KORU Medical Systems, Inc. (then Repro-Med Systems, Inc.) — Q2 FY2015 Form 10-Q
Reporting period: Three and six months ended August 31, 2014; comparisons are to the corresponding 2013 periods. The company designs, manufactures, and markets medical devices, including the FREEDOM60 infusion system, High-Flo safety needle sets, and RES-Q-VAC suction systems.
Financial performance
| Metric | Three months ended Aug. 31, 2014 | Three months ended Aug. 31, 2013 | Six months ended Aug. 31, 2014 | Six months ended Aug. 31, 2013 |
|---|---|---|---|---|
| Net sales | $2.505 million | $2.008 million | $5.142 million | $3.884 million |
| Gross margin | 65.3% | 59.8% | 61.5% | 61.0% |
| Operating profit | $319,064 | $135,572 | $560,163 | $260,671 |
| Net income | $202,994 | $90,709 | $361,050 | $164,063 |
| Net income per share, basic and diluted | $0.01 | Below $0.01 as presented | $0.01 | Below $0.01 as presented |
| Cash from operations | Not separately presented by quarter | $219,996 | $497,999 |
Quarterly sales rose 24.7%; six-month sales rose 32.4%. Six-month operating and net income more than doubled year over year. Sales growth was attributed mainly to FREEDOM60 and High-Flo products in domestic and international markets. RES-Q-VAC sales softened overall as the company concentrated resources on infusion products.
Financial position and liquidity
- At August 31, 2014, cash and cash equivalents were $2.242 million, certificates of deposit $259,219, and current assets $5.833 million. Current liabilities were $968,324; working capital was approximately $4.865 million.
- Total assets were $7.094 million, total liabilities $1.202 million, and stockholders’ equity $5.892 million. The balance sheet presents no borrowing balance; management said long-term debt had been retired in 2013.
- Operating cash flow declined to $219,996 from $497,999, principally reflecting a $621,794 inventory build and a $123,089 decrease in accrued tax liability. Investing used $478,130, including $397,567 for property and equipment and $79,934 for patents.
- Cash increased by $14,866 during the six months. Financing provided $273,000 net from an equity transaction; the prior-year period included $439,306 of debt repayments.
Material changes and notable items
- Quarterly R&D expense increased to $158,424 from $43,116; six-month R&D increased to $289,820 from $80,870, reflecting greater new-product development investment.
- Six-month selling, general and administrative expense rose to $2.182 million from $1.915 million, with added sales staffing, higher benefits, and patent-related legal expenses among the cited factors. Cost of goods sold also rose with sales, staffing, overtime, benefits, and product mix.
- On August 8, the company sold 1 million common shares and warrants for 1 million additional shares exercisable at $0.45 per share. The $288,000 aggregate purchase price produced $273,000 net proceeds after $15,000 in fees.
- Shares outstanding increased to 38,081,667 at August 31 from 36,661,667 at February 28. The filing also reports a 420,000-share, three-year consulting arrangement with a director; vesting of earlier employee stock awards was completed August 31.
- The CFO left in June; the Director of Administration became interim CFO, and a management consultant was appointed interim COO. Management reported disclosure controls were effective and no material internal-control changes during the quarter.
Outlook, risks, and contingencies
Management expected operating revenues and available capital to meet or exceed liquidity needs for the next 12 months; no specific revenue or earnings guidance was provided. The company opened a second cleanroom in June and reported investment in facility upgrades, production equipment, and patent protection.
Risks highlighted include FDA and other regulatory requirements, reimbursement changes, market acceptance and competition, product development, access to capital, and dependence on key personnel. FREEDOM60 sales depend in part on Medicare reimbursement, and the filing states reimbursement policy effects are uncertain. The company is in early-stage discovery in patent litigation involving a competitor’s claims and the company’s counterclaims. The company also leases an aircraft from a company controlled by its president; the prior lease expired and payments continued month to month. No material subsequent events through October 15, 2014 were reported.
Important facts for investors to verify
- Whether the substantial year-over-year sales gains, particularly in FREEDOM60 and High-Flo, continued after the reporting period.
- Whether the inventory increase supported demand or creates risks of slower turnover, obsolescence, or weaker operating cash flow.
- The trajectory and expected returns of higher R&D spending, capital investment, and patent-related legal costs.
- Current reimbursement conditions and competitive developments affecting FREEDOM60, including the outcome and potential consequences of the patent litigation.
- The effects of the share issuance, outstanding warrants, director compensation arrangement, and interim executive appointments on dilution and execution.