KORU Medical Systems, Inc. (Repro Med Systems, Inc.) — Q2 2020 Form 10-Q
Business and period: The company designs, manufactures and markets portable medical devices, primarily for ambulatory infusion. This unaudited report covers the three and six months ended June 30, 2020; the company operates as one segment.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $7.71 million | $5.35 million | $14.04 million | $10.32 million |
| Gross profit | $4.91 million | $3.48 million | $8.70 million | $6.52 million |
| Gross margin | 63.7% | 65.0% | 62.0% | 63.2% |
| Operating income (loss) | ($1.03 million) | $35,878 | ($449,178) | ($79,161) |
| Net income (loss) | ($1.08 million) | $78,183 | ($626,610) | ($7,207) |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $2.71 million | ($1.48 million) |
Q2 sales rose 44.1% year over year; six-month sales rose 36.0%. Management attributed growth to higher needle-set, tubing and pump volumes, increased home-infusion demand, clinical trials, and growth in primary immunodeficiency and neurology markets. Domestic sales drove most of the increase.
Gross margin declined year over year. Management cited COVID-related overtime and, for the six-month period, an inventory obsolescence reserve for a discontinued product line. It reported Q2 margin of 65.4% excluding overtime and six-month margin of 63.4% excluding overtime and the reserve. SG&A and R&D increased, with SG&A reflecting hiring, recruiting and consulting costs, among other items.
Adjusted EBITDA, a non-GAAP measure, was $1.76 million for Q2 2020 versus $1.49 million in Q2 2019, and $3.04 million for the first half versus $2.42 million in the prior-year period. The company cautions that this measure supplements, and is not a substitute for, GAAP results.
Liquidity, capital and material changes
- Cash and cash equivalents were $38.13 million at June 30, 2020, compared with $5.87 million at December 31, 2019. Current assets were $45.31 million and current liabilities $8.30 million.
- The company reported $3.5 million outstanding on its line of credit, versus none at year-end 2019. The line bears interest at the bank’s prime rate less 0.75%, is due June 1, 2021, and is secured by substantially all company assets. It also had finance and operating lease liabilities of approximately $4,225 and $306,101, respectively.
- First-half financing cash flow was $30.06 million, including $26.5 million net proceeds from a public stock offering and a $3.5 million credit-line draw. The offering included 3,593,750 shares at $7.52 per share, increasing the share count. The company drew the full credit line in response to COVID-19 concerns.
- Operating cash flow was positive, but included noncash stock-based and litigation-settlement charges and increases in accrued liabilities; inventory increased $1.28 million. Investing cash outflow was $513,273, primarily for capital expenditures and patents.
- The company obtained a $1.48 million Paycheck Protection Program loan in April and returned the funds in May 2020.
Outlook, unusual items and risks
- Management said cash on hand and expected operating cash generation should fund operations, R&D and capital spending for at least the next 12 months. No numerical revenue or earnings guidance was provided.
- In May, the company settled all litigation with competitor EMED. The settlement dismissed the cases and appeals with prejudice and provided freedom to operate under EMED’s existing patent portfolio. Consideration included restricted stock units and an option for up to 400,000 shares, with cash settlement available at the company’s discretion. The company recorded approximately $2.2 million in noncash settlement expense.
- COVID-19 had not caused significant operational disruption through Q2, and manufacturing continued with safety measures. Risks cited include potential workforce, supply-chain, manufacturing and customer-access disruptions, as well as uncertainty about demand and broader economic effects.
- Management expects manufacturing-efficiency initiative expenses to continue for 12–18 months. It does not expect further expenses related to the discontinued Res-Q-Vac product line.
- The filing notes that some cash balances exceed FDIC insurance limits. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether elevated sales reflect sustained demand or temporary purchasing and pandemic-related factors.
- Whether gross margins recover as overtime and discontinued-product effects abate, and how operating expenses develop.
- The terms and potential dilution or cash cost from the EMED option and remaining restricted stock units.
- Credit-line repayment and collateral terms, cash deployment, and management’s stated 12-month liquidity outlook.
- The continuing impact of COVID-19, supply and staffing constraints, and the company’s ability to expand in home infusion and neurology markets.