KORU Medical Systems, Inc. (then Repro Med Systems, Inc.) — Form 10-Q summary
Reporting period: Quarter and nine months ended November 30, 2016. The filing is under the name Repro Med Systems, Inc., the company’s name at the time.
Business context and financial results
The company designed, manufactured, and marketed medical devices, primarily for ambulatory infusion and emergency medical applications. It reported one operating segment.
| Metric | Three months ended Nov. 30, 2016 | Three months ended Nov. 30, 2015 | Nine months ended Nov. 30, 2016 | Nine months ended Nov. 30, 2015 |
|---|---|---|---|---|
| Net sales | $3.19 million | $3.14 million | $9.33 million | $8.94 million |
| Gross profit | $2.06 million | $2.11 million | $5.96 million | $5.63 million |
| Gross margin | 64.6% | 67.1% | 63.8% | 63.0% |
| Operating income (loss) | $(112,469) | $290,215 | $(601,029) | $718,132 |
| Net income (loss) | $(104,275) | $167,552 | $(420,204) | $438,126 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $(314,411) | $913,999 |
Quarterly diluted and basic loss per share were displayed as a dash in the filing; nine-month loss per share was $(0.01), versus income per share of $0.01 in 2015. No formal numeric revenue or earnings guidance was provided.
Financial position and liquidity
At November 30, 2016, cash and cash equivalents were $3.44 million, with certificates of deposit of $261,118. Current assets were $7.12 million and current liabilities were $1.63 million. Total assets were $8.47 million, total liabilities $1.74 million, and stockholders’ equity $6.74 million. The balance sheet shows no material borrowing balance; the filing does not provide a separate debt total.
Cash decreased by $761,789 over the nine months, to $3.44 million. Investing activities used $307,123, including property/equipment and patent spending; financing activities used $140,255, primarily for share repurchases. Management said cash on hand and expected operating cash generation should fund operations, R&D, and capital expenditures for the next 12 months.
Changes versus the prior comparable periods
- Sales rose 1.5% for the quarter and 4.4% year to date. International sales grew 8.3% in the quarter and 13.1% year to date; domestic sales were nearly flat in the quarter and rose 2.5% year to date.
- Quarterly gross margin fell to 64.6%, mainly due to increased rebates tied to a customer contract renewal and higher quality-department costs. Year-to-date gross margin increased to 63.8%, with the company citing higher sales and the medical-device-tax moratorium, partly offset by quality-related staffing costs.
- SG&A increased 19.8% for the quarter and 34.5% year to date. The company attributed much of the increase to litigation, regulatory compliance, consulting, operations management, and implementation of the FDA’s unique device identification system. R&D spending also rose.
- Results moved from net income to net loss in both comparisons. Year-to-date operating cash flow also shifted from positive $914,000 to negative $314,000, with working-capital use including higher inventory, receivables, and prepaid expenses.
Outlook, risks, and unusual items
- Management cited new international customers, existing-customer growth, expansion of infusion-product markets, and FREEDOM60 product enhancements as potential sales drivers. It also described a large home-care hospital system selecting FREEDOM60 for patients receiving antibiotic therapy.
- The FDA issued a Warning Letter in February 2016 following a 2015 facility inspection. A re-inspection concluded December 16, 2016, after the reporting period, with a Form 483 issued; the company said it planned to respond within the deadline. Manufacturing and distribution continued, but management could not assure that the FDA would consider its actions satisfactory.
- Patent and unfair-business-practice litigation with EMED remained ongoing. A motion seeking to bar sales of three products in California was pending; a related Texas case was stayed pending a USPTO decision. An inter partes review hearing occurred November 22, 2016, with a decision due by February 19, 2017. The company warned an adverse outcome could materially affect its business and finances.
- The company repurchased 395,356 shares under its program by November 30, at an average $0.45 per share; authorization had been increased to 2 million shares. It also reported 905,000 stock options outstanding under its amended plan.
- Management’s non-GAAP normalized EBITDA was $509,310 for the quarter and $1.10 million year to date, compared with $603,658 and $1.39 million, respectively, in 2015. These figures add back professional fees related to litigation and regulatory matters; they are supplemental, not GAAP results.
- Other disclosed risks included reimbursement and home-health-care regulation, FDA requirements, product acceptance and competition, availability of capital, dependence on key personnel, and success in developing and expanding products and markets.
Important facts for investors to verify
- Progress and potential consequences of the FDA Warning Letter and the December 2016 Form 483 response.
- Developments and potential exposure in the EMED litigation, including the pending California injunction motion and USPTO review.
- Whether sales growth—especially international growth and FREEDOM60 adoption—can offset elevated operating expenses and restore GAAP profitability.
- Cash conversion and working-capital trends, particularly inventory, receivables, and continued operating cash use.
- Actual costs and outcomes of litigation and regulatory efforts, and the assumptions behind management’s non-GAAP adjustments and 12-month liquidity assessment.