KORU Medical Systems, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. The company designs, manufactures and markets portable medical devices for subcutaneous drug delivery, including the FREEDOM System, primarily used to deliver immunoglobulin therapies. Its revenue sources are domestic core, international core and novel therapies.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net revenue | $7.00 million | $7.76 million | $21.33 million | $20.55 million |
| Gross profit | $4.34 million | $4.32 million | $12.38 million | $11.29 million |
| Gross margin | 62.0% | 55.7% | 58.0% | 54.9% |
| Operating expenses | $6.13 million | $5.85 million | $20.45 million | $19.56 million |
| Net loss | $1.37 million | $1.23 million | $6.28 million | $6.68 million |
| Loss per share, basic and diluted | $0.03 | $0.03 | $0.14 | $0.15 |
| Cash used in operating activities | — | $5.99 million | $6.74 million |
Financial position and liquidity
- At September 30, cash and cash equivalents were $10.77 million, down $6.64 million from December 31, 2022. The company also reported $4.68 million of inventory and $21.69 million of current assets.
- Current liabilities were $4.22 million; total liabilities were $7.92 million. These include $3.74 million of operating lease liabilities and $0.42 million of finance lease liabilities. The $0.47 million note payable relates to insurance-premium financing.
- Cash used in investing activities was $0.61 million, mainly for research and development and manufacturing equipment. Financing activities used $0.04 million.
- The company reported $27.43 million of stockholders’ equity. No dividends were reported.
Material changes and management commentary
- Q3 revenue fell 9.8% year over year, mainly because novel-therapy revenue declined $0.60 million, including the absence of a $0.5 million clinical-trial order recorded in Q3 2022. Domestic core revenue declined 2.1%, and international core declined 2.8%.
- For the first nine months, revenue grew 3.8%: domestic core increased 6.2% and international core increased 11.5%, while novel therapies declined 31.9%. Management attributed core growth to increased product volumes, new accounts and international market growth.
- Gross margin improved in both comparison periods. Management cited manufacturing efficiencies associated with outsourced manufacturing and the Chester site exit. Q3 operating expenses rose 4.8% (approximately) as R&D spending increased; nine-month R&D expense was up 34.4%, partly reflecting accelerated innovation investment.
- The nine-month net loss narrowed by $0.41 million, while the Q3 net loss widened by $0.14 million. Management attributed the year-to-date improvement mainly to higher revenue and gross profit and interest income, partly offset by higher operating expenses.
- Inventory fell $1.73 million from year-end. The company said it had completed the transition of manufacturing operations to Command and expected inventory to decline further in Q4 2023.
Outlook, risks and other items
- Management expects cash on hand, operating cash flows and available financing sources to meet requirements for at least the next 12 months from the filing’s issuance. It said longer-term execution may require additional debt and that it was exploring debt financing; equity or other securities may also be needed. There is no assurance that financing will be available.
- The company collected a $0.7 million Employee Retention Credit receivable in October 2023. It held $10.1 million in a U.S. Treasury bill maturing every 90 days and adopted an insured cash sweep program to reduce uninsured-deposit exposure.
- Key disclosed risks include customer ordering patterns and SCIg market growth, raw-material and labor availability and costs, inventory conversion to cash, regulatory requirements and audits, competition, reimbursement, novel-therapy partnerships, R&D success, access to capital, and dependence on key personnel.
- The company recorded a $1.48 million income tax benefit for the first nine months. Management considered realization of net U.S. deferred tax assets more likely than not, but noted a valuation allowance could be required in future periods.
- No material litigation was reported, and the filing disclosed no subsequent events. Management concluded disclosure controls were effective and reported no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether core-product growth can offset volatility in novel-therapy revenue and the Q3 decline in domestic prescriptions and consumables.
- Whether the expected Q4 inventory reduction occurs and supports cash generation without disrupting product availability.
- The pace of cash use and whether operating performance or financing will be needed to sustain longer-term plans beyond management’s 12-month liquidity assessment.
- Whether improved gross margins are sustainable as manufacturing arrangements and product volumes evolve.
- The assumptions supporting deferred-tax-asset realization and the possibility of a future valuation allowance.