KORU Medical Systems, Inc. (Repro Med Systems, Inc.) — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; comparative periods ended June 30, 2017. The company designs, manufactures, and markets medical devices, primarily for ambulatory infusion and emergency medical applications.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $4.50 million | $3.83 million | $8.54 million | $7.47 million |
| Gross profit | $2.74 million | $2.30 million | $5.21 million | $4.40 million |
| Gross margin | 60.8% | 60.0% | 61.0% | 58.9% |
| Operating profit | $617,012 | $190,342 | $1.12 million | $396,401 |
| Net income | $475,723 | $148,472 | $879,150 | $275,423 |
| Net margin | 10.6% | 3.9% | 10.3% | 3.7% |
| Basic and diluted EPS | $0.01 | Less than $0.01 as reported | $0.02 | $0.01 |
Q2 sales rose 17.6% year over year, led mainly by domestic needle-set volume; domestic sales increased 19.9% and international sales 9.4%. Management attributed growth in part to the 2017 FDA clearance for the Integrated Catch-Up Freedom Syringe Driver Infusion System and the newly approved Hizentra indication for CIDP. Sales included approximately $0.3 million of one-time clinical-support revenue in Q2 and $0.4 million for the first half. First-half sales increased 14.3%.
Operating expenses were relatively flat in Q2, up 0.8% for SG&A and R&D combined. For the first half, those expenses increased 2.2%; R&D declined 52.2%, which management attributed primarily to attrition. Profitability also benefited from a lower income tax rate. Foreign-exchange results were a partial offset: the company reported a Q2 currency loss versus a gain a year earlier, an adverse year-over-year effect of $54,508; the first-half adverse effect was $62,158.
Cash, liquidity, and capital
- At June 30, 2018, cash and cash equivalents were $3.42 million, with a further $1.50 million certificate of deposit classified as restricted cash and pledged as collateral. Current assets were $8.90 million and current liabilities $1.55 million.
- First-half operating cash flow was positive $955,787, compared with negative $270,852 in 2017. Investing used $1.56 million, mostly for the restricted CD; financing provided $49,495, primarily from option exercises. Cash and cash equivalents decreased $553,350 to $3.42 million.
- The company had no balance drawn on its $1.5 million demand revolving line of credit at June 30. The variable rate is LIBOR plus 2.25%, and the facility is collateralized by the $1.5 million CD. The filing reports no outstanding borrowings.
- No separate debt balance is reported. Management said cash on hand and expected operating cash generation should fund operations, R&D, and capital expenditures for the next 12 months.
- The stock repurchase program was paused for an undetermined period so cash could be directed to capital investment and business expansion.
Outlook, risks, and other notable items
- Management said it expects the subcutaneous immunoglobulin market to continue growing domestically and internationally and sees continued demand for the FREEDOM System. The filing provides no quantified revenue or earnings guidance.
- EMED Technologies litigation remains a material uncertainty. The disputes involve patent infringement allegations and claims including antitrust, defamation, and unfair business practices. A court affirmed the decision invalidating all but one claim of EMED’s ’476 patent; EMED sought rehearing. Separate proceedings concerning other patents and claims remained pending. The company warned an adverse outcome could materially affect its business, results, financial condition, and cash flows.
- Other stated risks include FDA and other regulatory requirements, competition, product acceptance and market penetration, reimbursement and home-health regulation, patent enforcement, capital availability, dependence on key personnel, and litigation outcomes.
- Related-party arrangements include a month-to-month aircraft lease from a company controlled by a director and a building lease from an entity in which a director is a principal. The company is in year 20 of the building lease and has an extension option structure beginning March 2019.
- Revenue recognition guidance was adopted effective January 1, 2018 on a full retrospective basis, with no material impact; prior periods were not recast. Management stated disclosure controls were effective and there were no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- How much of sales growth is recurring product demand versus clinical-support revenue, and whether growth continues after the one-time sales.
- Whether improved gross margins and earnings persist as operating costs, regulatory work, and investment needs evolve.
- The outcome and potential cost or business impact of the EMED litigation and related patent proceedings.
- Availability and terms of the demand credit line, including its CD collateral, and the company’s actual cash needs for expansion.
- Progress in the SCIg market, regulatory approvals, and the risks affecting adoption of the company’s infusion products.