KORU Medical Systems, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. The company files as Repro Med Systems, Inc. and does business as KORU Medical Systems. It designs, manufactures, and markets portable medical devices, primarily for ambulatory infusion. Financial statements are unaudited.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $5.53 million | $7.71 million | $10.96 million | $14.04 million |
| Gross profit / margin | $3.21 million / 58.1% | $4.91 million / 63.7% | $6.44 million / 58.8% | $8.70 million / 62.0% |
| Net loss | $1.12 million | $1.08 million | $2.40 million | $0.63 million |
| Net loss per share | $0.03 | $0.03 | $0.05 | $0.02 |
- Q2 sales fell 28.3% year over year; six-month sales fell 21.9%. Domestic core sales declined 17.3% in Q2 and 13.6% for the half. International core sales were approximately flat in both comparisons.
- Management attributed much of the decline to a prior-year non-recurring clinical-trial sale and pandemic-related stocking by the largest distributor in 2020. Q2 domestic core sales rose 4% sequentially from Q1; management said the domestic market and specialty-pharmacy end-user sales grew mid-single digits in Q2.
- Q2 gross margin declined 5.6 percentage points, which management attributed mainly to lower volume and unfavorable absorption. SG&A increased 27.6% in Q2 and 52.2% for the half; the half-year increase included CEO transition and recruitment costs, new hires, commercialization and regulatory work, and higher director and insurance costs. Prior-year litigation expense was absent after settlement.
- Operating cash flow was negative $2.78 million for the six months, versus positive $2.71 million in 2020. Investing cash outflow was $0.17 million; financing cash inflow was $2.17 million, mainly from option exercises and litigation-settlement stock issuance. Cash declined $0.78 million to $26.54 million.
Financial position and liquidity
- At June 30, 2021, cash was $26.54 million, current assets $37.14 million, current liabilities $3.31 million, and total assets $40.60 million. The resulting current ratio was approximately 11.2x.
- The company reported no balance drawn on its $3.5 million KeyBank revolving line and no amount outstanding under its equipment financing arrangement. The revolver was renewed through June 1, 2022, at Prime minus 1.50%, secured by substantially all company assets. Total liabilities were $3.34 million, primarily lease liabilities and operating payables/accruals.
- Inventory rose $0.73 million from year-end to $7.56 million as the company transitioned manufacturing to a secondary source. The company reported $1.33 million in net deferred tax assets, up from $0.13 million at year-end.
Outlook, risks, and notable items
- No quantitative revenue, earnings, or cash-flow guidance is provided. Management said COVID-19 may affect demand and new prescriptions, raw-material and labor availability and costs, and customer ordering patterns. Other cited risks include inventory conversion to cash, regulatory oversight, competition, reimbursement, new-product acceptance, market expansion, patents, capital availability, and key-person dependence.
- Management noted that sales recovery in new patient starts may continue to be affected by fewer patients seeking care during the pandemic. It also cited rising raw-material and labor costs and limited availability as potential pressures.
- A five-year manufacturing and supply agreement with Command Medical Products began in November 2020. Early termination by the company without specified cause during its first three years could trigger a termination fee.
- A previously disclosed securities class action was voluntarily dismissed without prejudice on July 12, 2021. The filing says the company was not then party to litigation believed material to its financial condition.
- The company reported $1.19 million of income-tax benefit for the six-month period in its statements of operations; MD&A separately describes a $0.5 million tax benefit. The filing text does not reconcile these amounts.
- The company had a $10 million share-repurchase authorization through December 31, 2021; it reported no purchases since December 2020 while evaluating cash needs. Share-based compensation and CEO equity awards were significant, and outstanding common shares increased from 43.26 million at year-end to 44.49 million at June 30.
- Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether domestic core sales and new-patient starts continue to recover, and whether international core demand remains stable.
- Whether manufacturing transition and higher inventory levels support fulfillment without creating obsolescence, cost, or cash-conversion issues.
- Drivers of elevated SG&A, stock-based compensation, and the effect of CEO and board changes on future expenses and dilution.
- The tax-benefit discrepancy between the financial statements and MD&A, and the basis for the reported deferred tax asset increase.
- Current status and terms of the revolver, supply agreement, and share-repurchase authorization, including any subsequent developments.