Business context and reporting period
Repro-Med Systems, Inc. (doing business as RMS Medical Products) designs, manufactures, and markets medical devices, including the FREEDOM60 infusion pump, HIgH-Flo safety needle sets, and RES-Q-VAC suction systems. This unaudited Form 10-Q covers the quarter and nine months ended November 30, 2013; comparisons are with the same 2012 periods. The filing identifies the registrant as Repro-Med Systems, not KORU Medical Systems.
Financial performance and position
| Metric | Three months ended Nov. 30, 2013 | Nine months ended Nov. 30, 2013 |
|---|---|---|
| Net sales | $2.180 million, up 5.3% | $6.064 million, up 5.2% |
| Gross margin | 60.8%, versus 62.2% | 60.9%, versus 63.8% |
| Operating profit | $240,613, versus $87,391 | $501,284, versus $775,505 |
| Net income | $161,954, versus $55,524 | $326,017, versus $496,507 |
For the nine-month period, cost of goods sold rose 13.6% to $2.370 million; SG&A rose 8.8% to $2.891 million; R&D rose 18.2% to $131,734. Interest expense fell to $4,547 from $21,491. Basic and diluted earnings per share were reported as $0.01 for the nine-month period and $0.00 for the quarter.
At November 30, cash and cash equivalents were $1.921 million, certificates of deposit $258,240, and current assets $4.667 million. Current liabilities were $505,884, approximately 9.2 times lower than current assets. Total liabilities were $805,440, versus $1.236 million at February 28; related-party notes had been fully repaid. Stockholders’ equity was $4.789 million. The company reported operating cash flow of $599,102 for the nine months, investing outflows of $168,678, financing outflows of $439,306, and a net cash decrease of $8,882. Capital spending on property and equipment was $146,908.
Material changes and management commentary
Quarterly net income rose 192%, helped by lower SG&A and the non-recurrence of prior-year employee/officer bonuses. In contrast, nine-month net income fell 34.3%, reflecting higher product costs, stock-award amortization, sales and marketing expansion, legal expenses, and the 2.3% medical-device excise tax. Management attributed lower gross margins to that tax and lower pricing associated with a shift from direct sales to distributors and introductory discounts. Sales grew in domestic and international markets, with substantial growth in needle-set sales, but management said unit-volume growth slowed.
Management said existing capital and sales growth should allow the company to meet or exceed liquidity needs for the next 12 months. No specific revenue or earnings guidance was provided. The filing notes that interim results are not necessarily indicative of full-year results.
Risks, contingencies, and unusual items
- Management cited reimbursement uncertainty, FDA and other regulation, competition, market acceptance, limited liquidity, access to capital, product-development execution, patent protection, and dependence on key personnel as risks. Medicare reimbursement and the effects of the Affordable Care Act on reimbursement remain uncertain.
- A competitor patent dispute is in discovery scheduling. The competitor asserted counterclaims that the company considers without merit; the company also added unfair-business-practice claims. The filing does not quantify potential exposure.
- Inventory includes $208,000 of subassemblies rejected for failing specifications and returned to the vendor for rework.
- The company leases an aircraft from a company controlled by its president; the expired agreement is operating month to month. It also leases from a company controlled by the president’s related party, with payments of $16,125 for the nine-month period.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. No material subsequent events were reported through January 14, 2014.
Important facts for investors to verify
- Reconcile operating cash flow: the cash flow statement reports $599,102, while the MD&A states $559,102.
- Track whether distributor-driven sales and introductory pricing continue to pressure gross margin, and whether needle-set volume growth offsets slower unit growth elsewhere.
- Assess the resolution and possible cost of the patent litigation and related counterclaims.
- Monitor the $208,000 of rejected subassemblies for rework outcome, usability, and any inventory valuation impact.
- Evaluate ongoing Medicare reimbursement, regulatory, and competitive developments, particularly for FREEDOM60 and HIgH-Flo products.