KORU Medical Systems, Inc. — Q1 2021 Form 10-Q
Business context and period. Repro Med Systems, Inc., doing business as KORU Medical Systems (Nasdaq: KRMD), designs and sells portable medical devices primarily for ambulatory infusion. This unaudited quarterly report covers the three months ended March 31, 2021, compared with the same period in 2020.
Key financial results
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Net sales | $5.43 million | $6.33 million; down 14.2% |
| Gross profit / margin | $3.23 million / 59.5% | $3.79 million / 59.9% |
| Operating expenses | $5.45 million | $3.21 million |
| Operating loss | $2.21 million | Operating profit of $0.58 million |
| Net loss / earnings per share | $1.28 million / $(0.03) | Net income of $0.45 million / $0.01 |
| Operating cash flow | $(2.61) million | $0.15 million provided |
| Cash and cash equivalents | $26.77 million at March 31, 2021 | $27.32 million at December 31, 2020 |
Cash used in investing activities was $0.10 million; financing activities provided $2.17 million. The company reported $4.59 million of total liabilities and $37.78 million of stockholders’ equity at quarter-end. It had no balance drawn on its $3.5 million KeyBank revolving line or its equipment financing facility. The revolving note matured June 1, 2021. Cash included funds held at a depository in excess of FDIC insurance limits.
Material changes and drivers
- Sales declined $0.90 million year over year. Domestic core sales fell 9.4%, and domestic novel-therapy sales fell 92.7%, principally because of a non-recurring prior-year clinical trial, lower pump volume, and the absence of a one-time pharmaceutical customer pump purchase. International sales were nearly flat.
- Management also cited slower growth in new patient starts for subcutaneous immunoglobulin (SCIg) therapy. Gross margin eased slightly, mainly due to lower sales volume of higher-margin pumps.
- Selling, general and administrative expense rose 74.4% to $4.99 million. Management attributed approximately $1.3 million to the CEO departure and replacement and recruitment of two directors, including $0.4 million in non-cash equity charges; additional costs included staffing to support commercialization and pharmaceutical-channel initiatives. Research and development expense increased 31.6% to $0.34 million.
- Inventory increased $1.23 million from year-end as manufacturing transitioned to a secondary source. Receivables rose $0.99 million, which management attributed in part to delayed payments from the largest distributor. Management expects inventory to convert to cash as the transition is completed.
- Common shares outstanding increased during the quarter, including 1.0 million shares issued on exercise of former CEO Donald Pettigrew’s options for $1.23 million. The company also issued 95,238 shares valued at $0.94 million in connection with the EMED litigation settlement.
Outlook, risks and unusual items
The filing provides no quantified revenue or earnings guidance. Management said the duration and business effects of COVID-19 remain uncertain, and noted that fewer patients seeking care could continue to affect new prescriptions for PIDD and CIDP. Other stated risks include customer ordering patterns, converting inventory to cash, product demand and acceptance, FDA and other regulation, reimbursement, competition, market expansion, capital availability, key-person dependence, and litigation.
A putative securities class action filed March 26, 2021 alleges misleading statements in company communications and filings covering August 2020 through January 2021. The company considers the claims without merit and intends to defend itself; it cannot estimate a possible loss or range of loss. The former CEO resigned in January, an interim CEO served until Linda Tharby became President and CEO on April 12, 2021, and a subsequent transition-services agreement provided for $119,500 in payments to the former interim CEO. A five-year manufacturing and supply agreement with Command Medical Products includes an early termination fee under specified circumstances.
The company reported a $0.94 million income tax benefit in its financial statements. Management’s discussion refers to a $0.5 million tax benefit, so the filing’s narrative and statement do not provide a clear reconciled value. The company said disclosure controls were effective and that there were no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the decline in domestic pump sales and new SCIg patient starts reverses, and how COVID-19 affects demand and new prescriptions.
- Progress of the secondary-source manufacturing transition, inventory conversion to cash, and collection of the large distributor receivable.
- Cash burn and liquidity after the revolving note’s June 1, 2021 maturity, including whether it was repaid, renewed, or replaced.
- Resolution and potential financial exposure from the securities class action; the company has not estimated a loss range.
- Reconciliation of the $942,361 income tax benefit in the statements with management’s $0.5 million discussion, and the treatment of unusual leadership, equity-compensation, and settlement costs.
- Potential dilution from outstanding options and subsequent CEO restricted-stock awards, and use of the remaining authorization under the $10 million stock repurchase program.