Business context and reporting period
This Form 10-Q is filed by Repro-Med Systems, Inc. (doing business as RMS Medical Products), the company identified in the filing; the request metadata names KORU Medical Systems, Inc. The report covers the three months ended May 31, 2014, compared with the three months ended May 31, 2013. The company designs, manufactures, and markets medical devices, including the FREEDOM60 infusion system, High-Flo safety needle sets, and RES-Q-VAC portable suction products.
Key financial results
| Metric | Three months ended May 31, 2014 | Comparable 2013 period | Change |
|---|---|---|---|
| Net sales | $2,637,021 | $1,876,386 | Up 40.5% |
| Gross profit | $1,526,250 | $1,168,949 | Up about 30.6% |
| Gross margin | 57.9% | 62.3% | Down 4.4 percentage points |
| Operating profit | $241,099 | $125,099 | Up about 92.7% |
| Net income | $158,056 | $73,354 | Up 115.5% |
| Cash from operations | $265,690 | $214,421 | Up about 23.9% |
Basic and diluted earnings per share are shown as zero (“—”) in the filing; a clear per-share value is not provided. Net income as a share of sales was approximately 6.0%, compared with 3.9% in 2013.
At May 31, 2014, cash and cash equivalents were $2.34 million, certificates of deposit were $258,590, and current assets totaled $5.66 million. Current liabilities were $1.05 million, for a current ratio of approximately 5.4x. Total liabilities were $1.29 million and stockholders’ equity was $5.38 million. The balance sheet shows no notes payable; interest expense was zero, and management attributed the year-over-year reduction in interest expense to repayment of long-term debt.
Cash increased $111,350 during the quarter. Investing activities used $154,340, principally for property and equipment and patents; there were no financing cash flows. Inventory increased $205,862 and prepaid expenses increased $141,198, while accounts payable increased $273,690.
Material changes and management commentary
- Management attributed sales growth primarily to FREEDOM60 pumps and tubing and High-Flo needle sets. High-Flo sales improved domestically and internationally; stronger international RES-Q-VAC sales largely offset weaker domestic demand.
- Cost of goods sold rose 57.0%, faster than sales, reflecting higher volume, production staffing, overtime, benefits, and product mix. SG&A increased 15.0% amid sales-team expansion and higher marketing efforts.
- Research and development expense increased 248% to $131,396 as the company invested in new product development.
- The company invested in capital equipment and patent protection. It reported $62,913 of patent spending, compared with $3,930 in the prior-year quarter.
- Management expected revenues and available capital to meet or exceed liquidity needs for the next 12 months. This is a management expectation, not quantified earnings or sales guidance.
Outlook, risks, contingencies, and unusual items
- Key risks cited include uncertain reimbursement, FDA and other regulatory requirements, competition, market acceptance, limited liquidity and access to capital, product-development execution, and dependence on key personnel. The company noted uncertainty about the effects of federal health-care legislation on reimbursement.
- The company is in early-stage discovery in patent litigation involving a competitor’s claims concerning its needle sets. The company asserts its own claims and believes the competitor’s counterclaims lack merit; the filing gives no estimate of potential financial exposure.
- On June 9, 2014, CFO Mike R. Boscher left the company; Barry Short became interim CFO, and Rick McWhorter was appointed interim COO. These changes occurred after quarter-end.
- A director’s consulting agreement, effective March 1, 2014, provides for 420,000 shares valued at $0.20 per share over three years. The filing reports $84,000 of common stock issued as compensation as a noncash item and 7,000 of related amortization expense for the quarter.
- The company leases an aircraft from a company controlled by its president; payments were $5,375 for the quarter, and the lease was month-to-month after the original agreement expired.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material subsequent events requiring recognition or additional disclosure were reported through July 15, 2014.
Important facts for investors to verify
- Confirm the issuer and security identity: the supplied filing is for Repro-Med Systems, Inc., not a company named KORU Medical Systems, Inc.
- Assess whether sales growth can continue and whether gross margins recover after the reported decline.
- Track cash conversion, inventory and prepaid-expense growth, and the company’s stated 12-month liquidity expectation.
- Monitor reimbursement policy, regulatory developments, competitive products, and the outcome and possible costs of the patent litigation.
- Review the effects of the interim CFO and COO appointments and the director’s stock-compensation arrangement.