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.
- 15 -
PART I – ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This Quarterly Report on Form 10-Q contains certain “forward-looking” statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) and information relating to us that are based on the beliefs of the management, as well as assumptions made and information currently available.
Our actual results may vary materially from the forward-looking statements made in this report due to important factors such as uncertainties associated with future operating results, unpredictability related to Food and Drug Administration regulations, introduction of competitive products, acceptance of and demand for new and existing products, ability to penetrate new markets, success in enforcing and obtaining patents, reimbursement related risks, government regulation of the home health care industry, success of the research and development effort, expanding the market of FREEDOM60® demand in the SCIg market, availability of sufficient capital if or when needed, dependence on key personnel, the impact of recent accounting pronouncements and the outcome of litigation. When used in this report, the words “estimate,” “project,” “believe,” “may,” “will,” “anticipate,” “intend,” “expect” and similar expressions are intended to identify forward-looking statements. Such statements reflect current views with respect to future events based on currently available information and are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company does not undertake any obligation to release publicly any revision to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Throughout this report, “KORU Medical,” the “Company,” “we,” “us” and “our” refer to Repro Med Systems, Inc.
OVERVIEW
The third quarter of 2019 ended with record net sales results of $6.6 million, an increase of 45.5% compared with the same period last year. The increase was driven by organic growth mostly from increased volume and to a lesser extent from price increases, two unusually large orders from a domestic distributor and a new customer in Europe, as well as clinical trials. The large domestic distributor orders followed the acquisition of Medical Specialties Distributors, LLC by McKesson Medical-Surgical, Inc. as they move forward with their integration. We cannot predict whether such large distributor orders or volume generally will continue in the future. We ended the third quarter with $0.8 million in open orders. Excluding the two large orders, clinical trials and adjusting for the open orders for the quarter, net sales grew in excess of 25% year over year. We believe the organic volume growth continues to be the result of growth in diagnosis of primary immunodeficiency diseases (“PIDD”) and expansion into the neurology market with expanded Hizentra® indication for chronic inflammatory demyelinating polyneuropathy (“CIDP”). Our gross margin percentage improved nearly 2.6 percentage points versus the same period last year mostly due to price increases. Net income was $0.7 million for period ended September 30, 2019, compared with $0.4 million for the previous year, driven by the increase in net sales, partially offset by increased legal fees for litigation activity and higher salary and related expenses resulting from the executive management changes and recently announced new hires. Our cash balance at September 30, 2019, was $5.1 million, which included $0.5 million for the exercise of outstanding warrants.
RESULTS OF OPERATIONS
Three months ended September 30, 2019 compared to September 30, 2018
Net Sales
The following table summarizes our net sales for the three months ended September 30, 2019 and 2018:
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Three Months Ended September 30,
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Change from Prior Year
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% of Sales
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2019
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2018
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$
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%
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2019
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2018
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Sales
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Domestic
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$
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5,856,203
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$
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3,699,410
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$
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2,156,793
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58.3%
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88.5%
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81.4%
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International
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761,194
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847,777
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(86,583
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)
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(10.2%
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)
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11.5%
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18.6%
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Total
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$
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6,617,397
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$
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4,547,187
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$
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2,070,210
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45.5%
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Total net sales increased $2.1 million or 45.5% for the three months ended September 30, 2019, compared with the same period last year. This growth was driven by organic growth mostly from increased volume and to a lesser extent from price increases, two unusually large orders, one from a domestic distributor and one from a new customer in Europe, as well as clinical trials. We cannot predict whether such large orders will continue in the future. We ended the quarter with open orders totaling $0.8 million.
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Excluding the two large orders, clinical trials in both periods, and adjusting for the open orders, net sales increased in excess of 25% year over year. We believe organic volume growth continues to be due to growth in the diagnosis of PIDD and expansion into the neurology market with the expanded Hizentra® indication for CIDP. Internationally, net sales were down mostly due to open orders totaling $0.1 million at the end of the period.
Gross Profit
Our gross profit for the three months ended September 30, 2019 and 2018 is as follows:
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Three Months Ended September 30,
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Change from Prior Year
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2019
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2018
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$
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%
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Gross Profit
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$
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4,382,908
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$
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2,891,568
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$
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1,491,340
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51.6%
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Stated as a Percentage of Net Sales
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66.2%
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63.6%
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Gross profit increased $1.5 million or 51.6% in the three months ended September 30, 2019, compared to the same period in 2018. This increase in the quarter was mostly driven by the increase in net sales. Gross profit improved 2.6 percentage points compared with the same period last year, mostly due to price increases.
Selling, general and administrative, Litigation and Research and development
Our selling, general and administrative expenses, litigation, and research and development costs for the three months ended September 30, 2019 and 2018 are as follows:
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Three Months Ended September 30,
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Change from Prior Year
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2019
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2018
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$
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%
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Selling, general and administrative
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$
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2,441,381
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1,917,127
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$
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524,254
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27.3%
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Litigation
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864,009
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286,487
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577,522
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201.6%
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Research and development
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170,260
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126,923
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43,337
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34.1%
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$
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3,475,650
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2,330,537
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$
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1,145,113
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49.1%
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Stated as a Percentage of Net Sales
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52.5%
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51.3%
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Selling, general and administrative expenses during the three months ended September 30, 2019 increased $0.5 million, or 27.4%, over the same period last year. Driving the increase was higher salary and related benefits including $0.3 million of stock option expense, due to the addition of the Executive Chairman of the Board, our new President and Chief Executive Officer and other executive changes, including the additions of Vice Presidents of Medical Affairs, Growth and Innovation, and Sales and Marketing, adding $0.6 million year over year. Partially offsetting these increases was attrition in regulatory totaling $0.1 million.
Litigation fees continue to be higher than the previous year period, up $0.6 million as we continue to defend ourselves against our competitor through several motions and court proceedings, as well as in the patent office. We have had some favorable rulings in the courts and have filed motions for court costs and attorney fees. Refer to Note 4 Legal Proceedings in the Notes to the Financial Statements.
Research and development expenses increased $43,337, or 34.1%, over last year due to increased headcount and expanded product development initiatives compared to last year.
Depreciation and amortization
Depreciation and amortization expense increased by 5.7% to $82,774 in the three months ended September 30, 2019 compared with $78,345 in the three months ended September 30, 2018. We continued to invest in capital assets, mostly related to production equipment, computer equipment and leasehold improvements, and in patent applications and their maintenance.
Net Income
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Three Months Ended September 30,
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Change from Prior Year
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2019
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2018
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$
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%
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Net Income
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$
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651,813
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$
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386,553
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$
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265,260
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68.6%
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Stated as a Percentage of Net Sales
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9.9%
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8.5%
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- 17 -
Our net income for the three months ended September 30, 2019 was $0.7 million compared to $0.4 million for the same period last year. The increase is mostly driven by the increase in net sales, partially offset by selling general and administrative fees, as well as litigation fees as described above.
Nine months ended September 30, 2019 compared to September 30, 2018
Net Sales
The following table summarizes our net sales for the nine months ended September 30, 2019 and 2018:
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Nine months Ended September 30,
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Change from Prior Year
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% of Sales
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2019
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2018
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$
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%
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2019
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2018
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Sales
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Domestic
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$
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14,308,994
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$
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10,657,010
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$
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3,651,984
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34.3%
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84.5%
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81.5%
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International
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2,631,493
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2,425,727
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205,766
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8.5%
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15.5%
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18.5%
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Total
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$
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16,940,487
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$
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13,082,737
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$
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3,857,750
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29.5%
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Total net sales increased $3.9 million or 29.5% for the nine months ended September 30, 2019 driven by growth in all product categories (pumps, needles, and tubing) in the Freedom Infusion System. The nine month period includes clinical trials at several customers, and two unusually large orders from a domestic distributor and a new customer in Europe. We ended the third quarter with $0.8 million in open orders. Excluding both large orders, clinical trials and adding in the open orders, the net sales increase would have been 24%, demonstrating strength in continued organic growth driven by increased volume and to a lesser extent price increases. We believe the organic volume growth continues to be driven by growth in the diagnosis of PIDD and expansion into the neurology market with expanded Hizentra® indication for CIDP.
Gross Profit
Our gross profit for the nine months ended September 30, 2019 and 2018 is as follows:
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Nine months Ended September 30,
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Change from Prior Year
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2019
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2018
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$
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%
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Gross Profit
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$
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10,906,526
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$
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8,096,976
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$
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2,809,550
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34.7%
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Stated as a Percentage of Net Sales
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64.4%
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61.9%
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Gross profit increased $2.8 million or 34.7% in the nine months ended September 30, 2019, compared to the same period last year. Gross margin improved 2.5 percentage points during the period and was driven mostly by price increases and to a lesser extent some production efficiencies.
Selling, general and administrative, Litigation and Research and development
Our selling, general and administrative expenses, litigation and research and development costs for the nine months ended September 30, 2019 and 2018 are as follows:
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Nine months Ended September 30,
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Change from Prior Year
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2019
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2018
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$
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%
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Selling, general and administrative
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$
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6,976,684
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$
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5,513,727
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$
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1,462,957
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26.5%
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Litigation
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2,481,471
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592,787
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1,888,684
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318.6%
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Research and development
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450,454
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160,735
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289,719
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180.3%
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$
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9,908,609
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$
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6,267,249
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$
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3,641,360
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58.1%
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Stated as a Percentage of Net Sales
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58.5%
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47.9%
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Selling, general and administrative expenses increased $1.5 million, or 26.5%, during the nine months ended September 30, 2019 compared to the same period last year. The increase is mostly driven by higher salary and related benefits totaling $1.3 million, due to the addition of the Executive Chairman of the Board, our new President and Chief Executive Officer, including a performance bonus payment to our former interim Chief Executive Officer in the amount of $0.3 million, as well as the addition of Vice Presidents for
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Medical Affairs, Growth and Innovation and Sales and Marketing and other executed changes. Included in the $1.3 million of salary and related benefits is $0.5 million in stock option expense. Higher consulting fees of $0.2 million related to strategic initiatives, and higher investor relation expenses and director fees also contributed $0.2 million to the increase. Partially offsetting these increases was lower recruiting fees of $0.2 million.
Litigation expenses continued to increase, up $1.9 million compared to the same period last year as we continue to defend ourselves against our competitor through several motions and court proceedings, as well as in the patent office. We have had several favorable rulings in the courts and have filed motions for court costs and attorney fees. Refer to Note 4 Legal Proceedings in the Notes to the Financial Statements.
Research and development expense increased by $0.3 million, or 180.3%, primarily due to increased headcount and expanded product development initiatives compared to last year.
Depreciation and amortization
Depreciation and amortization expense increased by 10.4% to $252,594 in the nine months ended September 30, 2019 compared with $228,900 in the nine months ended September 30, 2018. We continued to invest in capital assets, mostly related to production equipment, computer equipment and leasehold improvements, and in patent applications and their maintenance.
Net Income
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Nine months Ended September 30,
|
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Change from Prior Year
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2019
|
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2018
|
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$
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%
|
Net Income
|
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$
|
644,606
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|
$
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1,265,703
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$
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(621,097
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)
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(49.1%)
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Stated as a Percentage of Net Sales
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3.8%
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9.7%
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Our net income for the nine months ended September 30, 2019 was $0.6 million compared to a net income of $1.3 million for the nine months ended September 30, 2018. This decrease was driven by increased selling, general and administrative expenses and litigation fees, as described above.