The Company has evaluated subsequent events through July 15, 2014, the date on which the financial statements were issued. There were no material subsequent events that required recognition or additional disclosure in these financial statements.
Management does not believe that any of the standards adopted by the Financial Accounting Standards Board, but are not yet effective, will have a material effect on the Company’s financial reporting.
The Company leases an aircraft from a company controlled by the president. The lease payments aggregated were $5,375 for the three-months ended May 31, 2014 and 2013. The original lease agreement has expired and the Company is currently on a month-to-month basis for rental payments.
PART I – ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This Quarterly Report on Form 10-Q contains certain “forward-looking” statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) and information relating to us that are based on the beliefs of the management, as well as assumptions made and information currently available. Our actual results may vary materially from the forward-looking statements made in this report due to important factors such as uncertainties associated with future operating results, unpredictability related to Food and Drug Administration regulations, introduction of competitive products, limited liquidity, reimbursement related risks, government regulation of the home health care industry, success of the research and development effort, market acceptance of FREEDOM60®, 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 marketplace 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 May 31, 2014 VS. May 31, 2013
Net sales increased 40.5% overall from $1,876,386 in the quarter ended May 31, 2013, to $2,637,021 in the quarter ended May 31, 2014. This was due to an increase in sales of the FREEDOM60® Syringe Infusion Pump and tubing, and an increase in RMS High-Flo™ Subcutaneous Safety Needle Sets sales, quarter over quarter. Sales of the RMS High-Flo™ Subcutaneous Safety Needle Sets continued to improve in both domestic and international markets. An increase in international RES-Q-VAC sales offset most of a softening in demand for RES-Q-VAC domestically.
Net Operating Profit was $241,099 for the quarter ended May 31, 2014, as compared to $125,099 from the same period last year. This change is attributable to the increase in sales, partially offset by increases in cost of goods sold, increased R&D investment, and increased sales and marketing efforts. Net income increased 115.5% from $73,354 to $158,056.
Selling, General and Administrative costs increased 15% from $951,159 in 2013 to $1,094,065 in 2014 due, in part, to the expansion of the sales staff with the addition of a full-time representative in Europe, and increased sales and marketing efforts.
Cost of goods sold increased $403,334, or 57.0%, from $707,437 to $1,110,771 due to an increase in sales, increases in production staff, increased overtime, higher benefit costs and a change in product mix. Consequently, the gross profit margin declined this quarter to 57.9% compared to 62.3% for the comparative quarter in 2013.
Interest expense decreased to $0 in 2014 from $4,447 for the comparative quarter in 2013 as a result of retirement of long-term debt.
Research and Development expenses increased $93,642 or 248% from $37,754 in 2013 to $131,396 as a result of increased investment in new product development.
Depreciation and amortization expenses increased by $4,753 from $54,937 in 2013 to $59,690 in 2014 due to increased investment in capital assets.
LIQUIDITY AND CAPITAL RESOURCES
Net Cash provided from Operations was $265,690 for the three months ended May 31, 2014, as compared with net cash provided by operations of $214,421 for the previous three months ended May 31, 2013. Increases in inventory and prepaid expenses, and a decrease in accounts receivable were offset by increases in accounts payable and accrued expenses.
Net cash increased by $111,350 for the three months ended May 31, 2014, as compared to a net cash decrease of $297,047 for the same period in 2013. In May 2013, we paid off a note to a related party, which was responsible for the net cash decrease in that period.
We continued to invest in capital equipment, as well as patent protection for products under development.
As a result of our revenues from operations and our available capital at the end of this period, we expect to meet or exceed the Company’s liquidity needs for the next twelve months.
As of June 9, 2014, Mike R. Boscher, Chief Financial Officer, is no longer associated with the Company. Barry Short, 54, who had been serving as the Company’s Director of Administration, was promoted to the position of Interim Chief Financial Officer.
On June 9, 2014, the Company created the new position of Chief Operating Officer. Rick McWhorter, 66, who had been serving as a management consultant to the Company, was appointed to the position on an interim basis.
BRANDING AND RECOGNITION
We continue to enhance marketing effects with an expanded schedule of advertising for our product lines in appropriate industry publications on a monthly basis. The Company also exhibited at several infusion shows in the first quarter of the fiscal year.
The FREEDOM60® Syringe Infusion Pump is designed for ambulatory medication infusions. 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 accurate infusion rates and uniform flow profiles providing consistent transfer of medication.
The FREEDOM60® is popular in the treatment of Primary Immune Deficiency by injecting immune globulin (IgG) under the skin as a subcutaneous administration (SCIg). 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 advertised to the IgG market that FREEDOM60® operates in “dynamic equilibrium”, that is, the pump finds and maintains a balance between what a patient’s subcutaneous tissues are able to manage 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 more comfortable administration with fewer side effects for those patients.
We have expanded the use of the FREEDOM60® to cover antibiotics including the widely used and somewhat difficult to administer Vancomycin and beta lactams with longer infusion times. 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 as well as subcutaneous immune globulin.
RMS HIGH-FLO™ SUBCUTANEOUS SAFETY NEEDLE SET
We received approval from the U.S. Food and Drug Administration (FDA) on May 20, 2011, for domestic marketing of our new subcutaneous needle administration set. Previously available internationally, the needle set is branded the RMS High-Flo™ Subcutaneous Safety Needle Set.
On June 5, 2012, we announced that the results of an Active Controlled Clinical Simulated Use Study confirmed that RMS HIgH-Flow™ Subcutaneous Needle Sets are “safety sets.” The sets’ butterfly wing closures encase needles after use and help to protect against accidental needle stick injuries, an area of concern to the medical community. The sets were renamed to RMS HIgH-Flo™ Subcutaneous Safety Needle Sets to reflect the safety feature.
The FDA cleared a 510(k) on May 6, 2013, for enhancements to the RMS Subcutaneous Safety Needle Sets which included formally recognizing our clinical studies to support the safety needle set claim, additional lengths of 4mm and 14mm, use for greater than 24 hours, non-pyrogenic claims, the use of up to eight sites, and the 24 gauge needle.
The RMS High-Flo™ Subcutaneous Safety Needle Set was developed as an improvement in performance and safety over similar devices. Our design permits drug flows which are the same or faster than those achieved with larger gauge needles currently on the market. Offered in needle lengths of 4mm, 6mm, 9mm, 12mm and 14mm, the sets are available in combinations for single, double, triple, quadruple, penta and hexa infusions. Using a Low Residual “Y” Connector, needle sets can deliver to as many as eight infusion sites.
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 providers to consider alternatives to expensive electronic systems especially for new subcutaneous administrations which usually cannot be done with gravity. Due to 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.
IMPORTANCE OF INSURANCE REIMBURSEMENT TO FREEDOM60® SALES
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). 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 code significantly increases the reimbursement for the FREEDOM60® for billable syringe pump application approved by Medicare. Current approved uses under Medicare include among others, subcutaneous immune globulin, antivirals, antifungals, and chemotherapeutics.
Effects, if any, of the federal government’s Public Law 111-148, The Patient Protection and Affordable Care Act, on reimbursements for infusion pumps and related supplies and services cannot be stated with certainty at this time.
COMPETITION FOR THE FREEDOM60®
Competition for the FREEDOM60® for IgG consists mostly of 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.
In expanded uses beyond SCIg, competition for FREEDOM60® would come from gravity bags and elastomeric pumps in addition to electric/electronic pumps.
There is the potential for new drugs to enter the market, containing products such as 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 that their policy regarding reimbursement for other infusion pumps that are currently in the market or new ones that may enter shortly will not change, which could adversely affect our sales into this market.
There is a mechanical pump, manufactured by a competitor, which we do not believe to have FDA clearance. The new pump uses a prior design of a simple coil spring which does not create a constant pressure and which had been removed from the market several years ago. The competitor offering this product is also representing that it is capable of manufacturing lower cost accessories which can be used with the FREEDOM60®. We have recommended that our customers use RMS tubing and needle sets exclusively for best performance, accuracy and safety. We are currently involved in legal proceedings with such competitor involving various claims and counter-claims.
RES-Q-VAC® PORTABLE MEDICAL SUCTION
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 Full Stop Protection® filter(FSP) and disposable features of the RES-Q-VAC® reduce the risk of exposing health professional to HIV or SARS when suctioning a patient or during post treatment cleanup. All of the parts that connect to the pump are disposable.
A critical component and advantage of the RES-Q-VAC® system is our Full Stop Protection® filter, a patented filtering system that both prevents leakage and overflow of the aspirated fluids, even at full capacity, and traps virtually 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 ‘Occupational Exposure to Bloodborne Pathogens’ CFR29 1910.1030. 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 Bloodborne Pathogen regulation and that the product’s use would fulfill the regulatory requirements.
Recent concerns are for diseases that are easily transmitted by small aerosolized droplets such as Asian Bird Flu, Swine Flu, and resistant tuberculosis. Additional concerns are hepatitis and HIV, among others.
One 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, the elderly, patients on ventilators and with tracheostomies all benefit from the portability, cost and performance of RES-Q-VAC®. In hospitals, RES-Q-VAC® provides emergency backup due to power loss or breakdown of the wall suction system.
Hospital Use - for crash carts, emergency rooms, patients in isolation, patient transport (e.g., from ICU to Radiology) and respiratory backup, RES-Q-VAC® is available sterile with Full Stop Protection® for the ultimate in performance and to meet all appropriate OSHA regulations and CDC guidelines for treating patients. Hospitals are required under the EMTALA regulations to provide emergency treatment to patients anywhere in the primary facility and up to 250 yards away. The RES-Q-VAC® ensures full compliance with these regulations and helps minimize unfavorable outcomes and, therefore, potential lawsuits. 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 and other areas, and portable suctioning for outside events and travel. Chronic suction can be accommodated with RES-Q-VAC®, which can be left by the bedside for immediate 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 backup 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, exposure to chemical weapons of mass destruction such as Sarin is best treated by rapid, aggressive, and repeated suctioning. 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.
We continue actively pursuing a direct sales effort into the hospital market and continue our effort into nursing homes working with direct sales and several regional distributors in the respiratory market. We also work with national regional distributors who are well represented in the hospital respiratory market.
COMPETITION FOR THE RES-Q-VAC®
We believe that the RES-Q-VAC® is currently the performance leader for manual, portable suction instruments. In the emergency market, the primary competition is the V-Vac™ from Laerdal. The V-Vac™ is more difficult to use, cannot suction infants, and cannot be used while wearing heavy gloves such as in chemical warfare or in the extreme cold. Laerdal has more resources than Repro-Med Systems and had begun marketing the V-Vac™ before RES-Q-VAC® entered the market. Another competitor is Ambu, with the Res-Cue brand pump, a product similar to our design, made in China. We believe that the product is not as well made or as versatile, and may not be purchased by the military segment of the market due to lines of supply concerns. We believe that the addition of Full Stop Protection® substantially separates the RES-Q-VAC® from competitive units, which tend to leak fluid when becoming full or could pass airborne pathogens during use. There is a heightened concern from healthcare professionals concerning exposure to disease and we believe the RES-Q-VAC® provides improved protection for these users.
PART I – ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
PART I – ITEM 4. CONTROLS AND PROCEDURES.
The Company’s management, including the Company’s Principal 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 evaluations, the Principal 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 Principal Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There have been no changes in the Company’s internal control over financial reporting during the quarter ended May 31, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We commenced a declaratory judgment action in 2013 to establish the invalidity and non-infringement of claims of a patent of a competitor that alleged that our needle sets would infringe. The defendant answered the complaint and asserted various counterclaims that we believe are without merit. We subsequently added claims against the defendant to show that the defendant had engaged in various unfair business practices. The litigation is in early stage discovery.
ITEM 1A. RISK FACTORS.
Not required for smaller reporting companies.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On December 20, 2013, we executed an agreement effective March 1, 2014, with a Company director, Dr. Mark Baker, to provide clinical research and support services related to new and enhanced applications for the FREEDOM60® Syringe Infusion System. Authorized by the Board of Directors, the agreement provides for payment of 420,000 shares of common stock valued at $0.20 per share over a three-year period.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
ITEM 4. MINE SAFETY DISCLOSURES.
ITEM 5. OTHER INFORMATION.
ITEM 6. EXHIBITS.
Certification of Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act 2002
Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act 2002
Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act 2002
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act 2002
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”.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
REPRO-MED SYSTEMS, INC.
July 15, 2014
/s/ Andrew I. Sealfon
Andrew I. Sealfon, President, Chairman of the Board, Director, Principal Executive Officer
July 15, 2014
/s/ Barry K. Short
Barry K. Short, Treasurer and Chief Financial Officer (Interim)