ITEM 1A. RISK FACTORS
RISK FACTORS
An investment in our common stock involves significant risks. Before making an investment in our common stock, you should carefully consider all of the information contained in this Annual Report on Form 10-K and our other filings with the SEC including the material risks and uncertainties that we have identified below. The risks and uncertainties identified below are not the only risks and uncertainties we face. If any of the material risks or uncertainties that we face were to occur, the trading price of our common stock could decline and you could lose part or all of your investment. Please note that additional risks not currently known to us or that we currently deem immaterial also may adversely affect our business, operations, results of operations, financial condition and prospects.
Risks Related to Our Business
We may be unable to compete successfully in our highly competitive industry.
We are a global company that faces competition from a wide range of international and domestic companies, including those that deliver electronic volumetric pumps, elastomeric infuser pumps and other mechanical devices. These include large medical device companies with multiple product lines, some of which may have greater financial and marketing resources than we do. We also face competition from companies that are even more specialized than ours with respect to particular markets or product lines. Some of those companies have greater financial and sales and marketing resources than we do or offer products at a lower price point than ours. In addition, former employees may develop products that are competitive with ours or capitalize on customer relationships developed while employed with us, subject to their continuing obligations under confidentiality agreements and other restrictive covenants that may survive their employment. We face competition on the basis of product features, clinical or economic outcomes, product quality, availability, price, services, technological innovation and other factors. In addition, we face changing customer preferences and requirements, changes in the ways health care services are delivered, including the transition of high-acuity care to lower-acuity, and non-acute care settings. Competition may increase further as additional companies begin to enter our markets or modify their existing products to compete directly with ours. If we are forced to reduce our prices due to increased competition, our business could suffer.
The medical technology industry has also experienced a significant amount of consolidation, resulting in larger companies with greater access to markets. Health care systems, other health care companies and even retail pharmacies are also consolidating, resulting in greater purchasing power for these companies. As a result, competition among medical device suppliers to provide goods and services has increased. Group purchasing organizations and integrated health delivery networks have also served to concentrate purchasing decisions for some customers, which has led to downward pricing pressure for medical device suppliers. Further consolidation in the industry could intensify competition among medical device suppliers and exert additional pressure on the prices of our products.
Consolidation in the medical industry could have a negative impact with payor and provider relationships and distributor relationships, as we could lose market share as consolidation occurs.
Technological developments by others may disrupt our business and negatively impact our revenues.
The medical device industry is subject to rapid technological change and discovery and frequent product introductions. The development of new or improved products, processes or technologies by other companies that provide better features, pricing or clinical outcomes or economic value may render our products or proposed products obsolete or less competitive. If our competitors respond more quickly to new or emerging technologies and changes in customer requirements or we do not introduce new versions or upgrades to our product portfolio in response to those requirements, our products may not be marketable. If competitors develop more effective or affordable products, or achieve earlier patent protection or product commercialization for new products than we do, our operations will likely be adversely affected.
If we are unable to successfully introduce new products or fail to keep pace with advances in technology, our business, financial condition and results of operations could be adversely affected.
We need to successfully introduce new products to achieve our strategic business objectives. A significant element of our strategy is to increase revenue growth by investing in innovation and new product development, which will require substantial resources. Our successful product development will depend on many factors, including our ability to attract strong talent to lead our research and development efforts, properly anticipate and satisfy customer needs, adapt to new technologies, obtain regulatory concurrence on a timely basis, demonstrate satisfactory clinical results, manufacture products in an economical and timely manner, obtain appropriate
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intellectual property protection for our products, gain and maintain market acceptance of our products, and differentiate our products from those of our competitors. In addition, patents attained by others can preclude or delay our commercialization of a product. There can be no assurance that any products now in development or that we may seek to develop in the future will achieve technological feasibility, obtain regulatory concurrence or gain market acceptance. If we cannot successfully introduce new products or adapt to changing technologies, our products may become obsolete and our revenue and profitability could suffer.
We are subject to costly and complex laws and governmental regulations and any adverse regulatory action may materially adversely affect our financial condition and business operations.
Our medical devices and technologies, as well as our business activities, are subject to a complex set of regulations and rigorous enforcement, principally by the FDA, and numerous other federal, state, and non-U.S. governmental authorities. To varying degrees, each of these agencies requires us to comply with laws and regulations governing the design, development, and manufacturing; testing, , labeling, content and language of instructions for use and storage; clinical trials; product safety; establishment registration and device listing; marketing, promotion, and distribution of our products; premarket clearance and approval; record keeping procedures; advertising and promotion; recalls and field safety corrective actions; post-market surveillance, including reporting of deaths or serious injuries and malfunctions that, if they were to recur, could lead to death or serious injury; post-market approval studies; and product import and export.
In the U.S., our device products are subject to clearance or approval by FDA under the FFDCA. Before we can market a new medical device, or a new use of, new claim for, or significant modification to, an existing product, we must first receive either 510(k) clearance or approval of a PMA application from the FDA, unless an exemption applies. Under the 510(k) process, the manufacturer must submit to the FDA a premarket notification, demonstrating that the device is “substantially equivalent,” as defined in the statute, to a legally marketed predicate device. To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics and not raise different questions of safety or effectiveness than the predicate device. If the manufacturer is unable to demonstrate substantial equivalence to FDA’s satisfaction, or if there is no available predicate device, then the manufacturer may be required to seek approval through the PMA application process, which is generally more costly and time consuming than the 510(k) process. Through the PMA application process, the applicant must submit data and information demonstrating reasonable assurance of the safety and effectiveness of the device for its intended use. Accordingly, a PMA application typically includes, but is not limited to, extensive technical information regarding device design and development, pre-clinical and clinical trial data, manufacturing information, labeling and financial disclosure information for the clinical investigators in device studies.
We cannot guarantee that we will be able to obtain or maintain FDA
510(k) clearance or premarket approval for our new products or enhancements or modifications to existing products (including the
use of our FREEDOM System with therapies not covered by the existing FDA clearance), and the failure to maintain approvals or clearances,
or obtain approval or clearance could have a material adverse effect on our business, results of operations, financial condition
and cash flows. Even if we are able to obtain approval or clearance, it may:
• take a significant amount of time
• require the expenditure of substantial resources
• involve modifications, repairs, or replacements of our products, and
• limit the proposed uses of our products.
Both before and after a product is commercially released, we have ongoing responsibilities under the FDA and other applicable non-U.S. government agency laws and regulations. The FDA and other worldwide regulatory agencies actively monitor compliance with local laws and regulations through review and inspection of design and manufacturing practices, recordkeeping, reporting of adverse events, labeling and promotional practices. The results of these inspections can include inspectional observations on the FDA’s Form 483, warning letters, or other forms of enforcement. If the FDA, state or foreign regulatory authorities were to conclude that we are not in compliance with any applicable laws or regulations, or that any of our medical products are ineffective or pose an unreasonable health risk, they could deem our products adulterated or misbranded, and take enforcement action against us. FDA, state and foreign regulatory authorities have broad enforcement powers. Possible enforcement actions include, but are not limited to: temporarily or permanently suspending the sale and/or distribution of such medical products; detaining or seizing all adulterated or misbranded medical products; ordering recall, repair, replacement, or refund of such products; refusing to grant pending pre-market approval or 510(k) clearance applications; and/or requiring us to notify health professionals and others that the devices present unreasonable risks of substantial harm to the public health. In addition, the FDA prohibits device manufacturers from promoting their products for uses and indications other than those set forth in the approved product labeling, and failure to comply with this prohibition could subject us to significant civil or criminal exposure, administrative obligations and costs, and/or other potential penalties from, and/or agreements with, the federal government. The FDA and other non-U.S. government agencies may also assess civil or criminal penalties against us, our officers or employees and impose operating restrictions on a company-wide basis. The FDA may also recommend prosecution
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to the U.S. Department of Justice. Any adverse regulatory action, depending on its magnitude, may restrict us from effectively marketing and selling our products and limit our ability to obtain future pre-market clearances or approvals, and could result in a substantial modification to our business practices and operations.
Regulations regarding the development, manufacture and sale of medical devices are evolving and subject to future change, and have tended to become more stringent over time. Regulatory changes could result in restrictions on our ability to continue or expand our operations, higher than anticipated costs, or lower than anticipated sales. We cannot predict what impact, if any, those changes might have on our business; however, failure to comply with applicable regulatory requirements could have a material adverse effect on our business, financial condition, and results of operations. Later discovery of previously unknown problems with a product or manufacturer could result in fines, delays or suspensions of regulatory clearances or approvals, seizures or recalls of products, physician advisories or other field actions, operating restrictions and/or criminal prosecution. We may also initiate field actions as a result of a failure to strictly comply with our internal quality policies. The failure to receive product approval clearance on a timely basis, suspensions of regulatory clearances, seizures or recalls of products, physician advisories or other field actions, or the withdrawal of product approval by the FDA or by comparable agencies in foreign countries could have a material adverse effect on our business, financial condition or results of operations.
Governmental regulations outside the U.S. have also, and may continue to, become increasingly stringent and common. In the EU, for example, a new MDR was published in 2017 which, when it enters into full force in 2021, will include significant additional premarket and post-market requirements. Penalties for regulatory non-compliance could be severe, including fines and revocation or suspension of a company’s EU device approval, ability to distribute products and criminal sanctions. Future foreign governmental laws and regulations may have a material adverse effect on us.
In addition, exported devices are subject to the regulatory requirements of each country to which the device is exported. Some countries do not have medical device regulations, but in most foreign countries, medical devices are regulated. Frequently, regulatory approval may first be obtained in a foreign country prior to application in the U.S. due to differing regulatory requirements; however, other countries, such as China for example, require approval in the country of origin or legal manufacturer first. Most countries outside of the U.S. require that product approvals be renewed or recertified on a regular basis, generally every four to five years. The renewal or recertification process requires that we evaluate any device changes and any new regulations or standards relevant to the device and conduct appropriate testing to document continued compliance. Where renewal or recertification applications are required, they may need to be renewed and/or approved in order to continue selling our products in those countries. There can be no assurance that we will receive the required approvals for new products or modifications to existing products on a timely basis or that any approval will not be subsequently withdrawn or conditioned upon extensive post market study requirements.
Our global regulatory environment is becoming increasingly stringent and unpredictable, which could increase the time, cost and complexity of obtaining regulatory approvals for our products, as well as the clinical and regulatory costs of supporting those approvals. Several countries that did not have regulatory requirements for medical devices have established such requirements in recent years and other countries have expanded on existing regulations. Certain regulators are exhibiting less flexibility and are requiring local preclinical and clinical data in addition to global data. While harmonization of global regulations has been pursued, requirements continue to differ significantly among countries. In the United Kingdom, for example, the Medicines and Healthcare products Regulatory Agency (MHRA) is responsible for regulating the UK medical device market. With recent changes in the United Kingdom’s membership with the European Union, the MHRA has and will continue to impose new regulatory obligations becoming effective in 2021 through 2023, for medical device manufacturers. We expect this global regulatory environment will continue to evolve, which could impact our ability to obtain future approvals for our products or could increase the cost and time to obtain such approvals in the future.
Proposed changes to the FDA 510(k) clearance pathway and post-market safety monitoring process could adversely affect our ability to offer our new and existing products.
As discussed above, the FDA’s and other regulatory authorities’ policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. In addition, the FDA may change its clearance and approval policies, adopt additional regulations or revise existing regulations, or take other actions which may prevent or delay approval or clearance of our future products under development.
In fact, the FDA has announced its intention to pursue comprehensive reforms to its current 510(k) clearance pathway, which is used for clearance of low- to moderate-risk devices that are substantially equivalent to a device already on the market, and to its post-market safety monitoring process. In May 2019, the FDA solicited public feedback on its plans to develop proposals to drive manufacturers utilizing the 510(k) pathway toward the use of newer predicates, including whether the FDA should publish a list of devices that have been cleared on the basis of demonstrated substantial equivalence to predicate devices that are more than 10 years old. The FDA sought input on whether it should consider certain actions, such as whether to sunset certain older devices that were
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used as predicates under the 510(k) clearance pathway. These proposals have not yet been finalized or adopted, and the FDA may work with Congress to implement such proposals through legislation. Accordingly, it is unclear the extent to which any proposals, if adopted, could impose additional regulatory requirements on us that could delay our ability to obtain new 510(k) clearances, increase the costs of compliance, or restrict our ability to maintain our current clearances, or otherwise create competition that may negatively affect our business.
In September 2019, the FDA finalized a guidance to describe an optional “safety and performance based” premarket review pathway for manufacturers of “certain, well-understood device types” to demonstrate substantial equivalence under the 510(k) clearance pathway, by demonstrating that such device meets objective safety and performance criteria established by the FDA, obviating the need for manufacturers to compare the safety and performance of their medical devices to specific predicate devices in the clearance process. The FDA intends to maintain a list of device types appropriate for the “safety and performance-based pathway” and develop product-specific guidance documents that identify the performance criteria for each such device type, as well as the testing methods recommended in the guidance, where feasible. The FDA may establish performance criteria for classes of devices for which we or our competitors seek or currently have received clearance. It is unclear the extent to which such performance standards, if established, could impact our ability to obtain new 510(k) clearances or otherwise create competition that may negatively affect our business.
These reforms could delay or prevent us from obtaining or maintaining 510(k) clearances or other premarket authorizations for our existing or new devices. Compliance with the new rules could require us to undertake significant additional costs prior to and following commercialization of our products, which may reduce the profitability of those products.
In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. Any new statutes, regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of any future products or make it more difficult to obtain clearance or approval for, manufacture, market or distribute our products. We cannot determine what effect changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted may have on our business in the future. Such changes could, among other things, require: additional testing prior to obtaining clearance or approval; changes to manufacturing methods; recall, replacement or discontinuance of our products; or additional record keeping.
Health care policy changes and industry cost-containment measures could result in downward pricing pressure for our products and limit our sales.
Most of our customers, and those to whom our customers supply medical devices, rely on third-party payers, including government programs and private health insurance plans, to reimburse some or all of the cost of the medical devices we manufacture. The continuing efforts of governmental authorities, insurance companies and other payers of health care costs to contain or reduce these costs and, more generally, to reform the health care system, could limit the prices we are able to charge for our products or the amounts of reimbursement available for our products or the drugs that they administer, which would put pressure on us to reduce our prices for our products and/or limit our sales. The adoption of some or all of these proposals could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Our business depends on an adequate supply of drugs to be administered by our products.
Demand for our products depends on the availability of drugs to be administered by them. Currently, most of our products require immunoglobulin therapies that rely on blood plasma collection for drugs such as Hizentra® and Cuvitru®. Any disruption in the supply of these drugs for any reason, including contamination, could significantly adversely affect our business. The change of any drug indication by the FDA or comparable foreign governmental agencies could also result in decreased demand for our products. In addition, pharmaceutical companies and other competitors have or are developing alternative therapies for disease states that are deliverable without a medical device. Due to the COVID-19 pandemic, thousands of blood drives have been canceled as community organizations and businesses restrict access to many locations and there are less volunteers resulting in shortages of blood plasma donations. If there is not an adequate supply of drugs requiring administration by medical devices such as those provided by us or alternative therapies are developed, our sales may suffer and/or our products may become obsolete.
Issues with product quality could have an adverse effect upon our business, subject us to regulatory actions, cause a loss of customer confidence in us or our products, among other negative consequences.
Quality management plays an essential role in determining and meeting customer requirements, preventing defects, improving our products and services, and assuring the safety and efficacy of our products. Our future success depends on our ability to maintain and continuously improve our quality management program. While we have a quality system that covers the lifecycle of our products, quality and safety issues may occur with respect to any of our products. A quality or safety issue may result in adverse inspection reports, voluntary or official action indicated, warning letters, import bans, product recalls (either voluntary or required by the FDA or
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similar governmental authorities in other countries) or seizures, monetary sanctions, injunctions to halt manufacture and distribution of products, civil or criminal sanctions, costly litigation, refusal of a government to grant approvals and licenses, restrictions on operations or withdrawal of existing approvals and licenses. An inability to address a quality or safety issue in an effective and timely manner may also cause negative publicity, a loss of customer confidence in us or our current or future products, which may result in the loss of sales and difficulty in successfully launching new products.
Defects or quality issues associated with our products could adversely affect the results of our operations.
The design, manufacture and marketing of medical devices involve certain inherent risks. Manufacturing or design defects, component failures, unapproved or improper use of our products, or inadequate disclosure of risks or other information relating to the use of our products can lead to injury or other serious adverse events. We are subject to the FDA’s medical device reporting regulations and similar foreign regulations, which require us to report to the FDA when we receive or become aware of information that reasonably suggests that one or more of our products may have caused or contributed to a death or serious injury or malfunctioned in a way that, if the malfunction were to recur, it could cause or contribute to a death or serious injury. The timing of our obligation to report is triggered by the date we become aware of the adverse event as well as the nature of the event. If we fail to comply with our reporting obligations, the FDA could take action, including warning letters, untitled letters, administrative actions, criminal prosecution, imposition of civil monetary penalties, revocation of our device clearances or approvals, seizure of our products, or delay in clearance or approval of future products.
These adverse events could also lead to safety alerts relating to our products or recalls (either voluntary or as required by the FDA or similar governmental authorities in other countries), and could result, in certain cases, in the removal of a product from the market. A recall could result in significant costs and lost sales and customers, enforcement actions and/or investigations by state and federal governments or other enforcement bodies, as well as negative publicity and damage to our reputation that could reduce future demand for our products. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital, distract management from operating our business and may harm our reputation and financial results.
Personal injuries relating to the use of our products can also result in significant product liability claims being brought against us. A product liability claim, regardless of its merit or outcome, could not only result in significant legal defense costs, but also have a material adverse effect on our business and reputation and ability to attract and retain customers for our products. In some circumstances, adverse events could also cause delays in regulatory approval of new products or the imposition of post-market approval requirements.
Interruption of our manufacturing operations could adversely affect our future revenues and operating income.
The FDA and other U. S. and non-U.S. government agencies regulate our manufacturing operations, which includes product assembly, calibration, pre- and post-assembly quality control inspection and testing, and final packaging for all of our products at our Chester, NY facility. Variations in the manufacturing process may result in production failures which could lead to launch delays, product shortage, unanticipated costs, lost revenues and damage to our reputation. A failure to identify and address manufacturing problems prior to the release of products to our customers may also result in a quality or safety issue that could result in a recall or other inability to sell our products.
Our products are manufactured and stored at the manufacturing facility in Chester, NY. Products are also stored in storage facilities in the local NY area. Loss or damage to our manufacturing and storage sites due to weather, vandalism, terrorism, a natural disaster, issues in our manufacturing process, equipment failure or other factors, could adversely affect our ability to manufacture sufficient quantities of products or otherwise deliver products to meet customer demand or contractual requirements which may result in a loss of revenue and other adverse business consequences, including damage to our relationship with customers. Because of the time required to construct, approve and register a manufacturing facility, we have entered into a supplier agreement with Command, to assist with current production requirements and production capacity in the event we lose manufacturing capacity or products are otherwise unavailable due to natural disaster, regulatory action or otherwise.
We take precautions to safeguard our facility and storage site, including acquiring insurance, adopting health and safety protocols and utilizing off-site storage of computer data. Our insurance may not cover our losses in any particular case. In addition, regardless of the level of insurance coverage, damage to our facilities may harm our business, financial condition and operating results.
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We may need to substantially change our manufacturing operations in order to expand.
As of December 31, 2020, we currently have two 6-month options to extend our current lease of our manufacturing facility, which is also our headquarters, through August 2022. Although we believe this facility is sufficient to meet our current, and foreseeable future production requirements, we are considering various alternatives to expand our manufacturing operations and carry out our business plan. There is no guaranty that any of these alternatives will be realized on favorable terms, or at all. If we do find an appropriate alternative, we may need to expend significant resources to ensure continued regulatory compliance. Changes to our corporate headquarters and/or manufacturing operations could cause us to incur significant expenses and could delay or reduce our ability to manufacture our products for some time. Our financial condition and results of operation could be materially adversely affected by any such change.
We are subject to lawsuits.
We have been and may be party to lawsuits, settlement discussions, mediations, arbitrations and other disputes, including patent and product liability claims, whether brought by companies, individuals or governmental authorities. These matters may result in a loss of patent protection, reduced revenue, incurrence of significant liabilities and diversion of our management’s time, attention and resources. Our insurance coverage may not provide adequate protection against actual losses. In addition, we are subject to the risk that one or more of our insurers may become insolvent and become unable to pay claims that may be made in the future. Even if we maintain adequate insurance, claims could have a material adverse effect on our financial condition, liquidity and results of operations and on our ability to obtain suitable, adequate or cost-effective insurance in the future. Litigation and other disputes, including any adverse outcomes, may have an adverse impact on our business, operations or financial condition. Even claims without merit could subject us to adverse publicity and require us to incur significant legal fees.
If we are unable to protect our patents or other proprietary rights, or if we infringe the patents or other proprietary rights of others, our competitiveness and business prospects may be materially damaged.
Patent and other proprietary rights are essential to our business. We own patents, trade secrets, trademarks and/or other intellectual property rights related to many of our products. Our success depends to a significant degree on our ability to obtain and enforce patents, both in the U.S. and in other countries. We can lose the protection afforded by these intellectual property assets through patent expirations, legal challenges or governmental action. Additionally, our intellectual property rights may be challenged or infringed upon by third parties, particularly in countries where property rights are not highly developed or protected, or we may be unable to enter into license agreements with third-party owners of intellectual property on reasonable terms. Unauthorized use of our intellectual property rights or inability to preserve existing intellectual property rights could adversely impact our competitive position and results of operations.
The patent position of a medical device company is often uncertain and involves complex legal and factual questions. Significant litigation concerning patents and products is pervasive in our industry. Patent claims include challenges to the coverage and validity of our patents on products or processes as well as allegations that our products infringe patents held by competitors or other third parties. A loss in any of these types of cases could result in a loss of patent protection or the ability to market products, which could lead to a significant loss of sales, or otherwise materially affect future results of operations. We also rely on trademarks, trade secrets and know-how to develop, maintain and strengthen our competitive positions. Third parties may know, discover or independently develop equivalent proprietary information or techniques, or they may gain access to our trade secrets or disclose our trade secrets to the public.
Although our employees, consultants, parties to collaboration agreements and other business partners are generally subject to confidentiality or similar agreements to protect our confidential and proprietary information, these agreements may be breached, and we may not have adequate remedies in the event of a breach of confidence. To the extent that our employees, consultants, parties to collaboration agreements and other business partners use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.
Furthermore, our intellectual property, other proprietary technology and other sensitive company data is potentially vulnerable to loss, damage or misappropriation from system malfunction, computer viruses, unauthorized access to our data or misappropriation or misuse thereof by those with permitted access and other events. While we have invested to protect our intellectual property, confidential information and other data, and continue to work diligently in this area, there can be no assurance that our precautionary measures will prevent breakdowns, breaches, cyber incidents or other events. Such events could have a material adverse effect on our reputation, business, financial condition or results of operations.
Misappropriation or other loss of our intellectual property from any of the foregoing would have an adverse effect on our competitive position and may cause us to incur substantial litigation costs.
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We need to attract and retain key employees to be competitive.
Our ability to compete effectively depends upon our ability to attract and retain executives and other key employees, including people in technical, marketing, sales, research and quality assurance and regulatory compliance positions. We depend on key management personnel and attracting and retaining other qualified personnel, and our business could be harmed if we lose key management personnel or cannot attract and retain other qualified personnel. We do not maintain any “key man” insurance policies on the lives of any of our employees.
In addition, if we expect to grow our operations, it will be necessary for us to attract and retain additional qualified personnel. In particular, we will need to find experienced key employees to lead our research and development and quality assurance and regulatory compliance functions. The failure to attract, integrate, motivate, and retain additional skilled and qualified personnel could have a material adverse effect on our business. We compete for such personnel against numerous companies, including larger, more established companies with significantly greater financial resources than we possess. Our ability to recruit such talent will depend on a number of factors, including compensation and benefits, work location and work environment. There can be no assurance that we will be successful in attracting or retaining such personnel and the failure to do so could have a material adverse effect on our business, financial condition and results of operations.
We sell a majority of our products through only a few distributors on whom we depend, and our financial results depend on their purchasing patterns.
Most of our customers prefer to purchase our products through distributors, rather than directly from us, because of “one-stop shopping” convenience and their ability to ship directly to patients. We sell most of our products through a small number of distributors, two in the U.S. and two outside the U.S. As of December 31, 2020, these four distributors comprised approximately 69% of our net revenues with one U.S. distributor contributing 51%. Purchasing patterns by these distributors cannot always be predicted and fluctuate from quarter to quarter and year to year based on, among other things, their expectations of customer demand. Any decline in business with the distributors outside the U.S. could have an adverse impact on our business. If we were unable to sell through the distributors outside the U.S., we would have to find other distributors or broaden our customer base and expand direct relationships with customers. Other distributors may not be available or may not agree to arrangements that are commercially reasonable. In the U.S. we could transition to direct customer purchase; however, customers may not want to purchase directly from us and may decide to purchase competitors’ products through their distributors. Moreover, a transition from distributors to direct customer purchase would be time consuming and costly.
We and our customers are subject to extensive regulation by governments around the world, and if these regulations are not complied with, existing and future operations may be curtailed, and we could be subject to liability.
Our devices and our customers’ drug-device combination products that utilize our products are subject to extensive regulation by governmental authorities in the United States, Europe and other countries, including the FDA. Not only do these regulations present challenges during the regulatory approval process, but after our devices or our customers’ drug-device combination products that utilize our products are approved for new indications and placed in the market, numerous regulatory requirements will apply. These include, but are not limited to QSR, labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or “off label” uses, medical device reporting regulations and post-market surveillance regulations, and laws and regulations that govern the development, testing, manufacturing, advertising, marketing and distribution of medical devices, including our devices and our customers’ drug-device combination products that utilize our products. The FDA has broad post-market and regulatory enforcement powers.
If our devices are commercialized as part of a drug-delivery combination product we, as the manufacturer of the device component of that combination product, we are subject to unannounced and preapproval inspections by the FDA of our manufacturing facility to determine our compliance with QSR and cGMP.
Failure to comply with applicable regulatory requirements can result in an enforcement action by the FDA or other regulatory authority, which may include any or all of the following sanctions: fines, injunctions, consent decrees and civil penalties, recall or seizure of our products or our customers’ drug-device combination products, operating restrictions, partial suspensions or total shutdown of production, refusing our customers’ requests for regulatory approvals of their drug-device combination products or new intended uses, as applicable, refusing our requests for regulatory approval of our devices, withdrawing our customers’ or our regulatory approvals that may be granted and criminal prosecution.
The therapeutic efficacy of certain of our customers’ drug-device combination products that utilize our device is either unproven in humans or has only been proven in limited circumstances, and we may not be able to successfully develop and sell our products in combination with our customers’ drug-device combination products.
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While some of our customers use our products with established, approved drugs, in certain instances, the benefits of those drugs as injectable therapies are either unproven or have only been proven in limited circumstances. Our ability to generate revenue from our products will depend heavily on the successful development, commercialization and sales of drugs included in our customers’ drug-device combination products, which is subject to many potential risks. For example, data developed in clinical trials or following the commercialization of drugs included in our customers’ drug-device combination products may show that such therapies do not prove to be effective treatments for the targets they are being designed to act against (or as effective as other treatments available). In clinical trials or following commercialization, it may be shown that those drugs interact with human biological systems in unforeseen, ineffective or harmful ways. If those drugs are associated with undesirable side effects or have characteristics that are unexpected, the pharmaceutical companies that make those drugs may need to abandon clinical development or discontinue commercial sales or limit clinical development or sales to certain uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective. As a result of these and other risks described herein that are inherent in the development and sale of therapeutic agents, pharmaceutical companies may never successfully develop or successfully commercialize their drugs, or the commercialization of their drugs may be abandoned or severely limited, which may limit our profitability with respect to customers with drug-device combination products including those drugs and our device, and we may not be successful in achieving commercial scale production and sales of our injectable drug delivery systems in combination with certain drugs.
Certain of the injectable therapies being targeted for use with our products are not approved, but are in various phases of clinical development. These injectable therapies may be independently terminated by their makers prior to submission of a regulatory filing or even after regulatory approval, resulting in the cessation of any revenue associated with that contract or program.
We work with pharmaceutical and biotechnology companies who are targeting the use of our products with a variety of injectable therapies. Certain of those injectable therapies are not FDA approved, and are in various phases of clinical development. The clinical development of these pipeline therapies can be terminated by their developers at any stage. Furthermore, these pharmaceutical companies could obtain regulatory approval for their injectable therapies, and decide for business reasons not to market and sell their drugs with a drug-device combination product that utilizes our device. Prior investments we have made in manufacturing capacity or research and development will then not result in the generation of revenue that would have previously been anticipated.
Our commercial success depends upon the attainment of significant market acceptance of drug product candidates to be included in our customers’ drug-device combination products that utilize our device, if approved, among physicians, patients, healthcare payers or the medical community.
Even if pharmaceutical companies obtain regulatory approval for their drug product candidates to be included in our customers’ drug-device combination products that utilize our device, their product candidates may not gain sufficient levels of market acceptance among physicians, healthcare payers, patients or the medical community to make them commercially feasible. Market acceptance of our customers’ product candidates, if they receive approval, depends on a number of factors, including the:
• efficacy and safety of the product candidates;
• clinical indications for which the product candidates are approved;
• safety of the product candidates seen in a broader patient group;
• prevalence and severity of any side effects;
• cost of treatment in relation to alternative treatments;
• relative convenience and ease of administration; and
• effectiveness of the pharmaceutical companies’ sales and marketing efforts.
If pharmaceutical companies’ candidates are approved but fail to achieve market acceptance among physicians, patients or healthcare payers, we may not be able to generate anticipated revenue. This may limit our ability to generate anticipated revenue from our prior investments. Moreover, even if we achieve commercial scale production and sales of our injectable drug delivery systems in combination with certain injectable therapies, the makers of such therapies may face indirect competition from companies who develop and market other brand name, biosimilar or generic injectable therapies as well as alternative treatments and delivery methods that compete with our customers’ drug-device combination products that utilize our products, which may have a material adverse effect on our results of operations, our financial condition and/or cash flows.
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Most brand name injectable therapies will face future competition from generic or biosimilar therapies, which could significantly reduce their commercial viability.
Brand name injectable therapies will usually become exposed to competition from generic or biosimilar rivals at some time after their regulatory approval and commercial launch. The average selling price and market share of brand name injectable therapies can be significantly diminished following the introduction of generic or biosimilar competition. These factors may result in our customers using our products with their brand name injectable therapies seeking to withdraw such injectable therapy from the market, or change market tactics in a way that makes the use of our products cost prohibitive. This may result in the termination of supply contracts and the significant loss of revenue.
If we are unable to obtain sufficient components or raw materials on a timely basis or for a cost-effective price, or if we experience other supply difficulties, our business and results of operations may be adversely affected.
Our ability to meet customer demand depends, in part, on our ability to obtain timely and adequate delivery of raw materials and components for our products. All of the materials and components that go into the manufacturing of our products are sourced from third-party suppliers.
The price and supply of materials and components for our products may be impacted or disrupted for reasons beyond our control. While we work with suppliers to ensure continuity of supply, no assurance can be given that these efforts will be successful. Although we do carry strategic inventory and maintain insurance to help mitigate the potential risk related to any supply disruption, there can be no assurance that such measures will be sufficient or effective. The termination, reduction or interruption in supply of raw materials and components and an inability to quickly develop acceptable alternative sources for such supply, could adversely impact our ability to manufacture and sell certain of our products in a timely or cost-effective manner.
Some of the components for our products are provided by a single supplier, including our Taiwan-based supplier of molded plastic parts and our U.S.-based supplier of tubing. We also rely on a single supplier to provide needle set subassemblies for our products. We do not have long-term agreements in place with all of these suppliers, although we entered into a long-term agreement with our needle set subassembly supplier in 2020. Due to regulatory requirements relating to the qualification of suppliers, we may not be able to establish additional or replacement sources on a timely basis or without excessive cost.
Additionally, the sourcing of our needle sets and tubing products with Command are manufactured in Nicaragua. There could be a delay in providing the products timely due to their climate and international boundaries.
Additionally, volatility in our cost of energy, raw materials, components, subassemblies, transportation/freight, and manufacturing and distribution could adversely affect our results of operations. Climate change (including laws or regulations passed in response to it) could increase our costs, in particular our costs of supply, energy and transportation/freight. Material or sustained increases in the price of oil and natural gas could have an adverse impact on the cost of many of the plastic materials we use to make and package our products, as well as our transportation/freight costs. These outcomes may in turn result in customers transitioning to available competitive products, loss of market share, negative publicity, reputational damage, loss of customer confidence or other negative consequences (including a decline in stock price).
Our failure to comply with laws and regulations relating to reimbursement of health care products may subject us to penalties and adversely impact our reputation, business, results of operations, financial condition and cash flows.
Our devices are purchased principally by specialty pharmacies and ambulatory service providers or hospitals that typically bill various third-party payers, such as governmental programs (e.g., Medicare, Medicaid and comparable non-U.S. programs), private insurance plans and managed care plans, for the healthcare services provided to their patients. The ability of those customers to obtain appropriate reimbursement from third-party payers for our products and the drugs they administer is critical because it affects which products customers purchase and the prices they are willing to pay. As a result, our devices are subject to regulation regarding quality and cost by U.S. governmental agencies, including the Centers for Medicare & Medicaid Services (“CMS”), as well as comparable state and non-U.S. agencies responsible for reimbursement and regulation of health care goods and services, including laws and regulations related to kickbacks, false claims, self-referrals and health care fraud. Many states have similar laws that apply to reimbursement by state Medicaid and other funded programs, and in some cases to all payers. In certain circumstances, insurance companies can attempt to bring a private cause of action against a manufacturer for causing a false claim to be filed under the Federal Racketeer Influenced and Corrupt Organizations Act. In addition, as a manufacturer of FDA-approved devices reimbursable by federal healthcare programs, we are subject to the Physician Payments Sunshine Act, which requires us to annually report certain payments and other transfers of value we make to U.S.-licensed physicians or U.S. teaching hospitals. Any failure to comply with these laws
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and regulations could subject us or our officers and employees to criminal and civil financial penalties. Similar reporting requirements applicable to medical device manufacturers have also been implemented by some states. Failure to comply with these state requirements could result in civil monetary penalties being assessed against us.
These laws and regulations, among other things, constrain our business, marketing and other promotional activities by limiting the kinds of financial arrangements, including sales programs, we may have with hospitals, physicians or other potential purchasers of our products. Due to the breadth of these laws, the narrowness of statutory exceptions and regulatory safe harbors available, and the range of interpretations to which they are subject, it is possible that some of our current or future practices might be challenged under one or more of these laws.
To enforce compliance with the healthcare regulatory laws, certain enforcement bodies have recently increased their scrutiny of interactions between healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. Responding to investigations can be time-and resource-consuming and can divert management’s attention from the business. Additionally, as a result of these investigations, healthcare providers and entities may have to agree to additional compliance and reporting requirements as part of a consent decree or corporate integrity agreement. Any such investigation or settlement could increase our costs or otherwise have an adverse effect on our business. Even an unsuccessful challenge or investigation into our practices could cause adverse publicity and be costly to respond to. If our operations are found to be in violation of any of the healthcare laws or regulations described above or any other healthcare regulations that apply to us, we may be subject to penalties, including administrative, civil and criminal penalties, damages, fines, exclusion from participation in government healthcare programs, such as Medicare and Medicaid, imprisonment, contractual damages, reputational harm, disgorgement and the curtailment or restructuring of our operations. In addition, we are subject to the U.S. Foreign Corrupt Practices Act and similar anti-corruption laws outside the U.S. Actual or alleged violation of these laws by our employees, consultants, sales agents or distributors could subject us to investigations by the U.S. or foreign governments, significant criminal or civil sanctions and other liabilities, and damage our reputation.
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 2020 from the COVID-19 pandemic, customer purchasing patterns and clinical trial activity have been less predictable as well as a slowdown of new patient starts 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.
We may need additional funding in the future, and if we are unable to raise capital when needed, we may be forced to delay, reduce or eliminate our product development, commercial efforts, or sales efforts.
Producing and marketing our developed products is costly. Although we believe we currently have adequate capital to fulfill our near-term funding needs, we may need to raise additional capital in the future in order to execute our business plan and help us fund the development and commercialization of new products. We raised approximately $26.6 million from the equity offering in 2020.
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We may finance future cash needs through public or private equity offerings and may also use debt financings or strategic collaboration and licensing arrangements. We may seek to access the public or private equity markets whenever conditions are favorable, even if we do not have an immediate need for additional capital. To the extent that we raise additional funds by issuing equity securities, our shareholders may experience additional dilution; any debt financing, if available, may involve restrictive covenants and could result in high interest expense. If we raise additional funds through collaboration and licensing arrangements, it may require us to relinquish certain enumerated rights to our product candidates, processes, technologies, or development projects, or to enter into licenses on terms that are not favorable to us. We cannot be certain that additional funding will be available on acceptable terms, or at all. If adequate funds are not available from the foregoing sources, we may consider additional strategic financing options, or we may be required to delay, reduce the scope of, or eliminate our research or development and/or some of our commercialization efforts.
We may experience difficulties resulting from our evolving management structure and executive team.
We have made a number of changes to our management structure throughout the organization since July 2018 and have filled a number of these positions while we are actively recruiting to fill others. In January 2021, we appointed an interim CEO to serve during the search process for a CEO. Although, we believe the persons who currently and will serve in these positions are and will be qualified to do so, they may take time to integrate into the organization and with each other, if at all. Many of these persons have or will have had little to no experience with our company prior to joining us, which may result in delays in our ability to implement our business plans. If we are unable to integrate, motivate and retain the services of our new executives and other managers, or if integration takes longer than we expect, it may have an adverse effect on our business and financial condition.
Changes in tax or labor laws or exposure to additional income tax liabilities could increase our costs and reduce our margins.
Changes to the tax and labor laws in the U.S. or other countries in which we operate could have an adverse effect on our operating results. Certain changes in tax rates, deductibility of interest, deductibility of executive compensation expense, expensing of capital expenditures, the ability to use certain tax credits, taxation on earnings from international business operations, and the system of taxation (from worldwide to territorial) could adversely affect our financial condition and results of operations. Taxing authorities may audit us from time to time and disagree with certain positions we have taken in respect of our tax liabilities. We regularly assess the likely outcomes of these audits in order to determine the appropriateness of our tax provision. However, we may not accurately predict the outcome of these audits, and as a result the actual outcome of these audits may have an adverse impact on our financial results.
Prior to the U.S. presidential election, President Biden proposed an increase in the U.S. corporate income tax rate from 21% to 28%, the creation of a 10% penalty on certain imports and a 15% minimum tax on worldwide book income.
Our manufacturing operations depend on low-cost labor. Recent increases in U.S. minimum wage requirements, as well as those imposed by the state of New York, will increase our costs for employees to support those operations, reduce our margins and negatively impact our profit.
A downturn in global economic conditions could adversely affect our operations.
Deterioration in the global economic environment, particularly in countries with government-sponsored healthcare systems, may cause decreased demand for our products and increased competition, which could result in lower sales volume and downward pressure on the prices for our products, longer sales cycles, and slower adoption of new technologies. A weakening of economic conditions in the U.S. and/or abroad may also adversely affect our suppliers, which could result in interruptions in supply.
We are subject to foreign currency exchange risk.
A portion of our revenues is currently, and we expect in the future to be, derived from international operations. Our revenues from sales outside the U.S. may be adversely affected by fluctuations in foreign currency exchange rates. We cannot predict with any certainty changes in foreign currency exchange rates or our ability to mitigate these risks. We may experience additional volatility as a result of inflationary pressures and other macroeconomic factors. If we cannot adequately mitigate foreign currency exchange rates, our revenues and profit may suffer.
Our distribution network and other operations outside the U.S. subject us to certain risks.
Approximately 14% of our net sales in the year ended December 31, 2020 came from our operations outside the U.S., and we intend to continue to pursue growth opportunities in foreign markets. Our foreign operations subject us to certain risks, including, among
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others, the effects of fluctuations in foreign currency exchange, uncertainties with respect to local economic and political conditions, competition from local companies, trade protectionism and restrictions on the transfer of goods across borders, U.S. diplomatic and trade relations with the governments of the foreign countries in which we operate, foreign regulatory requirements or changes in such requirements, local product preferences and product requirements, longer payment terms for accounts receivable than we experience in the U.S., difficulty in establishing, staffing and managing foreign operations, changes to international trade agreements and treaties, changes in tax laws, weakening or loss of the protection of intellectual property rights in some countries, and import or export licensing requirements.
Brexit may impact our business in the United Kingdom.
One of our two most significant international distributors is located in the United Kingdom (“UK”), and the other is in Finland, a member of the European Union (“EU”). The June 2016 referendum result in the UK to exit the EU (commonly known as “Brexit”), and the subsequent commencement of the official withdrawal process by the UK government in March 2017, has created uncertainties affecting business operations in the UK and the EU. On January 31, 2020, the UK withdrew from the EU. Under the withdrawal agreement agreed between the UK and the EU, the UK was subject to a transition period until December 31, 2020 (the “Transition Period”) during which EU rules continued to apply. During the Transition Period, negotiations between the UK and the EU continued in relation to the future customs and trading relationship between the UK and the EU following the expiration of the Transition Period. Due to the current COVID-19 global pandemic, negotiations between the UK and the EU scheduled have either been postponed or occurred in a reduced forum via video conference. However, on December 24, 2020, the negotiators from the EU and UK reached an agreement on a new partnership. This agreement sets out the rules that apply between the EU and the UK as of January 1, 2021. It is possible that the withdrawal could, among other things, affect the legal and regulatory environments to which our business and the businesses of our distributors are subject, impact trade between the UK and the EU and other parties, and create economic and political uncertainty in the region.
We are dependent on information technology systems and subject to privacy and security laws, and our systems and infrastructure face certain risks, including from cyber security breaches and data leakage.
Despite the implementation of security measures, our internal computer systems, and those of third parties on which we rely, are vulnerable to damage from computer viruses, malware, natural disasters, terrorism, war, telecommunication and electrical failures, cyber-attacks or cyber-intrusions over the Internet, attachments to emails, persons inside our organization, or persons with access to systems inside our organization. While we do not believe that we have experienced any such system failure, accident, or security breach to date, if such an event were to occur and cause interruptions in our systems, it could result in a material disruption of our operations. To the extent that any disruption or security breach results in a loss of or damage to our data or applications or other data or applications relating to our technology, or inappropriate disclosure of confidential or proprietary information, we could incur liabilities, damage to our reputation, and the further development of our product candidates could be delayed. Additionally, such disruptions and security breaches, when there is a risk of patient harm, may require devices changes to fix vulnerabilities and strengthen cybersecurity. Such changes could, in some cases, require reporting to and approval by the FDA prior to implementation, which could cause a delay in the continued marketing of the underlying product that will result in a loss of revenues to us. Furthermore, failure to adhere to good cybersecurity practices with regards to medical devices could result in enforcement action by the FDA including warning letters or other forms of enforcement.
We cannot guarantee that any of our strategic acquisitions, investments or alliances will be successful.
We may seek to supplement our internal growth through strategic acquisitions, investments and alliances. Such transactions are inherently risky, and the integration of any newly acquired business requires significant effort and management attention. The success of any acquisition, investment or alliance may be affected by a number of factors, including our ability to properly assess and value the potential business opportunity or to successfully integrate any business we may acquire into our existing business. There can be no assurance that any past or future transaction will be successful.
Our operating results and financial condition may fluctuate.
Our operating results and financial condition may fluctuate from quarter to quarter and year to year for a number of reasons. Events such as a delay in product development, increases in litigation expenses, changes to our expectations or strategy or even a relatively small revenue shortfall may cause financial results for a period to be below our expectations or projections. As a result, we believe that period-to-period comparisons of our results of operations should not be relied upon as an indication of future performance. Our operating results and financial condition are also subject to fluctuation from all of the risks described throughout this section. These fluctuations may adversely affect our results of operations and financial conditions and our stock price.
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Future material impairments in the value of our long-lived assets could negatively affect our operating results.
We review our long-lived assets, including identifiable intangible assets and property, plant and equipment, for impairment. Long-lived assets are reviewed when there is an indication or triggering event that impairment may have occurred. Changes in market conditions or other changes in the future outlook of value may lead to impairment charges in the future. In addition, we may from time to time sell assets that we determine are not critical to our strategy. Future events or decisions may lead to asset impairments and/or related charges. Certain non-cash impairments may result from a change in our strategic goals, business direction or other factors relating to the overall business environment. Material impairment charges could negatively affect our results of operations.
Actions of activist stockholders could have an adverse effect on our business.
From time to time, we may be subject to proposals by stockholders urging us to take certain corporate actions. If activist stockholder activities ensue, our business could be adversely affected because responding to proxy contests and reacting to other actions by activist stockholders can be costly and time-consuming, disrupt our operations and divert the attention of management and our employees. For example, we may be required to retain the services of various professionals to advise us on activist stockholder matters, including legal, financial and communications advisors, the costs of which may negatively impact our future financial results. In addition, perceived uncertainties as to our future direction, strategy or leadership created as a consequence of activist stockholder initiatives may result in the loss of potential business opportunities, harm our ability to attract new investors, customers, employees, and joint venture partners, and cause our stock price to experience periods of volatility or stagnation.
Natural disasters, war and other events could adversely affect our suppliers and customers.
Natural disasters (including pandemics), war, terrorism, labor disruptions and international conflicts, and actions taken by the U.S. and other governments or by our customers or suppliers in response to such events, could cause significant economic disruption and political and social instability in the U.S. and areas outside of the U.S. in which we operate. Most of our products are manufactured in Nicaragua, where there is currently civil unrest whose outcome cannot be predicted. This and similar events could increase the costs for or cause interruptions in the supply of materials, result in decreased demand for our products or adversely affect our manufacturing and distribution capabilities.
Our insurance coverage may be inadequate to cover all the liabilities we may incur.
We face the risk of exposure to liability claims if any product that we develop causes injury. Although we carry insurance at levels customary for companies in our industry, such coverage may become unavailable or be inadequate to cover all liabilities we may incur. There can be no assurance that we will be able to continue to maintain such insurance, or obtain comparable insurance at a reasonable cost, if at all. If we are unable to obtain sufficient insurance coverage at an acceptable cost or otherwise, or if the amount of any claim against us exceeds the coverage under our policies, we may face significant expenses.
Risks Related to Ownership of Our Common Stock
There may be circumstances in which the interests of our significant stockholders could be in conflict with your interests as a stockholder.
Two stockholders, together with their respective affiliates, beneficially own approximately 27% and 14%, of our outstanding common stock, respectively. An affiliate of Horton Freedom, L.P. currently serves on our Board of Directors. Circumstances may arise in which these stockholders may have an interest in exerting influence to pursue or prevent acquisitions, divestitures or other transactions, including the issuance of additional shares or debt, that, in their judgment, could enhance their investment in us or another company in which they invest. Such transactions might adversely affect us or other holders of our common stock. Furthermore, our significant concentration of share ownership may adversely affect the trading price of our common stock because investors may perceive disadvantages in owning shares in companies with significant stockholders.
We do not currently intend to pay dividends on our common stock.
We have never paid dividends on our common stock, and we do not intend to pay any dividends to holders of our common stock for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future.
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Future sales and issuances of shares of our common stock or rights to purchase our common stock, including pursuant to our stock option plan, could result in additional dilution of the percentage ownership of our stockholders.
We may need additional capital in the future to continue our planned operations. To the extent we raise additional capital by issuing equity and/or convertible securities, our stockholders may experience substantial dilution. We may sell our common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner, we determine from time to time. If we sell our common stock, convertible securities or other equity securities, investors may be materially diluted. These sales may also result in material dilution to our existing stockholders, and new investors could gain rights superior to our existing stockholders.
We provide and intend to continue to provide additional equity-based compensation to our employees, directors and consultants. Under our stock option plan, 6,000,000 shares of our common stock have been reserved for issuance to our employees, including officers, which number may be increased with the approval of our stockholders. We may issue equity-based compensation outside of our stock option plan as inducement for new employees. If our Board elects to issue additional stock options or other equity-based compensation, our stockholders may experience additional dilution, which could cause our stock price to decline. Because stock options granted under our stock option plan will generally only be exercised when the exercise price for such option is below the then market value of the common stock, the exercise of such options or the issuance of shares will cause dilution to the book value per share of our common stock and to existing and new investors.
There has been volatility in the price of shares of our common stock.
Since our common stock was listed on the Nasdaq Capital Market on October 17, 2019, it has traded between $3.78 per share to $12.42 per share. Our stock price is subject to wide fluctuations in response to a variety of factors, including:
• quarterly variations in operating results;
• announcement of new products or customers by our competitors;
• changes in financial estimates by securities analysts;
• trading volume on the Nasdaq Capital Market;
• announcements related to litigation;
• general economic conditions; or
• other events or factors that are beyond our control.
In addition, the stock market has experienced significant price and volume fluctuations that have particularly affected the trading prices of equity securities of many biotechnology companies. These fluctuations have often been unrelated or disproportionate to the operating performance of these companies. Any negative change in the public’s perception of the prospects of medical device companies could further depress our stock price regardless of our results. Sales of substantial amounts of our common stock, particularly by our two most significant stockholders, or the perception that such sales might occur, could adversely affect prevailing market prices of our common stock and our stock price may decline substantially in a short time and our stockholders could suffer losses or be unable to liquidate their holdings.
If we do not maintain compliance with the listing standards of the Nasdaq Capital Market, Nasdaq may delist our common stock from trading on its exchange.
The Nasdaq Capital Market on which our common stock trades has continued listing standards that we must maintain on an ongoing basis in order to continue the listing of our common stock. If we fail to meet these continued listing requirements, our common stock may be subject to delisting. If our common stock is delisted and we are not able to list our common stock on another national securities exchange, we expect our securities would be quoted on an over-the-counter market. If this were to occur, our stockholders could face significant material adverse consequences, including limited availability of market quotations for our common stock and reduced liquidity for the trading of our common stock. In addition, we could experience a decreased ability to issue additional securities and obtain additional financing in the future, if or when needed.
We are a smaller reporting company and non-accelerated filer, and we cannot be certain if the reduced disclosure requirements applicable to us will make our common stock less attractive to investors.
We are currently a “smaller reporting company” and a “non-accelerated filer”, as those terms are defined in the Securities Act. Accordingly, we take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “smaller reporting companies” and “non-accelerated filers,” including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the provisions of Section 404(b) of the Sarbanes-Oxley Act of 2002 requiring that independent registered public accounting firms provide an attestation
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report on the effectiveness of internal control over financial reporting. Decreased disclosures in our SEC filings due to our status as a “smaller reporting company” and “non-accelerated filer” may make it harder for investors to analyze our results of operations and financial prospects.
We cannot predict if investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our share price may be more volatile.
Our significant shareholders, officers and directors can sell their stock, which may have a negative effect on our stock price and ability to raise additional capital, and may make it difficult for investors to sell their stock at any price.
12% and 7% of our outstanding common stock held by two stockholders, respectively, are freely tradeable in the market pursuant to a resale registration statement. These stockholders purchased those shares at prices significantly lower than the price at which our common stock is currently trading. In the event either of these significant stockholders choose to sell a substantial portion of their holdings, the price of our common stock may decline suddenly and sharply. This may make it difficult or impossible for other investors to sell their stock at any price.
Our officers and directors beneficially own approximately 38% of our outstanding common stock as of December 31, 2020. Each individual officer and director may be able to sell up to 1% of our outstanding common stock every ninety (90) days in the open market pursuant to Rule 144, which may have a negative effect on our stock price. In addition, if our officers and directors are selling their stock into the open market, it may make it difficult or impossible for investors to sell their stock at any price.
The price of our common stock may be adversely affected by the future issuance and sale of shares of our common stock or other equity securities.
We cannot predict the size of future issuances or sales of our common stock or other equity securities future acquisitions or capital raising activities, or the effect, if any, that such issuances or sales may have on the market price of our common stock. The issuance and sale of substantial amounts of common stock or other equity securities or announcement that such issuances and sales may occur, could adversely affect the market price of our common stock. Any decline in the price of our common stock may encourage short sales, which could place further downward pressure on the price of our common stock and may impair our ability to raise additional capital through the sale of equity securities.
You may find it difficult to sell our common stock.
Only recently has there been any active trading market in our common stock. We cannot assure you that such an active trading market for our common stock will be sustained. Regardless of whether an active and liquid public market exists, negative fluctuations in our actual or anticipated operating results will likely cause the market price of our common stock to fall, making it more difficult for you to sell our common stock at a favorable price, or at all.
If we fail to continue to meet the listing standards of the Nasdaq Stock Market LLC (“Nasdaq”), our common stock may be delisted, which could have a material adverse effect on the liquidity of our common stock.
Our common stock is currently listed on the Nasdaq Capital Market. Nasdaq has requirements that a company must meet in order to remain listed on Nasdaq. There can be no assurance that we will continue to meet all of these requirements, or any other requirement in the future. If we fail to meet the requirements, including maintaining minimum price, levels of stockholders’ equity or market values of our common stock, our common stock could be delisted. If our common stock were to be delisted, the liquidity of our common stock would be adversely affected and the market price of our common stock could decrease.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
We currently rent a masonry and steel frame building erected on 3.27 acres of land located at 24 Carpenter Road, Chester, New York 10918. This facility is used as our headquarters and for our general operations.
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On February 28, 2019, we completed year twenty of a twenty-year lease. 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. The Company exercised four of the six additional renewal options for September 1, 2019 through August 31, 2021. In January 2021, the Company exercised the remaining two renewal options, extending the lease through August 31, 2022.
We believe our current facilities are suitable and adequate for our current business operations.
We continue to seek another location with more square footage to provide us room for growth. In addition to the
increased costs of occupying a larger space, we expect to incur additional costs in connection with construction and FDA
compliance with respect to a new location.
ITEM 3. LEGAL PROCEEDINGS
For information regarding legal proceedings, refer to “NOTE 9 — COMMITMENTS AND CONTINGENCIES” in the accompanying “Notes to Financial Statements” appearing in this Annual Report on Form 10-K.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is traded on the Nasdaq Capital Market under the symbol, “KRMD.” We have not paid any cash dividends on our common stock and do not plan to pay any such dividends in the foreseeable future. We currently intend to use all available funds for our business operations.
We are authorized to issue 77,000,000 shares of capital stock, of which 75,000,000 are designated
common stock, $0.01 par value per share, and 2,000,000 are designated preferred stock. As of December 31, 2020,
43,259,617 shares of our common stock were issued and outstanding and there were approximately 585 stockholders of record.
There were no shares of preferred stock issued and outstanding.
Sales of Unregistered Securities
Effective January 1, 2021, each non-employee director of the Company (other than the Chairman of the Board) and Board advisor are eligible to receive of $75,000 annually, to be paid quarterly $12,500 in cash and $6,250 in common stock. The Chairman of the Board is eligible to receive $100,000 annually, to be paid quarterly $12,500 in cash and $12,500 in common stock.
Prior to January 1, 2021, each non-employee director of the Company was eligible to receive $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. The Chairman of the Board was eligible to receive an additional
$50,000 annually (effective October 1, 2019), all to be paid in common stock. All payments were and are pro-rated for
partial service. The Company issued an aggregate 32,181 shares of common stock to its non-employee directors during the
year ended December 31, 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. Also, on December 15, 2020, Mr. Marques exercised options held by him for an aggregate 137,500 shares of common stock through the delivery of previously owned shares having an aggregate fair market value of $149,000.
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. 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, which vested 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 was not exercised.
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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.
Issuer Purchases of Equity Securities
On November 16, 2020, the Company announced that its Board of Directors had authorized a stock repurchase program under which the Company may purchase up to $10.0 million of its outstanding common stock through December 31, 2021. As of December 31, 2020, the Company had purchased 683,271 shares since inception of this plan.
The following table sets forth information regarding our repurchases of securities for each calendar month in the three months ended December 31, 2020:
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included under ITEM 8 of this Annual Report on Form 10-K. This discussion contains forward-looking statements about our business and operations. Our actual results may differ materially from those we currently anticipate as a result of many factors, including those described under Part I – FORWARD LOOKING STATEMENTS and elsewhere in this Annual Report.
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 Company had several significant accomplishments in 2020 including (i) record net sales; (ii)
entering into an agreement with Command Medical Products, Inc. (“Command”) to manufacture and supply the
Company’s subassemblies, needle sets and tubing products for supply continuity and cost savings; (iii) a non-cash no
fault litigation settlement, which eliminates the associated distraction and litigation expenses related to that litigation
going forward and (iv) the completion of a capital raise of net $26.6 million.
The Company remains committed to growth over the long-term, as we
make short-term investments to execute on our strategic initiatives. In February 2019, the Company’s Board of Directors approved
a strategic plan through 2022, including certain financial goals. While those financial goals have not changed, given the results
of the past year, the likely timing of attaining those goals has been pushed out. The Board plans to revisit the strategic plan
with the Company’s new Chief Executive Officer, to align the plan with her growth strategies and will update shareholders
accordingly. Any strategic plan and related financial goals should not be relied upon as a predictor of future results. The
Company’s primary areas of focus for 2021 are expected to include (i) continued focus on improving the customer experience;
(ii) continued research and development efforts to introduce compelling products into the markets we serve; (iii) expansion of
sales into other drug therapies, both existing and new and expanded presence in international markets; (iv) the implementation
of secondary sourcing of our needle and tubing sets to Command and (v) completion of our search for a new manufacturing facility
and corporate headquarters.
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KORU Medical continues to monitor its operations and government recommendations and has made modifications to its normal operations because of the COVID-19 pandemic, 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 duration of the pandemic is known, we cannot predict the 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 continue to 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 patients not seeking care during the pandemic.
Our revenues derive from three business sources: (i) domestic core, (ii) international core, and (iii) novel therapies. Our core revenues include sales of our products for the delivery of SCIg to treat PIDD, CIDP, and other disease states that are not included in novel therapies. Novel therapies currently include revenues from clinical trials.
Total net sales increased $1.0 million or 4.4% for the year ended
December 31, 2020 as compared to the prior year period. The increase was due principally to an increase in domestic core
product sales volume, as well as higher domestic novel therapies of $0.8 million. We believe the increase in domestic core
product sales volume reflects growth in diagnosis of PIDD and CIDP (pre any COVID-19 impact to patient starts). Offsetting the
favorable impact on net sales from the domestic core product sales volume increases in 2020 were higher allowances, which include
(i) rebates resulting from the net impact of pricing increases at our largest distributor in the second half of 2019, and (ii)
pricing decreases and growth rebates to secure our contractual position with several large customers in 2020. Further increasing
allowances were payment discounts and distribution fees at our largest distributor under new contract terms entered into in the
fourth quarter of 2019.
Our inventory position grew from $2.4 million at December 31, 2019 to $6.8 million at December 31, 2020 mostly to ensure timely order fulfillment as we transition manufacturing of our needle sets and tubing products for supply continuity to Command. As transition is completed, this inventory is expected to convert to a source of cash in the future.
RESULTS OF OPERATIONS
Year Ended December 31, 2020 compared to Year Ended December 31, 2019
Net Sales
The following table summarizes our net sales for the years ended December 31, 2020 and 2019:
Years Ended December 31, Change from Prior Year % of Net Sales
Net Sales
Total net sales increased $1.0 million or 4.4% for the year ended December 31, 2020 as compared to the
prior year period. The increase was due principally to an increase in domestic core product sales volume, as well as
higher domestic novel therapies of $0.8 million. We believe the increase in domestic core product sales volume reflects
growth in diagnosis of PIDD and CIDP (pre any COVID-19 impact to patient starts). Offsetting the favorable impact on net
sales from the domestic core product sales volume increases in 2020 were higher allowances, which include (i) rebates
resulting from the net impact of pricing increases at our largest distributor in the second half of 2019, and (ii) pricing
decreases and growth rebates to secure our contractual position with several large customers in 2020. Further
increasing allowances were payment discounts and distribution fees at our largest distributor under new contract terms
entered into in the fourth quarter of 2019.
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Gross Profit
Our gross profit for the years ended December 31, 2020 and 2019 is as follows:
Years Ended December 31, Change from Prior Year
Stated as a Percentage of Net Sales 61.8% 64.1%
Gross profit increased $0.1 million or 0.6% for the year ended December 31, 2020, compared to the same period last year reflecting net sales growth described above as well as favorable production variances. Gross profit percentage of 61.8% for the year ended December 31, 2020 was negatively impacted by higher allowances as described above, overtime costs related to COVID-19 absenteeism and an obsolescence reserve resulting from a discontinued product line, compared to the year ended December 31, 2019 of 64.1%.
Selling, general and administrative, Litigation, and Research and development
Our selling, general and administrative, litigation and research and development costs for the years ended December 31, 2020 and 2019 are as follows:
Years Ended December 31, Change from Prior Year
Stated as a Percentage of Net Sales 65.2% 60.1%
Selling, general and administrative expenses increased $2.3 million, or 23.1%, for the year ended December 31, 2020 compared to the same period last year, due to an increase of $1.2 million of higher salary and related benefits, and recruiting fees. Also contributing to the increase were consulting fees of $0.8 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 of $0.5 million and other miscellaneous expenses of $0.3 million. Offsetting the increase were lower trade show and travel expenses of $0.5 million as a result of COVID-19 related travel restrictions.
Litigation fees decreased approximately $1.0 million compared to the same period last year due primarily to the negotiation of and entry into a litigation settlement agreement reached with EMED Technologies Corporation (“EMED”) in May 2020 resulting in a non-cash expense of $2.2 million.
Research and development expenses increased $0.6 million for the year ended December 31, 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
For the year ended December 31, 2020, depreciation and amortization expense increased approximately $0.1 million, or 23.0%, to $0.4 million compared with the same period last year. We continued to invest in capital assets, mostly related to manufacturing and computer equipment.
Net (Loss)/Income
Years Ended December 31, Change from Prior Year
Stated as a Percentage of Net Sales (5.0% ) 2.4%
Our net loss for the year ended December 31, 2020 was $1.2 million, as compared to net income of $0.6 million for the year ended December 31, 2019, driven by the EMED settlement charge of $2.2 million and higher selling, general and administrative expenses of $2.3 million.
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NON-GAAP FINANCIAL MEASURES
Management of the Company believes that investors’ understanding of the Company’s performance is enhanced by disclosing non-GAAP financial measures as a reasonable basis for comparison of the Company’s ongoing results of operations. These non-GAAP measures should not be considered a substitute for GAAP-basis measures and results. Our non-GAAP measures may not be comparable to non-GAAP measures of other companies. The table below provides a disclosure of these non-GAAP financial measures to the most closely analogous measure determined in accordance with GAAP.
Non-GAAP financial measures should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. They are limited in value because they exclude charges that have a material effect on our reported results and, therefore, should not be relied upon as the sole financial measures to evaluate our financial results. The non-GAAP financial measures are meant to supplement, and to be viewed in conjunction with, GAAP financial results.
We disclose and discuss Adjusted EBITDA as a non-GAAP financial measure in our public releases, including quarterly earnings releases, and other filings with the Securities and Exchange Commission. We define Adjusted EBITDA as earnings (net (loss)/ income) before interest, income tax expense, depreciation and amortization, discontinued product expense, reorganization charges, litigation expenses including stock-based settlement expense, manufacturing initiative and stock-based compensation 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 Years Ended December 31,
Discontinued Product Expense 70,859 —
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, senior management and changes to the Board of Directors 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.
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 rest 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.
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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, expenses related to the EMED litigation have discontinued as a result 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.
Stock-based Compensation Expense. We have excluded the effect of stock-based compensation expense in calculating our non-GAAP Adjusted EBITDA measure. We record non-cash compensation expense related to grants of options for executives, employees and consultants, and grants of restricted shares to our board. 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.
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of liquidity is our cash of $27.3 million as of December 31, 2020, which includes the net proceeds from the 2020 capital raise totaling $26.6 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, related costs, selling, general and administrative expenses. In 2020, the Company also purchased 683,271 shares of its common stock outstanding for $3.5 million under its stock repurchase program, pursuant to which the Company may purchase up to $10.0 million of its outstanding common stock through December 31, 2021.
Our inventory position grew from $2.4 million at December 31, 2019 to $6.8 million at December 31, 2020 mostly to ensure timely order fulfillment as we transition manufacturing of our needle sets and tubing products for supply continuity to Command. As transition is completed, this inventory is expected to convert to a source of cash in the future.
Cash Flows
The following table summarizes our cash flows:
Net cash (used in)/provided by operating activities $ (743,323 ) $ 320,620
Net cash (used in)/provided by investing activities $ (1,036,152 ) $ 1,310,209
Operating Activities
Net cash used in operating activities of $0.7 million for the year ended December 31, 2020 was mostly attributable to non-cash charges for stock-based compensation and litigation settlement expense of $2.9 million, and an increase in accrued expenses and accrued payroll of $1.4 million, driven by the litigation settlement with EMED and customer rebates. Further adding to the increase was an increase in depreciation and amortization of $0.4 million and a decrease in accounts receivable of $0.7 million due to timing of collections. Offsetting these were primarily working capital changes which include an increase in inventory of $4.4 million as we built inventory to keep pace with sales growth and to ensure timely order fulfillment as we transition manufacturing to Command, an increase in prepaid expenses and other assets of $0.4 million relating to increased insurance premiums, and a decrease in accrued tax liability of $0.2 million resulting from book to tax differences related to stock option expense.
Net cash provided by operating activities of $0.3 million for the year ended December 31, 2019 resulted from non-cash charges for stock-based compensation of $1.2 million, depreciation and amortization of long-lived tangible and intangible assets of $0.3 million, as well as increases in accrued expenses of $0.6 million primarily due to bonus, rebate and legal accruals and an increase in accrued taxes of $0.2 million. Partially offsetting these were higher accounts receivable of $1.8 million, increased inventory of $0.3 million as we build stock to keep pace with sales growth, as well as severance payments paid this year against last year’s accrual and increases in prepaids of $0.1 million related to directors’ and officers’ insurance.
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Investing Activities
Our net cash used in investing activities of $1.0 million for the year ended December 31, 2020, was primarily for capital expenditures for research and development and strategic initiatives. Our net cash provided by investing activities of $1.3 million for the year ended December 31, 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
The $23.2 million provided by financing activities for the year ended December 31, 2020 is from the $26.6 million capital raise, net of expenses, and $0.1 million from options exercised, offset against the repurchase of the Company’s common stock outstanding of $3.5 million. The $0.5 million provided by financing activities for the year ended December 31, 2019 was a result of warrants and options exercised during the period.
See “NOTE 11 — DEBT OBLIGATIONS” for further detail regarding the promissory note and loan agreement, and “NOTE 12 — EQUITY” regarding the equity offering in the accompanying “Notes to Financial Statements” appearing in this Annual Report on Form 10-K. Also, see “NOTE 5 — STOCK-BASED COMPENSATION” for further detail regarding the EMED settlement.
We believe that as of December 31, 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.
Debt and Borrowing Capacity
Refer to “NOTE 11 — DEBT OBLIGATIONS” in the accompanying “Notes to Financial Statements” appearing in this Annual Report on Form 10-K for further details regarding debt.
COMMITMENTS AND CONTRACTUAL OBLIGATIONS
Lease Commitments
We currently rent a masonry and steel frame building erected on 3.27 acres of land located at 24 Carpenter Road, Chester, New York 10918. This facility is used as our headquarters and for our general operations.
On February 28, 2019, we completed year twenty of a twenty-year lease. 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. The Company has exercised four of the six additional renewal options through August 31, 2021. In January 2021, the Company exercised the remaining two renewal options, extending the lease through August 31, 2022.
We believe our current facilities are suitable and adequate for our current business operations. We continue to seek another location with more square footage to provide us room for growth. In addition to the increased costs of occupying a larger space, we expect to incur additional costs in connection with construction and FDA compliance with respect to the new location.
Refer to “NOTE 6 – LEASES” in the accompanying “Notes to Financial Statements” appearing in this Annual Report on Form 10-K for further details regarding our operating and finance leases.
SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles of the United States (“GAAP”) requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in the financial statements and accompanying notes. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of the company’s financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified some of our more critical accounting estimates below. We also have other key accounting policies, which involve the use of estimates, judgments, and assumptions that are significant to understanding our results. For additional information, see “NOTE 1 — NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” in the accompanying “Notes to Financial Statements” appearing in this
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Annual Report on Form 10-K. Although we believe that our estimates, assumptions, and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions.
Revenue Recognition
The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. We adopted this ASU effective January 1, 2018 on a full retrospective basis. Adoption of this standard did not result in significant changes to our accounting policies, business processes, systems or controls, or have a material impact on our financial position, results of operations and cash flows or related disclosures. As such, prior period financial statements were not recast.
The Company’s revenues result from the sale of assembled products. We recognize revenues when shipment occurs, and at which point the customer obtains control and ownership of the goods. Shipping costs generally are billed to customers and are included in sales.
The Company generally does not accept return of goods shipped unless it is a Company error. The only credits provided to customers are for defective merchandise. The Company warrants the syringe driver from defects in materials and workmanship under normal use and the warranty does not include a performance obligation. The costs under the warranty are expensed as incurred.
Provisions for distributor pricing and annual customer 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 Company established an allowance for charging off uncollectible trade accounts receivable that have both of the following characteristics: (a) They have a contractual maturity of one year or less, (b) They arose from the sale of goods or services.
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.
We maintain reserves for excess and obsolete inventory resulting from the potential inability to sell certain products at prices in excess of current carrying costs. We make estimates regarding the future recoverability of the costs of these products and record provisions based on historical experience, expiration of sterilization dates and expected future trends. If actual product life cycles, product demand or acceptance of new product introductions are less favorable than projected by management, additional inventory write downs may be required, which could unfavorably affect future operating results.
ACCOUNTING PRONOUNCEMENTS RECENTLY ADOPTED
Refer to “NOTE 1 — NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” in the accompanying “Notes to Financial Statements” appearing in this Annual Report on Form 10-K.
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
Refer to “NOTE 1 — NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” in the accompanying “Notes to Financial Statements” appearing in this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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REPRO MED SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm 34
Financial Statements 35
Statements of Operations for the years ended December 31, 2020 and 2019 37
Statements of Stockholders’ Equity as of December 31, 2020 and 2019 38
Statements of Cash Flows for the years ended December 31, 2020 and 2019 39
Notes to Financial Statements 40
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Repro Med Systems, Inc.
Chester, New York
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Repro Med Systems, Inc. (the “Company”) as of December 31, 2020 and 2019, the related statements of operations, stockholders’ equity, and cash flows for years then ended, and the related notes (collectively, the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ McGrail Merkel Quinn & Associates, P.C.
We have served as the Company’s auditor since 2014.
Scranton, Pennsylvania
March 23, 2021
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REPRO MED SYSTEMS, INC.
BALANCE SHEETS
December 31, December 31,
ASSETS
CURRENT ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accrued tax liability — 204,572
Finance lease liability – current 2,646 5,296
Finance lease liability, net of current portion — 2,646
Operating lease liability, net of current portion 95,553 236,846
Commitments and contingencies (Refer to Note 9)
STOCKHOLDERS’ EQUITY
See accompanying Notes to Financial Statements.
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REPRO MED SYSTEMS, INC.
STATEMENTS OF OPERATIONS
For the Years Ended December 31,
OPERATING EXPENSES
Non-Operating Income
Gain/(Loss) on foreign currency exchange 1,536 (17,754 )
NET (LOSS)/INCOME PER SHARE
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
See accompanying Notes to Financial Statements.
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REPRO MED SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
Additional Total
Common Stock Paid-in Retained Treasury Stockholders’
Shares Amount Capital Earnings Stock Equity
Compensation expense related to stock options — — 888,319 — — 888,319
Compensation expense related to stock options — — 1,377,772 — — 1,377,772
See accompanying Notes to Financial Statements.
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REPRO MED SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
CASH FLOWS FROM OPERATING ACTIVITIES
Stock-based litigation settlement expense 1,285,102 —
Gain on disposal of fixed assets (16,591 ) (47,830 )
Deferred capital gain – building lease — (3,763 )
Provision for doubtful accounts (8,176 ) (4,855 )
Abandonment of intangible assets 41,919 —
Changes in operating assets and liabilities:
Increase in prepaid expenses and other assets (420,614 ) (140,805 )
Increase/(Decrease) in accrued payroll and related taxes 96,865 (231,449 )
(Decrease)/Increase in accrued tax liability (204,572 ) 187,964
NET CASH (USED IN)/PROVIDED BY OPERATING ACTIVITIES (743,323 ) 320,620
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from certificates of deposit — 1,517,927
Proceeds from disposal of property and equipment 25,000 217,821
NET CASH (USED IN)/PROVIDED BY INVESTING ACTIVITIES (1,036,152 ) 1,310,209
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock (3,499,358 ) —
Borrowings from indebtedness 4,976,508 —
Payments on indebtedness (4,976,508 ) —
Payments on finance lease liability (5,296 ) (4,783 )
Payment for cancelled shares — (2,820 )
Supplemental Information
Cash paid during the years for:
Schedule of Non-Cash Investing and Financing Activities:
Non-cash equity issuance for the EMED Settlement $ 938,094 $ —
See accompanying Notes to Financial Statements.
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REPRO MED SYSTEMS, INC.
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,” “KORU,” “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
We prepare our financial statements and accompanying notes in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Certain prior year amounts have been reclassified to conform to the current year presentation in our Financial Statements.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all short-term investments with an original maturity of three months or less to be cash equivalents. The Company holds cash in excess of $250,000 at its depository, which exceeds the FDIC insurance limits and is, therefore, uninsured.
CERTIFICATES OF DEPOSIT
The certificate of deposit 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.
We maintain reserves for excess and obsolete inventory resulting from the potential inability to sell certain products at prices in excess of current carrying costs. We make estimates regarding the future recoverability of the costs of these products and record provisions based on historical experience, expiration of sterilization dates and expected future trends. If actual product life cycles, product demand or acceptance of new product introductions are less favorable than projected by management, additional inventory write downs may be required, which could unfavorably affect future operating results.
INTANGIBLE ASSETS
Certain of our identifiable intangible assets, including patents and trademarks, are amortized using the straight-line method over their estimated useful lives which range from 6 to 20 years. All of our intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Our management is responsible for determining if impairment exists and considers various factors when making these determinations. Amortization expense related to intangible assets for the years ended December 31, 2020 and 2019 was $62,177 and $49,388, respectively.
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The estimated amortization expense for the succeeding years for the intangible assets is approximately:
Year Ending December 31,
Total amortization expense $ 843,587
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.
PROPERTY AND EQUIPMENT
Property and equipment are stated at original acquisition cost less accumulated depreciation. Additions and improvements are capitalized which increase the value or extend the life of an asset, while maintenance and repair costs are expensed as incurred. When assets are retired or otherwise disposed, the cost and related accumulated depreciation or amortization is removed from the respective accounts and any resulting gain or loss is included in income. Depreciation and amortization are calculated on the straight-line basis over the estimated useful lives of the assets which generally range from 3-10 years for furniture and office equipment, 3-12 years for manufacturing equipment and tooling and shorter of the lease term or their estimated useful lives for leasehold improvements. Depreciation and amortization expense related to property and equipment for the years ended December 31, 2020 and 2019 was $356,418 and $290,841, respectively.
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 includes only an increase in the weighted average shares by the common shares issuable upon exercise of stock options. See “NOTE 5 — STOCK-BASED COMPENSATION” for further detail.
Years Ended
Weighted Average Outstanding Shares:
Option shares includable — (a) 283,236
Net (loss)/income per share
__________
(a) Option shares of 239,935 were not included as the impact is anti-dilutive.
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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.
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 Company established an allowance for charging off uncollectible trade accounts receivable that have both of the following characteristics: (a) They have a contractual maturity of one year or less, (b) They arose from the sale of goods or services.
The following table summarizes net sales by geography for the years ended December 31, 2020 and 2019:
Years Ended December 31,
Sales
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.
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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.
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 implementation of this standard is not expected to have a material impact on the Company’s operating results, cash flows, financial condition or related disclosures.
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.
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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.
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 year ended December 31, 2020.
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 December 31, 2020.
NOTE 2 — INVENTORY
Inventory consists of:
Less: reserve for obsolete inventory (11,597 ) (28,490 )
NOTE 3 — PROPERTY AND EQUIPMENT
Property and equipment consists of the following at:
Less: accumulated depreciation and amortization (1,985,618 ) (1,819,239 )
On May 21, 2019, the Company sold the house it owned for $0.2 million.
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NOTE 4 — 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 $145,056 and $142,964 for the years ended December 31, 2020 and 2019, respectively. The Company also paid property taxes in the amount of $52,092 and $52,195 for years ended December 31, 2020 and 2019, respectively.
NOTE 5 — 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 with EMED Technologies Corporation (“EMED”) to settle all claims in connection with all pending litigation matters between them (the “Claims”) as described in “NOTE 9 — 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.
Effective January 1, 2021, each non-employee director of the Company (other than the Chairman of the Board) and Board advisor are eligible to receive of $75,000 annually, to be paid quarterly $12,500 in cash and $6,250 in common stock. In addition, for chairing the Audit Committee, Compensation Committee and the Nominating and Corporate Governance Committee, each non-employee director is eligible to receive annually $15,000, $11,500 and $7,500 respectively, to be paid quarterly in cash and subject to proration for partial quarter service. The Chairman of the Board is eligible to receive $100,000 annually, to be paid quarterly $12,500 in cash and $12,500 in common stock.
Prior to January 1, 2021, each non-employee director of the Company was eligible to receive $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. The Chairman of the Board was eligible to receive an additional
$50,000 annually (effective October 1, 2019), all to be paid in common stock. All payments were pro-rated for partial
service. The Company issued an aggregate 32,181 shares of common stock to its non-employee directors during the year
ended December 31, 2020, respectively.
Pursuant to Daniel S. Goldberger’s employment agreement dated October 12, 2018, on February 1, 2019, when Donald B. Pettigrew was appointed to President and Chief Executive Officer, Mr. Goldberger was awarded a performance bonus in the amount of $270,000 to be paid half in cash and half in stock. 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.
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2015 STOCK OPTION PLAN, as amended
Time-Based Stock Options
The per share weighted average fair value of stock options granted during the years ended December 31, 2020 and December 31, 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 years ended December 31, 2020 and December 31, 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. These assumptions are subjective and generally require significant analysis and judgment to develop. We have recognized tax benefits associated with stock-based compensation of $62,393 and $61,333 for the years ended December 31, 2020 and 2019, respectively.
Weighted-average volatility — —
Expected dividends — —
Expected term (in years) 10 Years 10 Years
The following table summarizes the status of the Company’s stock option plan:
Shares Weighted Average Exercise Price Shares Weighted Average Exercise Price
Total stock-based compensation expense, net of forfeitures, for stock option awards totaled $874,869 and $594,956 for the years ended December 31, 2020 and 2019, respectively. Cash received from option exercises for the years ended December 31, 2020 and 2019 was $95,880 and $58,900, respectively.
The weighted-average grant-date fair value of options granted during the years ended December 31, 2020, and 2019, was $2,350,264 and $2,202,678, respectively. The total intrinsic value of options exercised during the years ended December 31, 2020 and 2019, was $397,962 and $58,900, respectively.
The following table presents information pertaining to options outstanding as of December 31, 2020:
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As of December 31, 2020, there was $3,376,990 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 was $803,171 and $539,553 at December 31, 2020, and December 31, 2019, respectively.
Performance-Based Stock Options
The per share weighted average fair value of stock options granted during the years ended December 31, 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 years ended December 31, 2020 and December 31, 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.
December 31,
Dividend yield — 0.00%
Expected Volatility — 58.9%
Weighted-average volatility — —
Expected dividends — —
Expected term (in years) — 10 Years
Risk-free rate — 2.07%
The following table summarizes the status of the Plan with respect to performance-based stock options:
December 31,
Shares Weighted Average Exercise Price Shares Weighted Average Exercise Price
Exercised — $ — — $ —
Forfeited — $ — — $ —
Weighted average fair value of options granted during the period — $ — — $ 1.16
Total performance stock-based compensation expense totaled $502,904 and $293,363 for the years ended December 2020 and 2019, respectively.
The weighted-average grant-date fair value of options granted during the years ended December 31, 2020 and 2019 was zero and $1,162,561, respectively.
The following table presents information pertaining to performance-based options outstanding as of December 31, 2020:
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As of December 31, 2020, there was $366,294 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 25 months. The total fair value of shares vested as of December 31, 2020 and
2019 was $387,520 and zero, respectively.
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.
At contract inception, we evaluate whether an arrangement is or contains a lease for which we are the lessee (that is, arrangements which provide us with the right to control a physical asset for a period of time). Operating leases are accounted for on the balance sheets with ROU assets being recognized in “Operating lease right-of-use assets” and lease liabilities recognized in “Operating lease liability – current” and “Operating lease liability, net of current portion.” Finance leases are accounted for on the balance sheets recognized in “Property and equipment, net” and lease liabilities recognized in “Finance lease liability – current” and “Finance lease liability, net of current portion.”
Operating lease expenses are recognized on a straight-line basis over the lease term. With respect to finance leases, amortization of the ROU asset is presented separately from interest expense related to the finance lease liability.
We have elected to combine lease and non-lease components for all lease contracts where we are the lessee. Additionally, for arrangements with lease terms of 12 months or less, we do not recognize ROU assets and lease liabilities and lease payments are recognized on a straight-line basis over the lease term with variable lease payments recognized in the period in which the obligation is incurred. ROU assets are measured for impairment when a triggering event occurs.
The components of lease expense were as follows:
Years Ended
December 31,
Finance lease cost:
Amortization of right-of-use assets $ 5,302 $ 4,837
Interest on lease liabilities 237 239
Supplemental cash flow information related to leases was as follows:
Years Ended
December 31,
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 136,888 $ 110,120
Financing cash flows from finance leases $ 5,296 $ 4,783
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Supplemental balance sheet information related to leases was as follows:
Operating Leases
Operating lease liability, net of current portion 95,553 236,846
Finance Leases
Property and equipment, net $ 2,586 $ 7,888
Finance lease liability – current 2,646 5,296
Finance lease liability, net of current portion — 2,646
Total finance lease liabilities $ 2,646 $ 7,942
Weighted Average Remaining Lease Term
Operating leases 1.4 Years 2.4 Years
Finance leases 0.7 Years 1.3 Years
Weighted Average Discount Rate
Maturities of lease liabilities are as follows:
Year Ending December 31, Operating Leases Finance Leases