Business context and reporting period
This Form 10-Q is for Repro-Med Systems, Inc. (the filing issuer name; the request identifies KORU Medical Systems, Inc.) for the quarter and nine months ended November 30, 2011. The company develops and sells medical devices, including the Freedom60 infusion pump and RES-Q-VAC portable suction system. The new RMS High-Flo subcutaneous needle set received FDA marketing approval in May 2011.
Financial results and position
| Metric | Three months ended Nov. 30, 2011 | Nine months ended Nov. 30, 2011 |
|---|---|---|
| Net sales | $1.501 million | $4.357 million |
| Gross margin | 60.7% | 62.8% |
| Operating profit | $226,197 | $737,045 |
| Net income | $182,247 | $498,279 |
| Net income per common share | $0.00 | $0.01 |
- Revenue and profitability: Quarterly sales rose 19.7% year over year; nine-month sales rose 31.4%. Nine-month operating profit increased from $605,381 to $737,045, and net income increased from $357,801 to $498,279.
- Cash flow: Nine-month operating cash flow was $258,314, versus $792,888 a year earlier. Investing used $304,940, while financing provided $289,980. Cash increased $243,354 to $1.566 million.
- Liquidity: At November 30, cash was $1.566 million and certificates of deposit were $254,000. Current assets were $3.902 million against current liabilities of $562,000. Management said available capital and increasing sales should meet or exceed liquidity needs for the next twelve months.
- Debt: Total notes payable were $493,267, including $489,221 owed under a director loan; $42,840 was current and $450,427 long term. The director loan bears 6% interest and matures in February 2021.
- Balance sheet changes: Total assets rose to $4.452 million from $3.435 million at February 28, 2011. Inventory increased to $1.062 million from $668,200, and accounts receivable increased to $878,163 from $713,906.
Material changes versus prior comparable periods
- Quarterly Freedom60 sales grew 18.7%; the product represented 79% of quarterly revenue. High-Flo represented 5% of quarterly revenue. For the nine months, Freedom60 sales increased 27.5%, RES-Q-VAC sales increased 14.6%, and High-Flo contributed $134,158.
- Gross margin declined 6.5 percentage points in the quarter and 2.8 points over nine months. Management attributed this to higher production costs, increased payroll and night-shift costs, and related benefits.
- Quarterly operating profit fell from $290,314 to $226,197 despite higher revenue. SG&A rose 19.7% in the quarter and 25.3% over nine months; R&D also increased, primarily for High-Flo development.
- Nine-month operating cash flow fell substantially, mainly because inventory grew by $393,726 and receivables increased by $164,257. Capital spending was $203,407, compared with $86,544 in the prior-year period.
- Two million twenty-five thousand stock options were exercised during the period; common shares outstanding increased from 36,577,667 at February 28 to 38,602,667 at November 30.
Outlook, risks and unusual items
- No quantified sales or earnings guidance was provided. Management cited continued sales growth and stated it expected liquidity to cover the next twelve months.
- Management identified risks including reimbursement changes, FDA and other regulatory requirements, market acceptance and competition, product development, access to capital, and dependence on key personnel. Freedom60 sales are particularly exposed to Medicare reimbursement decisions and competing products.
- Other income included $90,181 for the quarter and $120,523 for nine months, compared with $1,006 and $4,838, respectively, in the prior periods. The filing does not clearly explain the source of this increase; management also cited services performed for a third-party manufacturer in discussing quarterly net income growth.
- The company reported a $35,158 accrued tax liability and no deferred tax asset at November 30, versus a $45,641 deferred tax asset and no accrued tax liability at February 28. It reported no unrecognized tax benefits.
- The company leases its headquarters under a sale-leaseback, with $960,654 of minimum future rent payments disclosed. It also leases an aircraft from a company controlled by its president on a month-to-month basis.
- The board was discussing a proposed employment agreement for the president that could include a salary increase and bonus. A new CFO appointment was announced, effective February 1, 2012.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is for Repro-Med Systems, Inc., although the request metadata names KORU Medical Systems, Inc.
- Review the composition and sustainability of the sharp increase in “interest and other income,” and its effect on reported net income.
- Assess whether elevated inventory converts to sales and whether receivables are collected, given the decline in operating cash flow.
- Track gross-margin recovery as production, staffing, advertising, and High-Flo development costs rise.
- Verify the stock-option exercise and related tax-benefit figures: the cash-flow statement reports $198,951 of excess tax benefits, while the note cites $202,076 recorded to additional paid-in capital.
- Monitor Medicare reimbursement, regulatory approvals, competition, and the terms and cost of the proposed president employment agreement.