KORU Medical Systems, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparative period is Q1 2019. KORU Medical, the trade name used by Repro Med Systems, Inc., designs, manufactures and markets portable medical devices primarily for ambulatory infusion. It reports one operating segment.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $6.33 million | $4.97 million |
| Gross profit / margin | $3.79 million / 59.9% | $3.05 million / 61.3% |
| Operating income (loss) | $582,823 | $(115,039) |
| Net income (loss) | $449,428 | $(85,390) |
| Operating cash flow | $153,236 | $(1.05) million |
| Cash and cash equivalents at period-end | $7.43 million | $2.59 million |
| Line of credit outstanding at period-end | $1.50 million | $0 |
Sales rose 27.3%, driven primarily by needle sets, tubing and pump sales. Management attributed volume growth to increased PIDD diagnoses, expansion into neurology following an expanded Hizentra indication for CIDP, and clinical-trial volume. Domestic sales increased 37.5% to $5.34 million; international sales declined 9.3% to $989,143.
Gross profit increased 24.3%, but gross margin fell 1.4 percentage points, mainly due to a discontinued-product obsolescence reserve and higher overtime, partly offset by price increases. SG&A rose 11.2% to $2.76 million, and R&D rose 151.1% to $256,025; litigation expense declined 79.9% to $99,158. Cash provided by financing activities was $1.58 million, primarily the $1.50 million line-of-credit draw. Investing cash outflow was $180,138.
At March 31, 2020, current assets were $14.48 million and current liabilities $4.27 million; total liabilities were $4.47 million and stockholders’ equity $12.13 million. Inventory increased to $3.09 million from $2.39 million at year-end. Cash includes the line-of-credit proceeds; cash held at the bank exceeded FDIC insurance limits and was uninsured.
Changes, outlook and risks
- Management said cash on hand and expected operating cash generation should fund operations, R&D and capital expenditures for the next 12 months. No specific revenue or earnings guidance was provided.
- Management reported operations remained active and the New York facility qualified as an essential business. Most non-production staff worked remotely, with added health and safety measures. The filing said the pandemic had not caused significant disruption through Q1, but warned that future effects on staff, suppliers, supply chains, access to plasma and drugs, demand and financial markets were uncertain.
- After quarter-end, the company replaced its prior credit arrangement with a $3.5 million revolving line, drew an additional $2.0 million on April 23, and disclosed a Prime Rate–minus-0.75% rate and June 1, 2021 maturity. The filing also disclosed a $1,476,508 PPP loan, funded April 27, at 1% interest with a two-year term; qualifying use may permit forgiveness, which the company said it would assess.
- Separately, the company entered into equipment financing arrangements providing up to $2.5 million, subject to conditions and conversion of advances into term loans. The filing does not state that the full amount was drawn.
- EMED litigation remains a material contingency. On April 9, 2020, the Federal Circuit affirmed a non-infringement judgment in one patent case; the company’s fee-recovery motion remains pending. An appeal and fee dispute in another patent matter, along with other claims, also remain unresolved. The company said litigation outcomes cannot be predicted and could materially affect results, financial condition and cash flows.
- Adjusted EBITDA, a non-GAAP measure, was $1.28 million versus $928,000. The company’s definition excludes specified items, and its 2020 reconciliation includes discontinued-product and manufacturing-initiative expenses; management cautioned it is supplemental and not a substitute for GAAP results.
Key facts for investors to verify
- Whether sales growth and improved profitability continue, and whether gross margin recovers from the Q1 decline.
- Operating cash generation, inventory growth and cash needs, particularly because Q1 cash growth depended substantially on borrowing.
- Terms, balances and use of the expanded credit line, PPP loan and equipment financing, including any PPP forgiveness and resulting obligations.
- COVID-19 effects on manufacturing continuity, suppliers, workforce, product demand and availability of treatments administered using the company’s products.
- Developments in EMED litigation, appeals and pending fee motions, and any resulting costs or exposure.
- Management’s Adjusted EBITDA adjustments and the distinction between non-GAAP measures and GAAP results.