KORU Medical Systems, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. KORU designs, manufactures and markets portable infusion devices, principally for ambulatory infusion and subcutaneous drug delivery. Results are unaudited.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $6.55 million | $5.53 million | $12.79 million | $10.96 million |
| Gross profit | $3.35 million | $3.21 million | $6.97 million | $6.44 million |
| Gross margin | 51.1% | 58.1% | 54.5% | 58.8% |
| Operating expenses | $6.96 million | $4.59 million | $13.71 million | $10.04 million |
| Net loss | $2.92 million | $1.12 million | $5.46 million | $2.40 million |
| Net loss per share | $0.07 | $0.03 | $0.12 | $0.05 |
Q2 sales increased 18.4% year over year; first-half sales increased 16.7%. First-half sales growth reflected domestic core growth and higher novel-therapy sales, including NRE milestones and clinical-product sales. International core sales were nearly flat for the first half.
First-half gross margin declined 4.3 percentage points. Management attributed pressure to supply-chain and labor-related manufacturing variances and lower-margin NRE revenue. In Q2, accelerated amortization of manufacturing variances related to lower finished-goods inventory reduced margin by 3.8 percentage points; management characterized this effect as non-recurring. Operating expense growth reflected hiring and commercialization support, as well as increased R&D consulting and product-development costs.
Cash, liquidity and obligations
- Cash and cash equivalents were $18.27 million at June 30, 2022, down from $25.33 million at December 31, 2021. Current assets were $30.97 million and current liabilities $5.73 million.
- First-half operating cash use was $4.63 million, versus $2.78 million a year earlier; investing cash use was $1.93 million versus $0.17 million. Financing cash use was $0.52 million, including repayment of the insurance-premium note.
- Inventory was $6.77 million, up from $6.11 million at year-end, including excess work-in-process that management said could not be converted to finished goods because of supply-chain and labor constraints.
- No balance was drawn on the $3.5 million revolving credit line at quarter-end. Its maturity was extended to June 1, 2023; the interest rate changed to Prime, and collateral shifted to certain bank accounts. The insurance-premium note was repaid.
- Lease liabilities totaled $4.54 million, primarily reflecting the new headquarters and manufacturing facility lease. Property and equipment increased to $2.82 million, including facility buildout.
Outlook, developments and risks
- Management expected cash on hand and operating cash flows to cover requirements for at least the next 12 months. It said longer-term execution could require debt or equity financing after December 31, 2023, or sooner if liquidity proves insufficient.
- Management estimated 2022 expenses of $27–28 million and projected 2022 capital investments of $1.5–2.0 million, net of approximately $0.9 million in planned financing arrangements. It expected inventory reduction to support cash generation by year-end.
- Approximately $0.3 million of domestic backorders were excluded from reported sales; management expected to clear them in Q3 2022. The company was transitioning needle-and-tubing-set manufacturing to a second source, with implementation expected by March 31, 2023, and expected to complete its manufacturing move before year-end 2022.
- A $0.7 million Employee Retention Credit receivable recorded at year-end 2021 had not been received by June 30, 2022. Management cited potential liquidity benefits from the credit, facility credits, equipment financing and inventory reduction.
- Risks include inflation and higher raw-material, labor, manufacturing and overhead costs; supply-chain disruptions and labor shortages; COVID-19 and geopolitical uncertainty; customer ordering patterns; regulatory and reimbursement matters; competition; product acceptance; and access to capital. Management expected inflationary effects to begin affecting results in the second half of 2022.
- After quarter-end, the company eliminated its COO position, with the incumbent’s employment scheduled to end September 30, 2022, and appointed a Senior Vice President of Operations on August 2. It also amended its annual incentive plan for eligible employees.
- The filing reports no litigation considered material to financial condition, no long-lived-asset impairment through June 30, and effective disclosure controls. Cash held above FDIC insurance limits was uninsured.
Important facts for investors to verify
- Whether backorders were cleared as expected and whether the second manufacturing source reached implementation on schedule.
- Whether excess inventory converted to cash and whether gross margin recovered after the stated manufacturing-variance effects.
- Receipt and timing of the ERC and other expected credits or financing, and whether cash use remains consistent with management’s 12-month liquidity assessment.
- Actual 2022 expenses and capital spending compared with management’s estimates, including the effect of inflation and facility-move costs.
- Progress in novel therapies and NRE activity, including the sustainability of revenue that included milestone completions.