In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The main difference between the current requirement under GAAP and this ASU is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases. This ASU requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases). Classification will be based on criteria that are largely similar to those applied in current lease accounting. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. This is effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. This ASU must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. We are currently assessing the potential impact of this ASU on our financial statements, disclosure requirements and methods of adoption.
The Company considers the applicability and impact of all recently issued accounting pronouncements. Recent accounting pronouncements not specifically identified in our disclosures are either not applicable to the Company or are not expected to have a material effect on our financial condition or results of operations.
The carrying amounts reported in the balance sheet for cash, trade receivables, accounts payable and accrued expenses approximate fair value based on the short-term maturity of these instruments.
The Company reviews its long-lived assets for impairment at least annually or whenever the circumstances and situations change such that there is an indication that the carrying amounts may not be recoverable. As of December 31, 2017, the Company does not believe that any of its assets are impaired.
Depreciation expense was $233,626 and $267,854 for the ten months ended December 31, 2017, and the twelve months ended February 28, 2017, respectively.
NOTE 4 RELATED PARTY TRANSACTIONS
On December 20, 2013, we executed an agreement effective March 1, 2014, with a Company director, Dr. Paul Mark Baker, to provide clinical research and support services related to new and enhanced applications for the FREEDOM System. Authorized by the Board of Directors, the agreement provided for payment of 420,000 shares of common stock valued at $0.20 per share over a three-year period. Amortization was zero for the ten months ended December 31, 2017, and was $28,000 for the twelve months ended February 28, 2017; the agreement is fully amortized.
On June 24, 2016, Cyril Narishkin executed a termination and general release agreement, which terminated his previous consulting agreement, and resigned as an officer and director for personal reasons. Mr. Narishkin was compensated for services as a consultant through January 31, 2017 at a monthly rate of $16,000 per month for up to eight days of service a month upon request of the Company. Mr. Narishkin’s compensation was $230,000 for the year ended February 28, 2017. In accordance with the agreement, the Company repurchased 96,542 shares of common stock of the Company owned by Mr. Narishkin at an aggregate purchase price of $43,393.
In December 2016 and January 2017, Brad Sealfon, the son of Andrew Sealfon, the Company’s President and Chief Executive Officer, consulted for the Company in its production and quality departments and was compensated $7,744. In March 2017, Mr. Sealfon provided additional consulting for the Company in its marketing department and was compensated $2,000.
LEASED AIRCRAFT
The Company leases an aircraft from a company controlled by Andrew Sealfon, the Company’s President and Chief Executive Officer. The lease payments were $13,421 for the ten months ended December 31, 2017 and $21,500 for the year ended February 28, 2017. The original lease agreement has expired and the Company is currently on a month-to-month basis for rental payments.
BUILDING LEASE
Mr. Mark Pastreich, a director, is a principal in the entity that owns the building leased by Company. The Company is in year nineteen of a twenty-year lease. With a monthly lease amount of $11,042, the lease payments were $110,420 for the ten months ended December 31, 2017, and $132,504 for the twelve months ended February 28, 2017. The Company also paid property taxes for the ten months ended December 31, 2017 in the amount of $41,959 and $48,455 for the twelve months ended February 28, 2017. 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 monthly lease amount of $12,088.
NOTE 5 STOCKHOLDERS’ EQUITY
On September 30, 2015, RMS’s Board of Directors authorized a stock repurchase program pursuant to which the Company has and expects to continue to make open market purchases of the Company’s outstanding common stock. The Board of Directors initially authorized such purchases up to 1,000,000 shares. On June 29, 2016, the Board of Directors approved the amendment to the stock repurchase program increasing the authorized to be repurchased to 2,000,000 shares. The purchases are made through a broker designated by the Company with price, timing and volume restrictions based on average daily trading volume, consistent with the safe harbor rules of the Securities and Exchange Commission (the “Commission”) for such repurchases.
As of December 31, 2017, the Company had repurchased 396,606 shares at an average price of $0.45 under the program. Management of the Company decided to discontinue repurchasing its outstanding common stock under the program for an undetermined period of time to utilize cash for capital investments needed to expand the business. As such, no shares were repurchased in the ten months ended December 31, 2017.
NOTE 6 STOCK-BASED COMPENSATION
On September 30, 2015, the Board of Directors approved the 2015 Stock Option Plan (“the Plan”) authorizing the Company to grant stock option awards to certain officers, employees and consultants under the Plan, subject to shareholder approval at the Annual Meeting of Shareholders held on September 6, 2016. The total number of shares of common stock of the Company, par value $0.01 per share (“Common Stock”), with respect to which awards may be granted pursuant to the Plan was not to exceed 2,000,000 shares.
On June 29, 2016, the Board of Directors approved the amendment to the Plan authorizing the total number of shares of common stock authorized to be subject to awards granted under the Plan to be increased to 4,000,000 shares. On September 6, 2016, at the Annual Shareholder Meeting, the Company’s shareholders approved the Plan as amended.
- 28 -
As of December 31, 2017, the Company has 1,038,000 options outstanding to certain executives and key employees under the Plan.
Effective November 1, 2016, the Company entered into an employment agreement with Dr. Ma, the Company’s Chief Medical Officer. The agreement calls for quarterly equity compensation in the form of shares of common stock of the Company. The stock will be awarded on the day following the last working day of each quarter. The number of shares issued each quarter shall be determined by dividing $15,000 by the closing bid price of the Company’s common stock as reported by the OTC Markets Inc. as of the last working day of such quarter (the “Closing Price”). As of December 31, 2017, 129,019 shares of common stock were issued to Dr. Ma.
On October 21, 2015, the Board of Directors of the Company approved non-employee director compensation of $25,000 each annually, to be paid quarterly half in cash and half in common stock, beginning September 1, 2015.
The per share weighted average fair value of stock options granted during the fiscal year ended December 31, 2017 and February 28, 2017 was $0.29 and $0.21, 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 fiscal year ended December 31, 2017 and February 28, 2017. 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, 2017
|
|
February 28, 2017
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
0.00%
|
|
|
0.00%
|
|
Expected Volatility
|
|
|
70.1%-72.2%
|
|
|
59.00%-70.90%
|
|
Weighted-average volatility
|
|
|
—
|
|
|
—
|
|
Expected dividends
|
|
|
—
|
|
|
—
|
|
Expected term (in years)
|
|
|
5 Years
|
|
|
5 Years
|
|
Risk-free rate
|
|
|
2.30%-2.36%
|
|
|
2.17%-2.48%
|
|
The following table summarizes the status of the Company’s stock option plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
February 28, 2017
|
|
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 1
|
|
|
1,345,000
|
|
$
|
0.39
|
|
|
1,060,000
|
|
$
|
0.37
|
|
Granted
|
|
|
318,000
|
|
$
|
0.49
|
|
|
500,000
|
|
$
|
0.41
|
|
Exercised
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
Forfeited
|
|
|
625,000
|
|
$
|
0.39
|
|
|
215,000
|
|
$
|
0.36
|
|
Outstanding at year end
|
|
|
1,038,000
|
|
$
|
0.41
|
|
|
1,345,000
|
|
$
|
0.39
|
|
Options exercisable
|
|
|
737,010
|
|
$
|
0.38
|
|
|
—
|
|
$
|
—
|
|
Weighted average fair value of options granted during the period
|
|
|
—
|
|
$
|
0.29
|
|
|
—
|
|
$
|
0.21
|
|
Stock-based compensation expense
|
|
|
—
|
|
$
|
(4,417
|
)
|
|
—
|
|
$
|
115,828
|
|
Total stock-based compensation expense, net of forfeitures, for stock option awards totaled $(4,417) and $115,828 for the fiscal year ended December 31, 2017 and February 28, 2017, respectively.
The weighted-average grant-date fair value of options granted during ten months ended December 31, 2017 and the twelve months ended February 28, 2017 was $93,115 and $122,656 respectively. The total intrinsic value of options exercised during the ten months ended December 31, 2017 and the twelve months ended February 28, 2017, was zero for both periods.
- 29 -
The following table presents information pertaining to options outstanding at December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Price
|
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.36-0.50
|
|
1,038,000
|
|
5 years
|
|
$
|
0.41
|
|
737,010
|
|
$
|
0.38
|
|
As of December 31, 2017, there was $77,620 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 17 months. The total fair value of vested options during the ten months ended December 31, 2017 was $150,820 and for the twelve months ended February 28, 2017, it was $98,432.
NOTE 7 SALE-LEASEBACK TRANSACTION - OPERATING LEASE
On February 25, 1999, the Company entered into a sale-leaseback arrangement whereby the Company sold its land and building at 24 Carpenter Road in Chester, New York and leased it back for a period of twenty years. The leaseback is accounted for as an operating lease. The gain of $0.5 million realized in this transaction has been deferred and is amortized to income in proportion to rental expense over the term of the related lease.
At December 31, 2017, minimum future rental payments are:
|
|
|
|
|
Year
|
|
Minimum
Rental
Payments
|
|
|
|
|
|
|
2018
|
|
|
132,504
|
|
2019
|
|
|
22,084
|
|
|
|
$
|
154,588
|
|
Rent expense for the ten months ended December 31, 2017 was $110,420, and for the twelve months ended February 28, 2017 was $132,504.
NOTE 8
FEDERAL AND STATE INCOME TAXES
The provision (benefit) for income taxes at December 31, 2017, and February 28, 2017 consisted of:
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
February 28,
2017
|
|
|
|
|
|
|
|
State income tax:
|
|
|
|
|
|
Current, net of refund
|
|
$
|
1,670
|
|
$
|
2,004
|
|
Federal income (benefit) tax:
|
|
|
|
|
|
|
|
Deferred
|
|
|
(47,327
|
)
|
|
(40,689
|
)
|
Current
|
|
|
448,220
|
|
|
(203,015
|
)
|
Total
|
|
$
|
402,563
|
|
$
|
(241,700
|
)
|
- 30 -
The reconciliation of income taxes shown in the financial statements and amounts computed by applying the Federal expected tax rate of 34% is as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
February 28,
2017
|
|
|
|
|
|
|
|
Income (loss) before tax
|
|
$
|
1,307,520
|
|
$
|
(776,699
|
)
|
Computed expected tax (benefit)
|
|
$
|
444,557
|
|
$
|
(264,078
|
)
|
State income and franchise tax/(refund)
|
|
|
1,670
|
|
|
1,323
|
|
Reduction in deferred tax from change in tax rate
|
|
|
(13,420
|
)
|
|
—
|
|
Other
|
|
|
(30,244
|
)
|
|
21,055
|
|
Provision (benefit) for taxes
|
|
$
|
402,563
|
|
$
|
(241,700
|
)
|
The components of deferred tax liabilities at December 31, 2017, and February 28, 2017, respectively, are as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
February 28,
2017
|
|
|
|
|
|
|
|
Deferred compensation cost
|
|
$
|
33,987
|
|
$
|
49,228
|
|
Depreciation and amortization
|
|
|
(69,550
|
)
|
|
(156,596
|
)
|
Allowance for bad debts and other
|
|
|
13,888
|
|
|
24,946
|
|
Deferred tax liabilities
|
|
$
|
(21,675
|
)
|
$
|
(82,422
|
)
|
New Tax Legislation
On December 22, 2017, the President of the United States (“U.S.”) signed into law the Tax Cuts and Jobs Act tax reform legislation. This legislation makes significant change in U.S tax law including a reduction in the corporate tax rates, changes to net operating loss carryforwards and carrybacks, and a repeal of the corporate alternative minimum tax. The legislation reduced the highest U.S corporate tax rate from the current rate of 35% to 21%, effective January 1, 2018. As a result of the enacted law, the Company was required to revalue deferred tax assets and liabilities at the enacted rate. This revaluation resulted in an additional benefit of $13,420 included in income tax expense and corresponding reduction in the net deferred tax liabilities. The other provisions of the Tax Cuts and Jobs Act did not have a material impact on the 2017 financial statements.
NOTE 9 MAJOR CUSTOMERS
For the ten months ended December 31, 2017, and the twelve months ended February 28, 2017, approximately, 55% and 56%, respectively, of the Company’s gross product revenues were derived from one major customer. At December 31, 2017, and February 28, 2017, accounts receivable due from this customer were $0.9 million and $0.4 million, respectively.
The largest customer in both years is a domestic medical products and supplies distributor. Although a number of larger infusion customers have elected to consolidate their purchases through one or more distributors in recent years, we continue to maintain a strong direct relationship with them. We do not believe that their continued purchase of FREEDOM System products and related supplies is contingent upon the distributor.
NOTE 10 LEGAL PROCEEDINGS
Lawyers representing EMED Technologies Corp. (“EMED”) sent RMS a letter dated, May 1, 2013, which alleged that the RMS High-Flo Butterfly design infringed a patent controlled by EMED. RMS disputed this claim and believes that our design did not infringe and that the EMED patent itself was not valid. Under advice of counsel, on September 20, 2013, the Company commenced in the United States District Court for the Eastern District of California a Declaratory Judgment action against competitor, EMED to establish the invalidity of one of EMED’s patents and non-infringement of the Company’s needle sets. EMED answered the complaint and asserted patent infringement and unfair business practice counterclaims. The Company responded by asserting its own unfair business practice claims against EMED. Both parties have requested injunctive relief and monetary damages. Discovery is ongoing.
- 31 -
On June 16, 2015, the Court issued what it termed a “narrow” Preliminary Injunction against the Company from making certain statements regarding some of EMED’s products. On June 23, 2016, EMED filed a Motion seeking to have the Company held in contempt, claiming that certain language in the Company’s device labeling does not comply with the injunction. In response to a Show Cause Order, the Company advised the Court that the language in the Company’s labeling that EMED challenged is language that the FDA directed the Company to use in its labeling. The Court discharged the Show Cause Order, effectively rejecting EMED’s contempt argument.
On March 24, 2016, EMED filed a Motion seeking a second Preliminary Injunction prohibiting RMS from selling three of its products in California. The Company opposed that Motion on April 19, 2016. The Order denying this second Preliminary Injunction was issued June 6, 2017.
On August 22, 2017, the Company filed a Motion seeking a Preliminary Injunction prohibiting EMED from making false statements and claims regarding the products of both companies. EMED filed a Response and Objections to Company’s motion on September 21, 2017, and Company filed a subsequent Reply on September 28, 2017. The Court issued a Minute Order on September 22, 2017 vacating a hearing set for October 5, 2017, and stating that if the Court determines oral hearings to be required, the parties will be notified. Presently, the parties are awaiting further action by the Court.
On June 25, 2015, EMED filed a claim of patent infringement for the second of its patents, also directed to the Company’s needle sets, in the United States District Court for the Eastern District of Texas. This second patent is related to the one concerning the Company’s declaratory judgment action. Given the close relationship between the two patents, the Company requested that the Texas suit be transferred to California. Also, based on a validity review of the patent in the U.S. Patent and Trademark Office (“USPTO”), discussed below, the Company requested the Texas suit be stayed. On May 12, 2016, the Court entered an order staying the case until after the Patent Trial and Appeal Board (“PTAB”) at the USPTO issued a final written decision regarding the validity of the patent. On January 12, 2017, the PTAB issued its final written decision invalidating the claims asserted by EMED in the Texas litigation. On January 26, 2017, the Company and EMED requested that the Texas case remain stayed pending EMED’s appeal of the PTAB’s final ruling to the Court of Appeals for the Federal Circuit (“CAFC”).
On September 11, 2015, the Company requested an ex parte reexamination of the patent in the first filed case, and on September 17, 2015 the Company requested an inter partes review (“IPR”) of the patent in the second filed case. On November 20, 2015, the USPTO instituted the ex parte reexamination request having found a substantial new question of patentability concerning EMED’s patent in the first filed case. All EMED claims have been rejected by the USPTO Examiner in a Final Office Action dated July 19, 2017. EMED filed a response to this Final Office Action on September 15, 2017, and subsequently filed a Notice of Appeal on October 17, 2017. The Date for filing an Appeal Brief is two (2) months from the date of Notice. On January 25, 2018 EMED filed an Appeal Brief with a Petition for Revival having unintentionally delayed the filing by more than two months. Service was made to RMS on January 28, 2018. Thus, the ex parte reexamination is ongoing. A decision to institute the IPR for EMED’s patent in the second filed case was ordered by the USPTO on February 19, 2016 having determined a reasonable likelihood all claims of the patent may be found to be unpatentable. Oral argument for the IPR was held on November 22, 2016 and a final ruling issued on January 12, 2017. In its final ruling, the PTAB held the claim asserted by EMED against the Company in the second filed case was invalid. EMED appealed the PTAB’s final ruling, and EMED’s opening brief in the CAFC was filed on June 26, 2017. The Company’s response brief was filed on August 3, 2017. EMED filed a reply brief on August 17, 2017. Presently, the parties are awaiting further action by the CAFC.
Following the final decision on January 12, 2017 by the PTAB in the IPR regarding the second patent, EMED apparently filed a new application in the USPTO claiming priority back to US Application 12/187,256 – which was issued as US 8,500,703, and the subject of the Ex-Parte Re Examination noted above. This new application was submitted under the USPTO Tract 1 accelerated prosecution option and resulted in a new patent US 9, 808,576 issued November 7, 2017. On this same date, EMED filed a new claim of patent infringement for this third patent, also directed to the Company’s needle sets, in the United States District Court for the Eastern District of Texas. In light of the recent cases, including
TC Heartland v. Kraft Foods Group,
RMS has filed a Motion to Dismiss or Transfer Venue to the Southern District of New York. EMED has filed a Response to this Motion, and RMS filed a further Response on February 8, 2018 a day ahead of the due date. We await a decision by the Court.
Although the Company believes it has meritorious claims and defenses in these actions and proceedings, their outcomes cannot be predicted with any certainty. We believe that it is likely both patents will be determined invalid, however, if any of these actions against the Company are successful, they could have a material adverse effect on the Company’s business, results of operations, financial condition and cash flows.
- 32 -
NOTE 11 EMPLOYEE BENEFITS
We provide a safe harbor 401(k) plan for our employees that allows for employee elective contributions, Company matching contributions and discretionary profit sharing contributions. Employee elective contributions are funded through voluntary payroll deductions. The Company makes safe harbor matching contributions in an amount equal to 100% of the employee’s contribution not to exceed 3% of employee’s compensation plus 50% of employee’s pay contributed between 3% and 5% of employee’s compensation. Company matching expense for the period ended December 31, 2017 and February 28, 2017 was $64,881 and $54,042, respectively. The Company has not provided for a discretionary profit sharing contribution.
NOTE 12 SUBSEQUENT EVENTS
On February 8, 2018, the Company executed a Promissory Note with KeyBank National Association in the amount of $1.5 million as a variable rate revolving line of credit loan due on demand with an interest rate of Libor plus 2.25%, collateralized with a certificate of deposit in the amount of $1.5 million. The Company entered into this arrangement to establish a credit lending history and, in the event needed, to have additional cash on hand for future expansion.