total Current Assets ................................................. 1,392,762 988,191
PROPERTY & EQUIPMENT, less accumulated depreciation of $1,178,799 and
$1,126,612 at November 30, 2008 and February 29, 2008 respectively . 202,012 235,677
OTHER ASSETS:
Patents, net of accumulated amortization of $90,001 and $82,590 at
November 30, 2008 and February 29, 2008, respectively ............ 37,107 44,354
Goodwill ........................................................... 8,609 8,609
Security deposit ................................................... 28,156 28,156
----------- -----------
Total Other Assets ................................................... 73,872 81,119
----------- -----------
TOTAL ASSETS ......................................................... $ 1,668,646 $ 1,304,987
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable to financial institution .............................. $ 379,065 $ 400,000
Note payable - current portion ..................................... 4,524 4,293
Notes payable to related parties - current portion ................. - 15,000
Deferred capital gain - current portion ............................ 22,481 22,481
Accounts payable ................................................... 150,565 342,433
Accrued expenses ................................................... 85,026 53,180
Accrued interest ................................................... 69,590 63,590
Accrued preferred stock dividends .................................. 56,000 52,000
Accrued payroll and related taxes .................................. 23,080 18,594
Warranty liability ................................................. 62,194 62,194
Customer Deposits .................................................. 1,394 5,180
----------- -----------
Total Current Liabilities ............................................ 853,919 1,038,945
OTHER LIABILITIES
Note payable - less current portion ................................ 28,897 32,250
Notes payable to related parties - less current portion ............ 394,000 394,000
Deferred capital gain less current portion ......................... 207,955 224,815
----------- -----------
Total Other Liabilities .............................................. 630,852 651,065
----------- -----------
Total Liabilities .................................................... 1,484,771 1,690,010
=========== ===========
STOCKHOLDERS' EQUITY
Preferred Stock, 8% cumulative, liquidation value $100,000, $0.01
par value, 2,000,000 shares authorized, 10,000 shares issued and
outstanding at November 30, 2008 and February 29, 2008,
respectively ..................................................... 100 100
Common Stock, $0.01 par value, 50,000,000 shares authorized,
34,829,286 issued and outstanding at November 30, 2008 and
February 29, 2008 ................................................ 348,293 348,293
Additional paid-in Capital ......................................... 2,883,533 2,846,094
Accumulated deficit ................................................ (2,906,051) (3,437,510)
----------- -----------
325,875 (243,023)
Less: Treasury Stock, 2,275,000 shares at cost at November 30, 2008
and February 29, 2008 ............................................ (142,000) (142,000)
----------- -----------
Total Stockholders' Equity ........................................... 183,875 (385,023)
----------- -----------
Total Liabilities and Stockholders' Equity ........................... $ 1,668,646 $ 1,304,987
=========== ===========
See Accompanying Notes to Financial Statements
3
REPRO-MED SYSTEMS, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
NOVEMBER 30 NOVEMBER 30
---------------------------- ----------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
NET SALES ........................... $ 853,591 $ 620,879 $ 2,490,062 $ 1,624,242
COST AND EXPENSES
Cost of goods sold ................ 312,917 226,248 921,852 615,770
Selling, general and administrative 314,947 288,987 917,829 871,356
Research and development .......... 6,093 8,651 16,126 34,761
Depreciation and amortization ..... 19,002 16,186 59,598 48,248
------------ ------------ ------------ ------------
TOTAL COSTS AND EXPENSES ............ 652,959 540,072 1,915,405 1,570,135
------------ ------------ ------------ ------------
NET OPERATING PROFIT (LOSS) ......... 200,632 80,807 574,657 54,107
OTHER INCOME/(EXPENSES)
Interest Expense .................. (9,339) (19,448) (39,205) (120,410)
Interest and Other Income ......... - - 8 512
------------ ------------ ------------ ------------
TOTAL OTHER INCOME/(EXPENSE) ........ (9,339) (19,448) (39,197) (119,898)
------------ ------------ ------------ ------------
NET PROFIT (LOSS) BEFORE TAXES .... 191,293 61,359 535,460 (65,791)
Provision for Income Taxes ........ - - - -
------------ ------------ ------------ ------------
NET INCOME (LOSS) ................. $ 191,293 $ 61,359 $ 535,460 $ (65,791)
------------ ------------ ------------ ------------
PREFERRED STOCK DIVIDENDS ........... - - 4,000 4,000
------------ ------------ ------------ ------------
NET INCOME (LOSS) AVAILABLE TO COMMON
STOCKHOLDERS ....................... $ 191,293 $ 61,359 $ 531,460 $ (69,791)
------------ ------------ ------------ ------------
NET INCOME (LOSS) PER COMMON SHARE
AVAILABLE TO COMMON STOCKHOLDERS .. 0.01 0.01 0.02 (0.01)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING ....................... 34,829,286 32,193,155 34,829,286 32,193,155
============ ============ ============ ============
See Accompanying Notes to Financial Statements
4
REPRO-MED SYSTEMS, INC
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED
---------------------------
NOVEMBER 30, NOVEMBER 30,
2008 2007
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) ........................................ $ 535,460 $ (65,791)
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Stock based Compensation to obtain financing ........... - 75,840
Stock options to employee's and directors .............. 24,209 37,518
Interest charged to additional paid in capital ......... 13,230 -
Depreciation and amortization .......................... 59,598 48,248
Deferred capital gain - building lease ................. (16,860) (16,860)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable ............. (117,026) (72,505)
(Increase) decrease in inventory ....................... (11,274) (5,777)
(Increase) decrease in prepaid expense ................. (23,299) (19,514)
Increase (decrease) in accounts payable ................ (191,868) (42,842)
Increase (decrease) in accrued payroll and related taxes 4,486 (4,547)
Increase (decrease) in accrued expense ................. 31,846 36,360
Increase (decrease) in preferred stock dividend ........ - 4,000
Increase (decrease) in customer deposits ............... (3,786) -
Increase (decrease) in accrued interest ................ 6,000 5,795
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ........ 310,716 (20,075)
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for property and equipment ...................... (18,523) (36,851)
Reduction in patents ..................................... - -
Security deposits ........................................ - 26,646
Payments for patents ..................................... (164) (6,260)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES ...................... (18,687) (16,465)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on note payable to financial institutes ......... (20,935) -
Proceeds from note payable to related parties ............ - 16,762
Payments to note payable to related parties .............. (15,000) -
Payments on notes payable ................................ (3,122) -
Payments on capitalized lease obligations ................ - (617)
Preferred stock dividends ................................ - (4,000)
--------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ........ (39,057) 12,145
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....... 252,972 (24,395)
CASH BEGINNING OF PERIOD ................................... 95,561 99,421
--------- ---------
CASH END OF PERIOD ......................................... $ 348,533 $ 75,026
========= =========
Supplemental Information
Cash paid during the year for:
Interest ................................................. 11,738 14,698
See Accompanying Notes to Financial Statements
5
REPRO-MED SYSTEMS, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE NATURE OF OPERATIONS
Repro-Med Systems, Inc. (the "Company") was incorporated on March 24,
1980 under the laws of the State of New York. The Company was organized
to engage in research, development, laboratory and clinical testing,
production and marketing of medical devices used in the treatment of
the human condition.
BASIS OF PRESENTATION
The accompanying unaudited financial statements as of November 30, 2008
have been prepared in accordance with generally accepted accounting
principles in accordance with instructions to regulation S-X.
Accordingly, they do not include all of the information and disclosures
required by accounting principles generally accepted in the United
States of America for complete financial presentation.
In the opinion of the Company's management, the financial statements
contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the Company's financial position as of
November 30, 2008 and the results of operations and cash flow for the
interim periods ended November 30, 2008 and 2007.
The results of operations for the nine-month period ended November 30,
2008, are not necessarily indicative of the results to be expected for
the full year. These interim financial statements should be read in
conjunction with the financial statements and notes thereto of the
Company and management's discussion and analysis of financial condition
and results of operations included in the Company's Annual Report for
the year ended February 29, 2008, as filed with the Securities and
Exchange Commission on Form 10-KSB.
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.
INVENTORY
Inventories consist of purchased parts and assembled units and are
stated at the lower of average cost or market value. Average cost is
calculated using a rolling average based upon new purchases and
quantities.
PATENTS
Costs incurred in obtaining patents have been capitalized and are being
amortized over seventeen years.
6
REPRO-MED SYSTEMS, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
INCOME TAXES
The Company accounts for income taxes under the liability method, which
requires the determination of deferred tax assets and liabilities based
on the differences between the financial and tax bases of assets and
liabilities using enacted tax rates expected to be in effect for the
year in which differences are expected to reverse. Deferred tax assets
are adjusted by a valuation allowance since, based on available
evidence, it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
As November 20, 2008, the Company made no provisions for income taxes
because of the net operating loss carry forwards available in amounts
exceeding the current period liability. The deferred tax asset
associated with the net operating loss carry forwards available are
fully reserved (and have been prior to this time)based on the Company's
lack of profitability. When it is more likely than not that the Company
will recognize the net operating loss carry forwards, an appropriate
adjustment will be reflected in the Company's financial statement.
PROPERTY AND 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. Routine maintenance, repairs and replacement costs are expensed
as incurred and improvements that extend the useful life of the assets
are capitalized. When property and equipment are sold or otherwise
disposed of, the cost and related accumulated depreciation are
eliminated from the accounts and any resulting gain or loss is
recognized in operations.
STOCKHOLDERS' EQUITY/NOTES PAYABLE TO RELATED PARTIES
During the three month and nine month period ended November 30, 2008,
$4,410 and $13,230 respectively of interest accruing on a note payable
to related party was charged to additional paid-in capital.
NET INCOME (LOSS)PER COMMON SHARE
The Company computes per share amounts in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share".
SFAS No. 128 requires the presentation of primary and fully diluted
earnings per share ("EPS") and requires presentation of basic and
diluted EPS. Basic EPS is computed by dividing the income (loss)
available to Common Stockholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS is based on the
weighted-average number of shares of Common Stock and Common stock
equivalents outstanding during the periods. Common stock equivalents
have been excluded from the weighted average shares outstanding
calculation, as inclusion would be anti-dilutive. The diluted earnings
per share calculation include the addition of $4,000 from preferred
stock dividends, resulting in no difference between basic and diluted
earnings per share.
7
REPRO-MED SYSTEMS, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
USE OF ESTIMATES IN THE FINANCIAL STATEMENTS
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles ("GAAP") requires management
to make estimates and assumptions that affect the amounts reported in
the consolidated 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.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
In determining the allowance for doubtful accounts the Company analyzes
the aging of accounts receivable, historical bad debts, customer
creditworthiness and current economic trends.
REVENUE RECOGNITION
In accordance with Securities and Exchange Commission's (SEC's), Staff
Accounting Bulletin No. 104, sales of manufactured products are
recorded when shipment occurs and title passes to a customer,
persuasive evidence of an arrangement exists with the customer, the
sales price is fixed and determinable and the collectability of the
sales price is reasonably assured. The Company's revenue stream is
derived from the sale of an assembled product. Other service revenues
are recorded as the service is performed. Shipping and handling costs
are generally billed to customers and are included in sales. The
Company does not accept return of goods shipped unless it is a Company
error. The Company does not grant sales allowances other than an
occasional 1% discount for payments made within 30 days. The only
credits provided to customers are for defective merchandise and sales
incentives are occasional advertising in customer catalogues.
STOCK-BASED COMPENSATION
The Company accounts for employee stock based compensation and stock
issued for services using the fair value method. In accordance with
SFAS No. 123R, the measurement date of shares issued for services is
the date when the counterparty's performance is complete.
The Company accounts for stock issued for services using the fair value
method. In accordance with the Emerging Issues Task Force ("EITF")
96-18, the measurement date of shares issued for service is the date
when the counterparty's performance is complete.
RECLASSIFICATIONS
-----------------
Certain amounts in the February 29, 2008 and November 30, 2007,
financial statements have been reclassified to conform to the
presentation used in the November 30, 2008, financial statements.
8
REPRO-MED SYSTEMS, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
NOTE 2 INVENTORY
Inventory is valued at the lower of average cost or market and consists
of the following at:
November February
30, 2008 29, 2008
-------- --------
Raw materials ................. $446,364 $426,587
Work in progress .............. 56,992 56,992
Finished goods ................ 58,950 67,453
-------- --------
$562,306 $551,032
NOTE 3 PROPERTY AND EQUIPMENT
Property and equipment consists of the following at:
November February Estimated
30, 2008 29, 2008 Useful Lives
---------- ---------- ------------
Furniture and
office equipment $ 431,769 $ 413,247 5 years
Manufacturing
equipment and
tooling ........ 949,042 949,042 7-12 years
---------- ----------
1,380,811 1,362,289
Less: accumulated
amortization and
depreciation ... 1,178,799 1,126,612
---------- ----------
Property and
Equipment, Net . $ 202,012 $ 235,677
Depreciation expense was $52,187and $44,434 for nine months ended
November 30, 2008 and November 30, 2007 respectively.
NOTE 4 RELATED PARTY TRANSACTIONS
NOTES PAYABLE TO RELATED PARTIES
The President of the Company has advanced the Company $100,000 under a
demand loan which bears interest at the rate of 8% (see Note 6 -
Long-term debt). This note has been approved by the Board of Directors.
The President has agreed to extend the maturity date to March 30, 2010.
Additionally, during the year ended February 28, 2007, the President
made short term advances to the Company for working capital secured by
accounts receivable of the Company aggregating $69,274. These advances
were repaid during the fiscal year ending February 29, 2008.
9
REPRO-MED SYSTEMS, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
LEASED AIRCRAFT
The Company leases an aircraft from a Company controlled by the
President. The lease payments aggregated $16,125 for due nine months
ended November 30, 2008 and $22,500 for the years ended February
29, 2008. The original lease agreement has expired and the Company is
currently on a month-to-month basis for rental payments.
NOTE 5 NOTE PAYABLE TO FINANCIAL INSTITUTION
On February 21, 2008, the Company borrowed $400,000 from a financial
institution under a revolving loan agreement. The loan does not specify
a maturity date and is due on demand. The loan was personally
guaranteed by a director of the Company. The loan bears interest at the
rate of 4.75% per annum. The amount outstanding on the note payable is
$379,065 and 400,000 at November 30, 2008 and February 29, 2008
respectively.
NOTE 6 LONG-TERM DEBT
Long-term debt consists of the following at:
November February
30, 2008 29, 2008
-------- --------
In April 2004, the Company borrowed $25,000 from three individuals,
including $10,000 from the President, at 2% over the prime-lending rate.
These loans mature June 30, 2008. As an additional incentive to make the
loans, the Company agreed to grant one share of its common stock for each
dollar of indebtedness outstanding at each calendar quarter. During the
year ended February 29, 2008, the President was repaid the $10,000. The
remaining balance was paid in 2008. ..................................... - $ 15,000
The President of the Company has loaned the Company, $100,000 at 8%
interest. The loan is unsecured and matures March 30, 2010............... 100,000 100,000
In October 2006, the Company borrowed $325,000 from a Director of the
company, at 6% interest per annum. This loan matures April 30, 2010. In
addition to the interest the holder is issued Warrants' to acquire
150,000 shares of restricted common stock at $.10 per share. The Warrants
vest immediately. On February 21, 2008, the Director exercised the
warrants and stock options granted in June 2007 and, as consideration for
the stock received, reduced the loans outstanding. ...................... 294,000 294,000
In January 2008, the Company entered into an installment loan arrangement
to purchase a vehicle. The loan bears interest at the rate of 6.735% and
is payable in 84 monthly installments of $552. The loan is secured by the
vehicle. ................................................................ 33,421 36,543
-------- --------
427,421 445,543
Less current portion .................................................... 4,524 19,293
Long-term portion ....................................................... $422,897 $426,250
In connection with the October 2006 borrowing of $325,000, the company
issued 150,000 warrants to acquire its common stock at $0.10 per share.
As a result of the company performing a Black-Scholes computation on
the value of the warrants, it concluded that the resultant value of
approximately $4,500 was not significant and accordingly, did not
reduce the value of the warrants from the note proceeds.
10
REPRO-MED SYSTEMS, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
NOTE 7 STOCK OPTIONS
On June 6, 2007, the Board of Directors approved the issuance of
4,360,000 stock options to key employees and directors of the Company.
The options have an expiration date of 5 years from the date of grant
and an exercise price of $0.06 per share. Of the 4,360,000 stock
options granted, 1,690,000 vested immediately and 890,000 stock options
vest each succeeding year for three consecutive years.
The following table summarizes the company's stock options:
Weighted
Average Weighted Average
Options Exercise Exercise Average Exercise
Outstanding Price Price Life Price
----------- -------- -------- -------- --------
Balance,
February 29,
2008 ....... -- -- -- -- --
Granted .... 4,360,000 $ 0.06 $ 0.06 3.0 $ 0.06
Exercised .. 600,000 0.06 0.06 -- --
Cancelled .. -- -- -- -- --
--------- -------- -------- -------- --------
Balance,
November 30,
2008 ....... 3,760,000 $ 0.06 $ 0.06 3.0 $ 0.06
The fair value of the option calculated using the Black-Scholes pricing
model aggregated $120,966. The amount recorded in the Statement of
Operations for the 1,690,000 options, which vested immediately, was
$45,966. The balance of the expense will be recorded in the succeeding
3 years at approximately $25,000 per year.
The fair value of the options was calculated using the following
factors and the Black-Scholes pricing model:
Risk free rate 2.4%
Volatility 96.16%
Expected life 1.5 years
Dividend yield 0%
NOTE 8 SALE-LEASEBACK TRANSACTION - OPERATING LEASE
On February 25,1999, the Company entered into a sale-leaseback
arrangement whereby the Company sold its land and building at 24
Carpenter Road in Chester, New York and leased it back for a period of
20 years. The leaseback is accounted for as an operating lease. The
gain of $449,617 realized in this transaction has been deferred and is
amortized to income in proportion to rental expense over the term of
the related lease.
11
REPRO-MED SYSTEMS, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
At February 29, 2008 minimum future rental payments are:
Year Minimum Rental Payments
---- -----------------------
2009 $120,000
2010 120,000
2011 120,000
2012 120,000
2013 120,000
thereafter 845,000
----------
$1,445,000
==========
Rent expense for the year ended February 29, 2008 aggregated $120,000
and $90,000 for the nine months ended November 30, 2008.
NOTE 9 COMMITMENTS AND CONTINGENCIES
- Contingencies
The Company is contingently liable to rework and fulfill a contractual
commitment of its product for a customer order. The total additional
material and labor cost to complete this work approximates $62,000. The
provision has been recorded in the Company's financial statements.
- Accounting for Uncertainty in Income Taxes
The Company has a net operating loss carry over of approximately
$2,800,000 and did not file income taxes for four fiscal years. In
accordance with FASB Interpretation 48, "Accounting for Income Tax
Uncertainties", the Company recognizes that the failure to file tax
returns for these fiscal years is an event which will "more likely than
not" create a tax penalty liability to be sustained by the taxing
authority. As of November 30, 2008, the effect of taxes, interest and
penalties cannot be determined.
12
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 by 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, recent operating losses,
uncertainties associated with future operating results, unpredictability related
to Food and Drug Administration regulations, introduction of competitive
products, limited liquidity, reimbursement related risks, government regulation
of the home health care industry, success of the research and development
effort, market acceptance of Freedom60(R), availability of sufficient capital to
continue operations and dependence on key personnel. When used in this report,
the words "estimate," "project," "believe," "anticipate," "intend," "expect" and
similar expressions are intended to identify forward-looking statements. Such
statements reflect current views with respect to future events based on
currently available information and are subject to risks and uncertainties that
could cause actual results to differ materially from those contemplated in such
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. These
statements involve risks and uncertainties with respect to the ability to raise
capital to develop and market new products, acceptance in the market place of
new and existing products, ability to penetrate new markets, our success in
enforcing and obtaining patents, obtaining required Government approvals and
attracting and maintaining key personnel that could cause the actual results to
differ materially. Repro-Med 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.
THREE MONTHS ENDED NOVEMBER 30, 2008 VS. 2007
---------------------------------------------
Strong sales of our Freedom60 line continued during the quarter ended November
30, 2008 resulting in our net profit of $191,293 for the Quarter (which
contained no stock based compensation) as compared to $61,359 (which included
stock based compensation of $4,750) for the same quarter in 2007, an increase of
212%. Selling, General and Administrative Expense (SG&A) increased 9% to
$314,947 from $288,987 quarter over quarter 2008 vs. 2007, due to increased
staff and increases in marketing costs, such as trade shows. Research and
Development decreased to $6,093 from $8,651 primarily due to reallocation of
resources from engineering to sales.
Total sales increased by 37% from $623,613 to $855,869 for the three-month
period ending November 30, 2008 as compared to the quarter ending November 30,
2007. Returns and allowances were insignificant.
Sales of the Freedom60 Syringe Infusion System, related accessories and repairs
increased overall by 66% from $383,257 to $636,744 in the third quarter ending
November 30, 2008 as compared to the same period in 2007. This increase is due
to the increased sales for use with immune globulin caused by Medicare
specifying the Freedom60 for use with SCIG,(subcutaneous immune globulin) and
antibiotics along with word of the costs and performance being communicated
throughout the industry. Sales of RES-Q-VAC and related accessories showed an
13
overall decrease of 17% from $203,260 to $168,987 which was due to very strong
sales of RES-Q-VAC both internationally and domestically during the first half
of the year which did not continue in the third quarter, as these tend to be
somewhat cyclical in nature. Company sales of non-core products increased during
the quarter by $13,341 or 36% primarily due to the sales of needle sets
purchased to supply along with our Freedom60.
Interest expense decreased by 52% to $9,339 from $19,448 as a result of paying
off high interest demand notes and making more timely payments to vendors.
NINE MONTHS ENDED NOVEMBER 30, 2008 VS. 2007
--------------------------------------------
Net Income shows a profit of $535,460 (after deducting $24,209 of employee and
director stock options recorded as fair market value) for the nine months ending
November 30, 2008 as compared to a loss of $65,791 (after deducting stock based
compensation for financing of $75,840 and $37,518 for employee and director
stock options) for the same nine months in 2007 and represents a total
improvement in the year to date third quarter net income of $601,251.
Total sales increased by 53% to $2,496,040 from $1,632,140 for the nine-month
period ending November 30, 2008. Returns and allowances were insignificant.
Sales of the Freedom60 Syringe Infusion System, including related accessories
and repairs increased 87% in the nine months ended November 30, 2008 vs.the nine
months ended November 30, 2007. We have concentrated the majority of our efforts
in the Freedom60 line, specifically towards the subcutaneous immune globulin
(SCIG) market. This sales increase was due to our direct efforts, and the
reimbursement, which was increased twenty fold and subsequently resulted in
Medicare issuing a letter of clarification stating the Freedom60 as the only
pump approved for SCIG reimbursement. Lastly, we diligently called on,
in-serviced(trained) and sold virtually every major SCIG provider in the
domestic market. Reflected in the sales year to date is a new distributor in
Finland who has begun selling the Freedom60 in the Scandinavian market. We
anticipate these sales to continue to increase as the SCIG market continues to
develop and as we work on new enhancements to the Freedom60 that we believe will
expand this market even further. In addition, we expect many of the SCIG users
will see benefit in using the Freedom60 system for other uses, such as
antibiotics, chemotherapeutics and pain medications.
Sales of the RES-Q-VAC increased overall by 16% with increases in both the
international and domestic markets from $590,823 to $686,662 for the nine months
ended November 30, 2008 vs. nine months ended November 30, 2007.
Selling, General and Administrative Expense (SG&A) increased 5% to $917,829 in
2008 from $871,356 in 2007. This increase is related to an increase in trade
show expenses, and higher recruiting expenses associated with the hiring of
additional staff.
Research and development expenses decreased from $34,761 to $16,126 primarily
due to reallocation of certain labor costs to sales.
Depreciation and amortization expense increased by 24% from $48,248 during the
nine months of 2007 as compared to $59,598 for 2008 as a result of new
depreciation on capital equipment and adjustments to certain patent expenses.
Interest expense for the nine months has decreased from $120,410 to $39,205 for
the year to date third quarter 2007 to 2008 as a result of the elimination of
compensation relating to loans which were fully paid off before YE 2008 and
lower interest replacement loans. Our profit margin increased slightly from 62%
to 63% due to increased production efficiencies.
14
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
For the nine months ended November 30, 2008, the net profit improved to $535,460
(after deducting stock based compensation of $24,209) as compared to a loss of
$65,791 (after deducting stock based compensation for financing of $75,840 and
$37,518 for employee and director stock options) for the previous year to date
primarily as a result of our improved sales performance, especially with our
Freedom60 and to a lesser extent, Res-Q-Vac sales. For the nine months ending
November 30, 2008, Net Cash provided from Operations was $310,716 as compared
with net cash used by operations of $20,075 for the prior year. This increase is
due primarily to increased sales and certain cost controls related to Selling
and General and Administrative Expense.
In January of 2008 we were notified by The Trade Adjustment Assistance Program
of the Trade Department that our application for a grant of $150,000 was
approved for use to assist us with marketing, ISO and regulatory affairs, and
new product development. The grant matches the company on a 50-50 basis thereby
reducing our costs for these new programs in half. The Trade Adjustment
Assistance Program is a United States Government program to help manufacturing
firms adjust to foreign business competition. The program is authorized by the
Trade Act of 1974 and is administered by the U. S. Department of Commerce. The
program operates through Trade Adjustment Assistance Centers located across the
United States. The New York State area is served by the New York State Trade
Adjustment Assistance Center (NYS TAAC). The NYS TAAC is affiliated with the
Research Foundation of the State University of New York at Binghamton. Several
payments were issued during nine month period pursuant to this program.
In raising capital beginning in February 2004, the Company issued promissory
notes in the total amount of $432,000. These five-year promissory notes paid 2%
over prime plus four shares of common stock per year for every year the loan was
in place. The loans were fully satisfied by the end of February 2008 and
replaced with a simple loan secured with an interest rate set at prime on
February 21, 2008.
We believe the Freedom60 continues to find a solid following in the subcutaneous
immune globulin market and this market is expected to continue to increase both
domestically and internationally. We continued to experience an increase in
sales and cash flow during nine months ended November 30, 2008 and with these
increases and the capital we currently have, we will continue to meet or exceed
the company's financial needs for the next twelve months.
FREEDOM60
---------
The Freedom60 Syringe Infusion Pump is designed for ambulatory medication
infusions. Ambulatory infusion pumps are most prevalent in the home care market.
Other potential applications for the Freedom60 are pain control, the infusion of
specialized drugs such as IgG, and chemotherapy. The home infusion therapy
market is comprised of approximately 4,500 sites of service, including local and
national organizations, hospital-affiliated organizations, and national home
infusion organizations, and produces approximately $4.5 Billion in revenue
annually (Ref: www.nhianet.org). With insurance reimbursement in a severe
decline, there is a tremendous need for a low-cost, effective alternative to
electronic and expensive disposable IV administration devices for the home care.
The Freedom60 provides a high-quality delivery to the patient at costs similar
to gravity and is targeted for the home health care industry, patient emergency
transportation, and for any time a low-cost infusion is required.
15
For the home care patient, Freedom60 is an easy-to-use lightweight mechanical
pump using a 60cc syringe, completely portable, cost effective and maintenance
free, with no batteries to replace and no cumbersome IV pole. For the infusion
professional, Freedom60 delivers precise infusion rates and uniform flow
profiles providing consistent transfer of medication. A Form 510(k) Pre-market
Notification for initial design of the Freedom60 as a Class II device was
approved by the FDA in August 1994.
The Company also designed and manufactured the Freedom60-FM, an enhanced version
of the Freedom60 which contains an electronic flow monitor system that provides
occlusion and end of infusion alarm. This product is directed at nursing homes,
hospitals and pediatric ambulatory applications where alarms are generally
required for nursing acceptance. Nurses also appreciate being able to visualize
the drug volume by reading the scale on the syringe.
We have expanded the use of the Freedom60 to cover most antibiotics including
the widely used and somewhat difficult to administer vancomycin. We have also
found a following for Freedom60 for use in treating thalissemia with the drug
desferal. In Europe we found success in using the Freedom60 for pain control,
specifically post-operative epidural pain administration. Our European market
also uses the Freedom60 for chemotherapy.
The Freedom60 use for Primary Immune Deficiency by injecting immune globulin
(IgG) under the skin as a subcutaneous administration has seen increased usage
over the past year. This method has provided patients with vastly improved
quality of life with much fewer unpleasant side effects over the traditional
intravenous route. The Freedom60 is an ideal system for this administration
since the patient is able to self-medicate at home, the pump is easily
configured for this application, and the Freedom60 is the lowest cost infusion
system available in a heavily cost constrained market. We have begun to
advertise one of the main benefits of the Freedom60 for use with IgG which is
that it operates in "dynamic equilibrium"; that is the pump finds and maintains
a balance between what a patient is able to absorb and what the pump infuses.
This balance is created by a safe, limited and controlled pressure which adjusts
the flow rate automatically to the patient's needs providing a reliable, faster
and a more comfortable administration with fewer side effects for these
patients.
Repro-Med Systems' objective is to build a product franchise with Freedom60 and
the sale of patented disposable tubing sets. Freedom60 uses rate-controlled
tubing with standard slide clamp and luer-lock connector on the patient end. Our
patented syringe disc connector insures that only the Company's Freedom60 tubing
sets will function with the pump. Non-conforming tubing sets, without the
patented disc connector, are ejected from the pump to prevent the danger of an
overdose or runaway pump from injuring the patient.
THE MARKET FOR INFUSION PUMPS & DISPOSABLES
-------------------------------------------
The ambulatory infusion market has been rapidly changing due to reimbursement
issues. Insurance reimbursement has drastically reduced the market share of
high-end electronic type delivery systems as well as high-cost disposable
non-electric devices, providing an opportunity for the Freedom60. We believe
market pressures have moved to consider alternatives to expensive electronic
systems especially for new subcutaneous administrations which usually cannot be
done with gravity. For cost concerns some patients have been trained to
administer intravenous drugs through IV push where the drug is pushed into the
vein directly from a syringe. This is a low-cost option but has been associated
with complications and considered by many to be a high-risk procedure. Thus, the
overall trend has been towards syringe pumps due to the low-cost of disposables.
16
In order to receive more favorable Medicare reimbursement for our Freedom60
Syringe Infusion System, we had submitted a formal request for a HCPCS coding
verification with the Statistical Analysis Durable Medical Equipment Regional
Carrier (SADMERC). On May 21, 2007 we received a notification from CMS (Centers
for Medicare & Medicaid Services) that the Freedom60 had been re-reviewed for
Medicare billing. It was the determination that the Medicare HCPCS code(s) to
bill the four Durable Medical Regional Carries (DMERCs) should be: E0779
Ambulatory infusion pump, mechanical, reusable, for infusion 8 hours or greater.
The new coding provides for a substantial increase in reimbursement for
providers using an infusion pump for authorized users under Part B of Medicare.
Current approved uses under Medicare include among others, subcutaneous immune
globulin, antivirals, antifungals, and chemotherapeutics. In June 2007 CMS
issued a clarification that the Freedom60 Syringe Infusion Pump is the only
allowable pump to be billed with subcutaneous immune globulin under HCPCS code
E0779.
COMPETITION FOR THE FREEDOM60
-----------------------------
Competition for the Freedom60 for IgG is currently limited to electrically
powered infusion devices which are more costly and can create high pressures
during delivery which can cause complications for the administration of IgG.
However, there can be no assurance that other companies with greater resources
will not enter the market with competitive products which will have an adverse
effect on our sales.
There is the potential for new drugs to enter the market, such as using
Hyaluronidase which can facilitate absorption of IgG, making multiple site
infusions unnecessary and changing the market conditions for devices such as the
Freedom60. We believe the Freedom60 is ideal for all these new drug combinations
but there can be no assurance that these newer drugs will have the same needs
and requirements as the current drugs being used.
There can be no assurance that Medicare will continue to provide reimbursement
for the Freedom60 or they may allow reimbursement for other infusion pumps that
are currently in the market or new ones that may enter shortly, which could
adversely affect our sales into this market.
RES-Q-VAC
---------
The RES-Q-VAC Emergency Airway Suction System is a lightweight, portable,
hand-operated suction device that removes fluids from a patient's airway by
attaching the RES-Q-VAC pump to various proprietary sterile and non-sterile
single-use catheters sized for adult and pediatric suctioning. The one-hand
operation makes it extremely effective and the product is generally found in
emergency vehicles, hospitals and wherever portable aspiration is a necessity,
including backup support for powered suction systems. The disposable features of
the RES-Q-VAC reduce the risk of contaminating the health professional from HIV
or SARS when suctioning a patient or during post treatment cleanup. All of the
parts that connect to the pump are disposable.
We recently introduced a new version of the RES-Q-VAC with the addition of a
portable LED white light, which attaches to the canister assembly. The light is
fully malleable and can direct light during operations when lighting is poor or
at night. We have our latest version of the RES-Q-VAC called Ultra which
contains all of our latest enhancements. We have begun marketing the RES-Q-VAC
UTRA both domestically and with a distributor in Italy.
17
A critical component and advantage of the RES-Q-VAC ULTRA is the Full Stop
Protection, (FSP) a recently patented filtering system that both prevents
leakage and over-flow of the aspirated fluids, even at full capacity, and traps
all air and fluid borne pathogens and potentially infectious materials within
the sealable container. This protects users from potential exposure to disease
and contamination. The Full Stop Protection meets the requirement of the
Occupational Safety and Health Administration. The Company has received a letter
from OSHA confirming that the RES-Q-VAC with the Full Stop Protection falls
under the engineering controls of the Blood borne Pathogen regulation and that
the Products use would fulfill the regulatory requirements.
We have also added new connectors to our pediatric catheters, which allow them
to connect directly to the adult containers with FSP. These connectors allow
pediatric suctioning with the benefit of the Full Stop Protection device as well
as with sterile catheters. Many infants are born with contagious diseases and
the new system eliminates this concern among paramedics during an emergency
delivery.
A critical advantage of our RES-Q-VAC airway suction system is versatility. With
the addition of Full Stop Protection, we created specific custom RES-Q-VAC kits
for various vertical markets:
Emergency Medicine - we make several special kits for emergency use, which
contain all the catheters necessary to treat adults as well as infants or
children. These first responder kits are generally non-sterile. We also have
special attachments available for the advanced paramedic to treat patients who
are intubated.
Respiratory - in-home care, long term care, situations requiring frequent
suctioning such as cystic fibrosis patients, patients with swallowing disorders,
elderly, patients on ventilators and with tracheostomies all benefit from the
portability, cost and performance of the RES-Q-VAC. In hospitals, the RES-Q-VAC
provides emergency back up due to power loss or breakdown of the wall suction
system.
Hospital Use - for crash carts, the emergency room, patients in isolation,
moving patients throughout the hospital (e.g., from ICU to Radiology) and backup
for respiratory, RES-Q-VAC is available sterile with Full Stop Protection for
the ultimate in performance and to meet all the OSHA regulations and CDC
guidelines for use in treating patients in isolation, and in any location.
Hospitals are required under the EMTALA regulations to provide emergency
treatments to patients anywhere in the primary facility and up to 250 yards
away. The RES-Q-VAC insures full compliance with these regulations and helps
minimize unfavorable outcomes and potential lawsuits there from. We provide
special hospital kits, which are fully stocked to meet all hospital applications
for both adult and pediatric.
Nursing Homes, Hospice, Sub-acute - we provide special configurations for dining
areas, portable suctioning for outside events and travel. Chronic suction can be
accommodated with RES-Q-VAC, which can be left by the bedside for rapid use
during critical times.
Dental Applications - we offer a version of the RES-Q-VAC, called DENTAL-EVAC
which addresses the needs of oral surgeons for emergency back up suction during
a procedure. DENTAL-EVAC is supplied with the dental suction attachments such as
saliva ejector and high volume evacuator.
Military Applications - due to its lightweight, portability, and rapid
deployment, we believe that the RES-Q-VAC is ideal for any military situation.
In addition, rapid, aggressive, and repeated suctioning best treats exposure to
chemical weapons of mass destruction such as Sarin. We believe that the
RES-Q-VAC's compact size, powerful pump, and full protection of the user from
any contamination, gives us a competitive edge in this market.
18
RES-Q-VAC is sold domestically and internationally by emergency medical device
distributors. These distributors generally sell to the end user and advertise
these products in relevant publications and in their catalogs.
COMPETITION FOR THE RES-Q-VAC
-----------------------------
Currently there are a number of competitive devices built in China such as Ambu
Res Cue Pump and Easy Breezer, which are essentially copies of the RES-Q-VAC
technology, and are available at lower costs. There is also a device called
V-Vac made by Laerdal which has strong representation. None of these devices
have our patented Full Stop Protection filter, or are available sterile. The
RES-Q-VAC currently has greater performance and while lower cost devices
initially did affect our sales, currently it appears that we are increasing and
maintaining sales in this market. However with the decrease in funding to the
emergency medical market due to an economic downturn, there can be no assurance
that our sales will continue at the current level, or that these lower cost
devices will not begin to erode our markets.
TRADE SHOWS
-----------
In this quarter ended November 30, 2008, we attended tradeshows for Freedom60
including ESID (European Society for Immunodeficiency's) from October 16 to 19
held in the Netherlands and Medica from November 19 to 22 held in Dusseldorf,
Germany.
On September 4 we held new distributor training in Middletown, NY and September
29 we held another training session for a distributor in Finland.
For RES-Q-VAC we attended the EMS Expo from October 16 to 19, 2008 held in Las
Vegas, NV.
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 chief executive officer and
chief financial officer, have evaluated the effectiveness of the company's
"disclosure controls and procedures "as such is defined in Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Based upon their evaluation, the chief executive officer and chief
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 chief
executives and chief financial officers, as appropriate to allow timely
decisions regarding required disclosure.
There have been no changes in the Company's internal control over financial
reporting during the quarter ended November 30, 2008 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
19
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
--------------------------
We are, from time to time, subject to claims and suits arising in the ordinary
course of business, including claims for damages for personal injuries, breach
of management contracts and employment related claims.
ITEM 1A. RISK FACTORS
----------------------
Not required for Smaller reporting companies
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
--------------------------------------------------
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
----------------------------------------
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------
No matters were submitted to a vote of security holders of the Company during
the quarter ended November 30, 2008.
ITEM 5. OTHER INFORMATION
--------------------------
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------------
(a) EXHIBITS
31.1 Certification of Chief Executive Officer and Principal
Accounting Officer Pursuant to Section 302 of Sarbanes-Oxley
Act 2002
32.1 Certification of Chief Executive Officer and Principal
Accounting Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act 2002
20
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934 the Registrant has duly caused this report to be signed on its
behalf by the undersigned; thereunto duly authorized.
REPRO-MED SYSTEMS, INC.
/s/ Andrew I. Sealfon January 13, 2009
---------------------
Andrew I. Sealfon, President, Treasurer,
Chairman of the Board, Director, and
Chief Executive Officer
21