Provisions for distributor pricing and annual customer volume rebates are variable consideration and are recorded as a reduction of revenue in the same period the related sales are recorded or when it’s probable the annual growth target will be achieved. The rebates are provided to distributors for the difference in selling price to distributor and pricing specified to select customers.
In June 2016, 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, 2019, 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 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 Company maintains a long-term incentive stock benefit plan under which it grants stock options and stock to certain directors and key employees. 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 restricted stock granted are recorded at the fair value of the shares at the grant date and are recognized over the vesting period.
Certain reclassifications have been made to conform prior period data to the current presentation. These reclassifications had no effect on reported net income.
NOTE 2 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 three months ended June 30, 2018 and 2017, respectively, and zero and $7,000 for the six months ended June 30, 2018 and 2017, respectively; the agreement is fully amortized.
On June 24, 2016, Cyril Narishkin, the Company’s former Chief Operating Officer, 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 zero for the three months ended June 30, 2018 and 2017, respectively, and was zero and $16,000 for the six months ended June 30, 2018 and 2017, respectively.
In January 2017, Brad Sealfon, the son of Andrew Sealfon, a Company Director and former President and Chief Executive Officer, consulted for the Company in its production and quality departments and was compensated $5,184. In March 2017, Mr. Sealfon provided additional consulting as a principal of Stokequest, LLC for the Company in its marketing department and was compensated $2,000. Mr. Sealfon has not performed any consulting for the Company during the six months ended June 30, 2018.
LEASED AIRCRAFT
The Company leases an aircraft from a company controlled by Andrew Sealfon, a Company Director and former President and Chief Executive Officer. The lease payments were $3,876 for both three months ended June 30, 2018 and 2017, and $7,752 and $9,251 for the six months ended June 30, 2018 and 2017, respectively. 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 twenty of a twenty-year lease. With a monthly lease amount of $11,042, the lease payments were $33,126 for each of the three months ended June 30, 2018 and 2017 and $66,252 for each of the six months ended June 30, 2018 and 2017. The Company also paid property taxes for the three months ended June 30, 2018 and 2017 in the amount of $12,720 and $12,418, respectively, and $25,432 and $24,585 for the six months ended June 30, 2018 and 2017, respectively. On November 14, 2017, the Company 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 3 PROPERTY AND EQUIPMENT
Property and equipment consists of the following at:
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
54,030
|
|
$
|
54,030
|
|
Building
|
|
|
171,094
|
|
|
171,094
|
|
Vehicles
|
|
|
60,784
|
|
|
43,836
|
|
Furniture, office equipment, and leasehold improvements
|
|
|
1,020,801
|
|
|
1,008,665
|
|
Manufacturing equipment and tooling
|
|
|
1,129,827
|
|
|
1,075,471
|
|
|
|
|
2,436,536
|
|
|
2,353,096
|
|
Less: accumulated depreciation
|
|
|
(1,641,052
|
)
|
|
(1,516,813
|
)
|
Property and equipment, net
|
|
$
|
795,484
|
|
$
|
836,283
|
|
Depreciation expense was $67,504
and $70,154 for the three months ended June 30, 2018 and 2017, respectively, and $133,984 and
$139,162 for the six months ended June 30, 2018 and 2017, respectively.
- 8 -
NOTE 4 LEGAL PROCEEDINGS
The Company is involved in several lawsuits with its competitor, EMED Technologies Corp. (“EMED”), wherein EMED has alleged the Company’s needle sets infringe various patents controlled by EMED. Certain of these lawsuits also allege antitrust violations, unfair business practices and various other claims. Although no assurances can be given, the Company believes it likely that each of EMED’s patents at issue in these cases will be deemed invalid and that the Company will succeed on the merits with respect to all of the other elements of the cases.
The initial case involving EMED was filed by the Company in the United States District Court for the Eastern District of California on September 20, 2013, in response to a letter from EMED claiming infringement by RMS, and sought to establish the invalidity of the patent referenced in the letter – patent US 8,500,703 – or “’703.” EMED answered the complaint and asserted patent infringement of ’703 and unfair business practice counterclaims. The Company responded by adding unfair business practice claims against EMED. Both parties have requested injunctive relief and monetary damages in unspecified amounts.
On August 22, 2017, the Company filed a motion in this California case seeking a Preliminary Injunction prohibiting EMED from making false statements and claims regarding the products of both companies. The motion has now been fully briefed, and the parties are awaiting action by the Court.
Earlier, on September 11, 2015, the Company 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 EMED claims of the patent. On January 25, 2018 EMED filed an Appeal Brief with a Petition for Revival, and the ex parte reexamination is ongoing.
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 of another of its patents (US 8,961,476 – “’476”), by the Company’s needle sets, and seeking unspecified monetary damages. This ’476 patent is related to the ’703 patent.
On September 17, 2015 the Company requested an inter partes review (“IPR”) of ’476, and in response to the Company’s request, the Court entered an order staying the second case 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 RMS’s favor invalidating all but one of the claims in this patent. (The Company believes the remaining claim is not independently material to any of EMED’s litigation claims or RMS’s rights.) 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 the Company’s favor on April 3, 2018. On April 18, 2018, EMED filed a petition for en banc rehearing. The second court case in the Eastern District of Texas remains stayed pending EMED’s exhaustion of its rights of judicial review of the PTAB’s decision.
Following the PTAB’s Final Written Decision in the IPR of ’476, EMED filed a new patent application claiming priority back to the application that issued as ’703 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 (third case) in the United States District Court for the Eastern District of Texas claiming patent infringement of ’576, also directed to the Company’s needle sets, and seeking unspecified damages and a preliminary injunction against the Company’s marketing of its needle sets. RMS has filed a Motion to Dismiss or Transfer Venue to the Southern District of New York, as RMS has no physical or direct presence in the Eastern District of Texas. RMS also filed an opposition to EMED’s preliminary injunction motion, to which EMED did not file a reply. The Eastern District of Texas has now ordered the case moved to the Southern District of New York, which has now occurred.
On May 4, 2018 the Company requested an inter parties review (“IPR”) of ’576 and EMED’s response is due in mid-August. Upon the submission of that Response, the Company intends to Move for Stay of the ’576 Southern District of New York matter.
EMED has petitioned the Eastern District of Texas for right to move the ’476 matter to the Southern District of New York and for leave to amend the original complaint, but neither request is believed likely to succeed as both issues are years past statutory deadlines and at odds with prior statements made by EMED in this matter.
On April 23, 2018, EMED filed a new Civil Case in the Eastern District of Texas asserting antitrust, defamation and unfair business practice claims, and seeking unspecified damages, similar to those previously presented in the first case, described above. The Company has filed a Motion to Dismiss and the parties are awaiting 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. 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.
- 9 -
NOTE 5 STOCKHOLDERS’ EQUITY
On June 29, 2016, RMS’s Board of Directors authorized the Company to make open market purchases of up to 2,000,000 shares of the Company’s outstanding Common Stock. 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 rules of the Securities and Exchange Commission for such repurchases. As of June 30, 2018, the Company had repurchased 396,606 shares at an average price of $0.45. The management of the Company has 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.
NOTE 6 STOCK-BASED COMPENSATION
On June 29, 2016, the Board of Directors amended the 2015 Stock Option Plan authorizing the Company to grant awards to certain employees under the plan at fair market value, 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, shall not exceed 4,000,000 shares.
As of June 30, 2018, there were outstanding 931,000 options awarded to certain executives, key employees and advisory board members under the Plan.
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 six months ended June 30, 2018 and June 30, 2017 was $0.75
and $0.25, 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 six months ended June 30, 2018 and June 30, 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:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
0.00%
|
|
|
0.00%
|
|
Expected Volatility
|
|
|
65.2%
|
|
|
70.9-72.20%
|
|
Weighted-average volatility
|
|
|
—
|
|
|
—
|
|
Expected dividends
|
|
|
—
|
|
|
—
|
|
Expected term (in years)
|
|
|
5 Years
|
|
|
5 Years
|
|
Risk-free rate
|
|
|
2.80%
|
|
|
2.36-2.48%
|
|
The following table summarizes the status of the Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months Ended June 30,
|
|
|
|
2018
|
|
2017
|
|
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1
|
|
1,038,000
|
|
$
|
0.41
|
|
|
905,000
|
|
$
|
0.37
|
|
Granted
|
|
18,000
|
|
$
|
1.33
|
|
|
518,000
|
|
$
|
0.41
|
|
Exercised
|
|
125,000
|
|
$
|
0.41
|
|
|
—
|
|
$
|
—
|
|
Forfeited
|
|
—
|
|
$
|
—
|
|
|
310,000
|
|
$
|
0.36
|
|
Outstanding at June 30
|
|
931,000
|
|
$
|
0.43
|
|
|
1,113,000
|
|
$
|
0.39
|
|
Options exercisable at June 30
|
|
656,885
|
|
$
|
0.39
|
|
|
538,000
|
|
$
|
0.38
|
|
Stock-based compensation expense
|
|
—
|
|
$
|
26,670
|
|
|
—
|
|
$
|
(26,021
|
)
|
- 10 -
Total stock-based compensation expense, net of estimated forfeitures for stock option awards totaled $26,670 and ($26,021) for the six months ended June 30, 2018 and June 30, 2017, respectively.
Cash received from option exercises for the six months ended June 30, 2018 and 2017 was $51,250 and zero, respectively.
The weighted-average grant-date fair value of options granted during the six months ended June 30, 2018 and June 30, 2017, was $0.75 and $0.25, respectively. The total intrinsic value of options exercised during the six months ended June 30, 2018 and June 30, 2017, was $30,664 and zero, respectively.
The following table presents information pertaining to options outstanding at June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Price
|
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.36 - $1.33
|
|
931,000
|
|
5 years
|
|
$
|
0.43
|
|
656,885
|
|
$
|
0.39
|
|
As of June 30, 2018, there was $64,507 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 19 months. The total fair value of shares vested as of June 30, 2018 and June 30, 2017, was $135,979 and $107,732, respectively.
NOTE 7 DEBT OBLIGATIONS
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. As of June 30, 2018 the Company has no outstanding amounts against the line of credit.
- 11 -