Business context and reporting period
Repro-Med Systems, Inc. (the registrant named in this filing; the request metadata identifies KORU Medical Systems, Inc.) designs, manufactures, and markets medical devices, including FREEDOM60 infusion pumps, RMS HIgH-Flo safety needle sets, and RES-Q-VAC portable suction systems. This unaudited Form 10-Q covers the quarter and nine months ended November 30, 2012; balance-sheet comparisons are with February 29, 2012.
Financial performance and position
| Metric | Three months ended Nov. 30 | Nine months ended Nov. 30 |
|---|---|---|
| Net sales | $2.070 million vs. $1.501 million (+37.9%) | $5.766 million vs. $4.357 million (+32.3%) |
| Gross margin | 62.2% vs. 60.7% | 63.8% vs. 62.8% |
| Operating profit | $87,391 vs. $226,197 | $775,505 vs. $737,045 |
| Net income | $55,524 vs. $182,247 | $496,507 vs. $498,279 |
| Net income per share | $0.00 basic and diluted | $0.01 basic and diluted |
| Operating cash flow | Not presented separately for the quarter | $503,591 vs. $258,314 |
Quarterly cost of goods sold rose 32.8% to $782,900, while selling, general and administrative expense rose 76.1% to $1.113 million. Nine-month SG&A increased 41.7% to $2.658 million, and research and development increased 126.1% to $111,452. Interest expense was $7,105 for the quarter and $21,491 year to date.
At November 30, cash and cash equivalents were $1.682 million and certificates of deposit were $255,624. Current assets were $4.411 million and current liabilities $669,735, giving working capital of approximately $3.741 million. Total assets were $5.402 million, total liabilities $1.314 million, and stockholders’ equity $4.087 million. Notes payable, including related-party notes, totaled approximately $450,428; the filing reports no defaults.
Cash decreased $74,882 over the nine months. Investing activities used $546,101, including $544,705 for property and equipment; financing activities used $32,372. The company reported purchasing an adjacent residence in August 2012 for additional office and research and development space.
Material changes and management commentary
- Management attributed revenue growth to higher sales of HIgH-Flo needle sets and improved domestic and international sales of both HIgH-Flo and FREEDOM60 products.
- Quarterly net income fell 69.5%, despite higher sales and gross margin, as SG&A rose and prior-year services for a third-party manufacturer did not recur. Nine-month net income was nearly flat.
- SG&A increases included a one-time bonus for key personnel, hiring a purchasing manager and sales leaders, and expanded advertising and trade-show activity. Production payroll and night-shift costs also increased.
- Management stated that available capital and rising sales should enable the company to meet or exceed liquidity needs for the next 12 months. This is management’s expectation, not a guarantee.
Outlook, risks, contingencies, and unusual items
- The filing gives no quantified revenue or earnings guidance. It identifies risks involving limited liquidity and access to capital, FDA and other regulation, reimbursement, competition, product acceptance, development efforts, and dependence on key personnel.
- Management said Medicare reimbursement coding for qualifying FREEDOM60 applications uses HCPCS code E0779, but warned reimbursement could change and competition or new drugs could affect demand.
- Inventory included $292,000 of subassemblies rejected for not meeting specifications and returned to the vendor for correction or replacement.
- In July 2012, 1,465,000 employee shares were authorized at $0.18 per share, subject to one- to two-year restrictions. The filing reports $263,700 of deferred compensation cost and $40,050 amortized during the quarter.
- Quarterly 2011 interest and other income included $90,181, compared with $2,730 in 2012; nine-month amounts were $120,523 and $5,662, respectively. This materially affects period comparisons.
- The company leases an aircraft from a company controlled by its president; the original lease expired and payments continued month to month. Ordinary-course claims and suits may arise; no specific material proceeding is described.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is for Repro-Med Systems, Inc., not a registrant named KORU Medical Systems, Inc.
- Assess whether sales growth can continue and whether expanded selling and marketing costs translate into sustained operating profitability.
- Verify resolution and recoverability of the $292,000 in rejected subassemblies, and monitor accounts receivable, which rose to $1.188 million.
- Review the use and expected returns from the $544,705 property-and-equipment investment, including the adjacent residence purchase.
- Evaluate the terms and related-party nature of outstanding notes and the aircraft lease, as well as the share-based compensation dilution and expense.
- Monitor Medicare reimbursement, FDA requirements, competitive products, and the company’s stated 12-month liquidity outlook.