KORU Medical Systems, Inc. (identified in the filing as Repro Med Systems, Inc.) — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; fiscal year ends December 31. The company designs, manufactures, and markets medical devices, including infusion products for ambulatory and emergency medical use. The filing attributes sales growth mainly to needle sets and demand associated with FDA clearance for its Integrated Catch-Up Freedom Syringe Driver Infusion System.
Financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $4.55 million | $3.85 million | $13.08 million | $11.32 million |
| Gross profit / margin | $2.89 million / 63.6% | $2.38 million / 61.8% | $8.10 million / 61.9% | $6.78 million / 59.9% |
| Operating profit | $483,000 | $392,000 | $1.60 million | $789,000 |
| Net income | $387,000 | $266,000 | $1.27 million | $541,000 |
| Net margin | 8.5% | 6.9% | 9.7% | 4.8% |
| Diluted earnings per share | $0.01 | $0.01 | $0.03 | $0.01 |
- Cash flow: Nine-month operating cash flow was $1.35 million, versus $497,000 a year earlier. Investing activities used $1.73 million, including a $1.5 million certificate-of-deposit purchase, capital expenditures, and patent spending. Cash declined $325,000 to $3.65 million.
- Liquidity and debt: September 30 cash was $3.65 million and certificates of deposit totaled $1.67 million. Current assets were $9.13 million versus current liabilities of $1.40 million. The company had a $1.5 million revolving credit line, with no amount drawn at quarter-end; it is due on demand and bears interest at LIBOR plus 2.25%. The $1.5 million CD originally pledged as collateral was released in September, and the company provided a commercial security agreement.
- Balance sheet: Total assets were $10.58 million, total liabilities $1.44 million, and stockholders’ equity $9.14 million at September 30, 2018. No funded debt was reported at quarter-end.
Changes versus prior periods
- Q3 sales rose 18.1%; nine-month sales rose 15.6%. Domestic and international sales both increased. Management cited needle-set volume, domestic pump and tubing sales, and, for the nine-month period, $300,000 of pharmaceutical clinical-trial sales.
- Gross margin improved by 1.8 percentage points in Q3 and 2.0 points year to date, which management attributed to operating efficiencies and higher sales.
- Nine-month net income increased 133.9%. Higher sales and gross margin and the lower income tax rate contributed; higher operating costs and an adverse foreign-exchange change partly offset the gains.
- Q3 SG&A increased 16.4%, including higher legal, regulatory, recruiting, consulting, and clinical/medical-affairs costs. Nine-month R&D rose 87.8% as staffing and product-development activity increased.
Outlook, developments, and risks
- Management said cash on hand and expected operating cash generation should fund operations, R&D, and capital expenditures for the next 12 months. It expects the subcutaneous immunoglobulin market to continue growing but provided no quantified revenue or earnings guidance.
- Management anticipated higher legal and professional fees in Q4 2018 and early 2019, including costs related to EMED litigation and an independent investigation overseen by a board special committee. It also expected increased salary and benefits as it recruited senior personnel.
- Leadership changed in July 2018: Andrew Sealfon was removed as CEO and chairman; Daniel Goldberger became interim CEO and chairman. Donald Pettigrew was hired as President and Chief Commercial Officer in September. Subsequent October and November employment and severance arrangements disclosed in the filing include compensation, bonuses, and stock options.
- EMED litigation remains a material uncertainty. The Supreme Court denied EMED’s petition concerning the ’476 patent on October 29, 2018, after lower rulings largely invalidated its claims; a separate ’576 patent case continues after the PTAB declined to institute review, and a settlement conference was tentatively set for January 2019. Other patent, antitrust, defamation, and unfair-business-practice proceedings also remain. The company cautions that adverse outcomes could materially affect its business and finances.
- Horton Capital Partners notified the company of its intention to exercise a warrant for 1 million shares at $0.45 per share, with closing no earlier than November 12, 2018. The warrant exercise could affect share count and ownership.
- Revenue is generally recognized upon shipment. Adoption of the new revenue standard did not materially affect the company. Management was assessing the impact of upcoming lease and credit-loss accounting standards.
Key facts for investors to verify
- Whether sales growth and margin gains continue, especially in needle sets and the SCIg market, and whether clinical-trial revenue is recurring.
- Actual cash generation and spending after the $1.5 million CD purchase, including patent, capital, recruiting, and legal costs; also verify the status and terms of the demand credit line.
- Developments and potential costs or outcomes in the EMED cases and the special committee’s investigation.
- Leadership succession, new executive compensation and option grants, the announced warrant exercise, and their impact on expenses and diluted share count.
- The company’s ability to meet its stated 12-month funding expectation if operating performance, legal costs, or hiring expenses differ from management’s assumptions.