From 1992 to 2018, we leased an aircraft from AMI Aviation, Inc., of which our former President and Chief Executive Officer, Andrew Sealfon, was a majority shareholder. The lease payments were zero and $1,292 for the three months ended September 30, 2019 and 2018, respectively and zero and $9,045 for the nine months ended September 30, 2019 and 2018 respectively. Upon the termination of Mr. Sealfon as President and Chief Executive Officer on July 25, 2018, the Company ceased leasing this aircraft.
Mr. Pastreich, a former director, 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 three additional renewal options commencing September 1, 2019 through February 28, 2021.
The lease payments were $36,264 and $33,126 for the three months ended September 30, 2019 and 2018, respectively, and $106,700 and $99,378 for the nine months ended September 30, 2019 and 2018, respectively. The Company also paid property taxes in the amount of $13,749 and $12,431 for the three months ended September 30, 2019 and 2018, respectively and $39,165 and $37,863 for the nine months ended September 30, 2019 and 2018, respectively.
Depreciation expense was $69,740 and $68,991 for the three months ended September 30, 2019 and 2018, respectively, and $218,328 and $202,975 for the nine months ended September 30, 2019 and 2018, respectively.
We are involved in several lawsuits with our principal competitor, EMED Technologies Corporation (“EMED”). EMED has alleged that our needle sets infringe various patents controlled by EMED. Certain of these lawsuits also allege antitrust violations, unfair business practices, and various other business tort claims. We are vigorously defending against all of the lawsuits brought by EMED. Although no assurances can be given, we believe we have meritorious defenses to all of EMED’s claims.
The initial case involving EMED was filed by us in the United States District Court for the Eastern District of California on September 20, 2013 (the “California case”), in response to a letter from EMED claiming patent infringement by us, and seeking a declaratory judgment establishing the invalidity of the patent referenced in the letter – EMED’s US patent 8,500,703 – “‘703.” EMED answered the complaint and asserted patent infringement of the ‘703 patent and several counterclaims relating generally to claims of unfair business practices against us. We responded by adding several claims against EMED, generally relating to claims of unfair business practices on EMED’s part. Both parties have requested injunctive relief and monetary damages in unspecified amounts. On June 16, 2015, the California court entered a preliminary injunction against KORU Medical making certain statements regarding what products were cleared by the FDA for use, or could be safely used, with KORU Medical’s Freedom60 pump, without voiding the product warranty. On September 11, 2015, we requested an ex parte reexamination of the ‘703 patent by the US Patent and Trademark Office (“USPTO”). The ex parte reexamination resulted in a Final Office Action dated July 19, 2017 rejecting all of EMED’s claims in the patent. On January 25, 2018, EMED filed an Appeal Brief with a Petition for Revival, which was accepted. On April 9, 2018, the USPTO denied EMED’s request for reconsideration of the order rejecting all claims in the ‘703 patent. On June 26, 2019, the Examiner responded to EMED’s appeal brief and maintained all of the final rejections. Both the California case and EMED’s appeal of the USPTO rejections are pending.
The second court case was filed by EMED in the United States District Court for the Eastern District of Texas on June 25, 2015, claiming patent infringement on another of its patents (US 8,961,476 – “‘476”), by our needle sets, and seeking unspecified monetary damages (“ED Texas ‘476 matter”). This ‘476 patent is related to the now rejected EMED ‘703 patent.
On September 17, 2015, we requested an inter partes review (“IPR”) of the ‘476 patent, and in response to our request, the Court entered an order staying the ED Texas ‘476 matter until after the Patent Trial and Appeal Board (“PTAB”) of the USPTO made a decision regarding the validity of the patent. On January 12, 2017, the PTAB issued its Final Written Decision in our favor, invalidating all but one (“dependent Claim 9”) of the claims in the ‘476 patent. EMED appealed the PTAB’s ruling to the United States Court of Appeals for the Federal Circuit, which affirmed the PTAB’s Final Written Decision in our favor on April 3, 2018. On April 18, 2018, EMED filed a petition for en banc rehearing, which was denied. On August 16, 2018, EMED petitioned the United States Supreme Court for a Writ of Certiorari to review the Federal Circuit’s upholding the PTAB’s Final Written Decision. On October 29, 2018 the United States Supreme Court denied EMED’s Petition for a Writ of Certiorari, thus finally affirming the PTAB’s invalidation of ‘476, save for one dependent claim.
Following the PTAB’s Final Written Decision in the IPR regarding the ‘476 patent, EMED filed a new patent application claiming priority back to the application that issued as ‘703, which is the patent at issue in the California case. Submitted for accelerated examination, this new application issued as US 9,808,576 – “‘576” on November 7, 2017. On this same date, EMED filed a new case (the “third case”) in the United States District Court for the Eastern District of Texas claiming patent infringement of ‘576, also directed to our needle sets, and seeking unspecified damages and a preliminary injunction against marketing and sales of our needle sets. We filed a Motion to Dismiss or Transfer Venue to the United States District Court for the Southern District of New York (“SDNY”), which resulted in the transfer of the third case to SDNY (“SDNY ‘576 matter”) on May 30, 2018.
On April 23, 2018, EMED filed a new civil case (the “fourth case”) against us in the United States District Court for the Eastern District of Texas asserting antitrust, defamation and unfair business practice claims, and seeking unspecified damages, similar to those previously presented in the California case, described above. The fourth case also names Andrew Sealfon, then President and CEO of KORU Medical, individually as a defendant. As the result of a hearing on November 14, 2018, on December 7, 2018, the Court entered an order transferring the fourth case to the United States District Court for the Eastern District of California (the “California Court”). The California Court set an initial schedule for a preliminary motion phase and on August 30, 2019 EMED filed a second amended complaint. On September 30, 2019, KORU Medical and Sealfon filed a motion to dismiss that complaint, and Sealfon filed a separate motion to dismiss the case as to him for lack of jurisdiction. Ultimately, we expect this case to be coordinated or consolidated with the California case, or dismissed, as the California Court sees fit.
At the same hearing on November 14, 2018, the Texas Court granted EMED leave to amend its infringement contentions, following the IPR decision invalidating all but one claim of the ‘476 patent, in order to assert infringement of that sole remaining claim, namely dependent Claim 9. The Texas Court’s order allowing EMED’s amendment of its infringement contentions against us was entered on December 7, 2018.
- 10 -
The ED Texas ‘476 matter proceeded under EMED’s amended infringement contention to incorporate the surviving dependent Claim 9, which incorporates Claims 1 and 8 of the ‘476 patent, meaning that, to prove infringement on the part of us, EMED must prove more elements of infringement than it originally charged against us. In April 2019, EMED served its damages expert’s report opining that EMED’s past infringement damages amount to $1.5 million, and in May KORU Medical served its damages expert’s rebuttal report opining that EMED’s expert miscalculated damages which if properly calculated would amount to less than $100,000. The Texas Court had set a trial date of August 19, 2019, for the trial of the ED Texas ‘476 matter. On June 24, 2019, the Texas Court Magistrate Judge issued a Report and Recommendation decision finding no infringement, literally or under the doctrine of equivalents, by KORU Medical’s accused products. EMED filed its objections on June 26, 2019. On June 28, 2019 the United States District Judge for the Eastern District of Texas issued a Final Judgment in favor of KORU Medical and adopted the decision of the Magistrate Judge that was issued on June 24, 2019, overruled EMED’s objections, awarded court costs to KORU Medical, and dismissed the case. A final judgment has been entered. KORU Medical has submitted its Bill of Costs for approximately $16,000 and moved to declare the case exceptional and for recovery of its attorney fees and expenses of approximately $2.3 million in defense of EMED’s assertion of the ‘476 Patent. EMED has objected to our Bill of Costs, opposed the motion for fees, and filed a notice of appeal of the non-infringement judgment to the Court of Appeals for the Federal Circuit. On September 16, 2019, EMED filed its opening appeal brief. KORU Medical plans to oppose EMED’s appeal. The ED Texas court has stayed proceedings in the district court until the appeal process is completed. KORU Medical’s fee motion remains pending lifting of the stay.
The SDNY ‘576 matter proceeded in the New York court through claim construction on the ‘576 Patent, whereupon KORU Medical sought permission from the New York court to file a motion for summary judgement, to which EMED objected. The New York court granted KORU Medical’s request, and on July 10, 2019, KORU Medical filed its motion for summary judgement. EMED opposed that motion, and on August 30, 2019, the New York court granted summary judgement, and dismissed the lawsuit. A final judgement has been entered. KORU Medical has submitted a Bill of Costs for approximately $1,500, to which EMED has objected, and has moved the New York court to declare the case exceptional and for recovery of its attorney fees and expenses of at least $1.16 million. EMED has opposed that motion, which is now fully briefed and has been referred to a United States District Court Magistrate Judge to prepare a report and recommendation. EMED also has appealed the New York court’s judgment of non-infringement to the Court of Appeals of the Federal Circuit, which matter is pending. EMED’s opening appeal brief is currently due November 8, 2019.
As is required by the respective Courts in both the SDNY ‘576 matter and the ED Texas ‘476 matter, the parties are engaging in settlement discussions and have conducted a court-sponsored mediation session, which did not result in settlement.
Although we believe KORU Medical has meritorious claims and defenses in all of the above-described actions and proceedings, their outcomes cannot be predicted with any certainty. If any of these actions against us are successful, they could have a material adverse effect on our business, results of operations, financial condition and cash flows.
NOTE 5 STOCK-BASED COMPENSATION
On June 29, 2016, the Board of Directors amended the 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 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.
As of September 30, 2019, the Company had 3,897,000 time based stock options outstanding to certain executives, key employees and consultants under the Plan, of which 1,650,000 were issued during the nine months ended September 30, 2019. The Company also had 1,000,000 performance based options outstanding under the Plan as of September 30, 2019, to its President and Chief Executive Officer, of which all were issued during the nine months ending September 30, 2019.
On February 20, 2019, the Board of Directors of the Company approved an increase in compensation for each non-employee director from $25,000 to $50,000 annually effective January 1, 2019 and an additional $10,000 annually for the chair of each Board committee effective February 20, 2019, in each case to be paid quarterly half in cash and half in common stock at the end of each fiscal quarter.
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 on April 1, 2019. 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.
- 11 -
2015 STOCK OPTION PLAN, as amended
Time Based Stock Options
The per share weighted average fair value of stock options granted during the nine months ended September 30, 2019 and September 30, 2018 was $1.33 and $0.68, respectively. The fair value of each award is estimated on the grant date using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in the nine months ended September 30, 2019 and September 30, 2018. 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.
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
0.00%
|
|
|
0.00%
|
|
Expected Volatility
|
|
|
56.1 – 60.7%
|
|
|
62.8 – 65.2%
|
|
Weighted-average volatility
|
|
|
—
|
|
|
—
|
|
Expected dividends
|
|
|
—
|
|
|
—
|
|
Expected term (in years)
|
|
|
10 Years
|
|
|
5 Years
|
|
Risk-free rate
|
|
|
1.60 – 2.72%
|
|
|
2.80 – 2.90%
|
|
The following table summarizes the status of the Plan with respect to time based stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months Ended September 30,
|
|
|
|
2019
|
|
2018
|
|
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1
|
|
2,419,000
|
|
$
|
1.00
|
|
|
1,038,000
|
|
$
|
0.41
|
|
Granted
|
|
1,650,000
|
|
$
|
1.92
|
|
|
1,018,000
|
|
$
|
1.23
|
|
Exercised
|
|
160,000
|
|
$
|
0.37
|
|
|
125,000
|
|
$
|
0.41
|
|
Forfeited
|
|
12,000
|
|
$
|
0.87
|
|
|
12,000
|
|
$
|
0.87
|
|
Outstanding at September 30
|
|
3,897,000
|
|
$
|
1.41
|
|
|
1,919,000
|
|
$
|
0.85
|
|
Options exercisable at September 30
|
|
1,037,885
|
|
$
|
0.81
|
|
|
666,969
|
|
$
|
0.40
|
|
Weighted average fair value of options granted during the period
|
|
—
|
|
$
|
1.33
|
|
|
—
|
|
$
|
0.68
|
|
Stock-based compensation expense
|
|
|
|
$
|
473,139
|
|
|
—
|
|
$
|
51,592
|
|
Total stock-based compensation expense totaled $473,139 and $51,592 for the nine months ended September 30, 2019 and 2018, respectively. Cash received from option exercises for the nine months ended September 30, 2019 and 2018 was $58,900 and $51,250, respectively.
The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2019 and 2018, was $1.33 and $0.68, respectively. The total intrinsic value of options exercised during the nine months ended September 30, 2019 and 2018, was $30,022 and $30,664, respectively.
The following table presents information pertaining to options outstanding at September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Price
|
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 0.38 – 3.15
|
|
3,897,000
|
|
7 years
|
|
$
|
1.41
|
|
1,037,885
|
|
$
|
0.81
|
|
- 12 -
As of September 30, 2019, there was $2,802,411 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 42 months. The total fair value of shares vested as of September 30, 2019 and 2018, was $506,729 and $139,569, respectively.
Performance Based Stock Options
The per share weighted average fair value of stock options granted during the nine months ended September 30, 2019 and 2018 was $1.16 and zero, respectively. The fair value of each award is estimated on the grant date using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in the nine months ended September 30, 2019 and September 30, 2018. 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.
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months Ended September 30,
|
|
|
|
2019
|
|
2018
|
|
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
Granted
|
|
1,000,000
|
|
$
|
1.70
|
|
|
—
|
|
$
|
—
|
|
Exercised
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
Forfeited
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
Outstanding at September 30
|
|
1,000,000
|
|
$
|
1.70
|
|
|
—
|
|
$
|
—
|
|
Options exercisable at September 30
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
Weighted average fair value of options granted during the period
|
|
—
|
|
$
|
1.16
|
|
|
—
|
|
$
|
—
|
|
Stock-based compensation expense
|
|
—
|
|
$
|
167,636
|
|
|
—
|
|
$
|
—
|
|
Total performance stock-based compensation expense totaled $167,636 and zero for the nine months ended September 30, 2019 and 2018, respectively.
The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2019 and September 30, 2018, was $1.16 and zero, respectively.
The following table presents information pertaining to performance based options outstanding at September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Price
|
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1.70
|
|
1,000,000
|
|
10 years
|
|
$
|
1.70
|
|
—
|
|
$
|
—
|
|
- 13 -
As of September 30, 2019, there was $994,925 of total unrecognized compensation cost related to non-vested performance share option based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 31 months. The total fair value of shares vested as of September 30, 2019 and 2018 was zero for both periods.
NOTE 6 DEBT OBLIGATIONS
On February 8, 2018, the Company issued a Promissory Note to KeyBank National Association (“KeyBank”) in the amount of $1.5 million as a variable rate revolving line of credit loan due on demand with an interest rate of LIBOR plus 2.25%, collateralized with a certificate of deposit in the amount of $1.5 million. 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. On September 25, 2018, KeyBank released the certificate of deposit as collateral for the loan and the Company executed a Commercial Security Agreement as collateral for the loan. As of September 30, 2019, the Company had no outstanding amounts against the line of credit.
NOTE 7 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.
The components of lease expense were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2019
|
|
Nine Months Ended
September 30, 2019
|
|
|
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
37,922
|
|
$
|
111,672
|
|
|
|
|
|
|
|
|
|
Finance lease cost:
|
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
1,061
|
|
$
|
3,182
|
|
Interest on lease liabilities
|
|
|
47
|
|
|
178
|
|
Total finance lease cost
|
|
$
|
1,108
|
|
$
|
3,360
|
|
Supplemental cash flow information related to leases was as follows:
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2019
|
|
Nine Months Ended
September 30, 2019
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
Finance cash flows from finance leases
|
$
|
1,053
|
|
$
|
3,122
|
|
Finance lease cost:
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
$
|
1,061
|
|
$
|
3,182
|
|
Interest on lease liabilities
|
|
47
|
|
|
178
|
|
Total finance lease cost
|
$
|
1,108
|
|
$
|
3,360
|
|
- 14 -
Supplemental balance sheet information related to leases was as follows:
|
|
|
|
|
|
|
Nine Months Ended
September 30, 2019
|
|
Operating Leases
|
|
|
|
|
Operating lease right-of-use assets
|
|
$
|
406,954
|
|
|
|
|
|
|
Operating lease current liabilities
|
|
|
135,275
|
|
Operating lease long term liabilities
|
|
|
271,679
|
|
Total operating lease liabilities
|
|
$
|
406,954
|
|
|
|
|
|
|
Finance Leases
|
|
|
|
|
Property and equipment, at cost
|
|
$
|
6,363
|
|
Accumulated depreciation
|
|
|
3,182
|
|
Property and equipment, net
|
|
$
|
3,181
|
|
|
|
|
|
|
Finance lease current liabilities
|
|
|
3,242
|
|
Finance lease long term liabilities
|
|
|
—
|
|
Total finance lease liabilities
|
|
$
|
3,242
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, 2019
|
|
Weighted Average Remaining Lease Term
|
|
|
|
Operating leases
|
|
3 Years
|
|
Finance leases
|
|
1 Year
|
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
|
Operating leases
|
|
4.75%
|
|
Finance leases
|
|
4.75%
|
|
Maturities of lease liabilities are as follows:
|
|
|
|
|
|
|
|
Year Ending December 31,
|
|
Operating Leases
|
|
Finance Leases
|
|
2019
|
|
$
|
37,922
|
|
$
|
1,100
|
|
2020
|
|
|
151,685
|
|
|
2,206
|
|
2021
|
|
|
149,476
|
|
|
—
|
|
2022
|
|
|
97,256
|
|
|
—
|
|
Total lease payments
|
|
|
436,339
|
|
|
3,306
|
|
Less imputed interest
|
|
|
(29,385
|
)
|
|
(64
|
)
|
Total
|
|
$
|
406,954
|
|
$
|
3,242
|
|
NOTE 8 SUBSEQUENT EVENTS
On September 30, 2019, R. John Fletcher was appointed Chairman of the Board. Mr. Fletcher succeeds Daniel S. Goldberger who resigned as Executive Chairman of the Company in connection with his appointment as Chief Executive Officer of a bioelectronic medical device company. Mr. Goldberger remains with KORU Medical as a non-executive member of the Board of Directors. In Mr. Fletcher’s role as Chairman, he will receive an additional $50,000 in annual compensation, to be paid quarterly in shares of KORU Medical common stock based on the closing price of the stock on the last day of each quarter.
On October 14, 2019, KORU Medical announced that its common stock was approved for listing on The Nasdaq Capital Market and began trading on October 17, 2019 under its then current symbol “REPR”.
On October 23, 2019, the Company announced it will operate under a new dba name, KORU Medical Systems, in place of RMS Medical Products. Reflecting this change, the Company’s common stock commenced trading under the new ticker symbol “KRMD” effective October 24, 2019.
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