KORU Medical Systems, Inc. (then Repro Med Systems, Inc.) — Q3 2017 Form 10-Q
Reporting context: The filing covers the quarter ended September 30, 2017 and presents results for the three and seven months ended September 30. The company changed its fiscal year-end from February 28 to December 31 in March 2017, so the seven-month figures are not a full-year comparison. The company designs, manufactures, and markets infusion and emergency medical devices.
Financial performance
| Metric | Three months ended September 30, 2017 | Seven months ended September 30, 2017 |
|---|---|---|
| Net sales | $3.85 million, up 19.5% year over year | $9.19 million, up 26.0% |
| Gross profit / margin | $2.38 million / 61.8% (63.1% prior year) | $5.65 million / 61.5% (63.8% prior year) |
| Operating profit (loss) | $392,378 (prior-year loss: $227,596) | $884,360 (prior-year loss: $552,487) |
| Net income (loss) | $265,754 (prior-year loss: $153,213) | $626,587 (prior-year loss: $359,095) |
| Net margin | 6.9% (prior-year negative 4.8%) | 6.8% (prior-year negative 4.9%) |
| Operating cash flow | Not separately presented for the quarter | $531,281 (prior-year use: $212,676) |
Balance sheet and liquidity at September 30: Cash and cash equivalents were $3.66 million, with certificates of deposit of $262,314. Current assets were $7.22 million and current liabilities $1.15 million. Total liabilities were $1.25 million; the balance sheet reports no borrowings or other interest-bearing debt. Cash increased $348,442 over the seven-month period. Investing activities used $163,479, mainly for property, equipment, and patents; financing activities used $19,360 for cancelled shares. No cash interest or tax payments were reported.
Material changes and management commentary
- Third-quarter sales growth was mainly domestic; domestic sales rose 23.5%, while international sales rose 2.6%. For the seven-month period, domestic and international sales rose 26.8% and 22.5%, respectively.
- Management said seven-month sales growth included $0.4 million of February backorders filled in the following quarter. Excluding those backorders, management reported growth of 18.0%. Growth also reflected a larger pump order, increased needle sales, and comparison with a prior-year product return related to a market withdrawal.
- Gross margin declined amid scrap from quality inspections, higher sterilization and shipping costs, and added production labor and overtime. The company was implementing nondestructive testing and expected it before year-end.
- Lower legal and marketing costs reduced selling, general and administrative expenses; research and development costs also declined due to staff attrition. Management said it was seeking to refill R&D vacancies. A $65,000 increase in bad-debt expense related to an international customer partly offset expense savings.
- The company reported first sales in Asia and Africa, new product and market initiatives, and FDA clearance for its Integrated Catch-Up Freedom Syringe Driver System. It also reported starting clinical trials with drug companies.
Outlook, risks, and contingencies
- Management believed cash on hand and expected operating cash flows would fund operations, R&D, and capital expenditures for the next 12 months. It cited expected growth in the SCIg market and potential additional uses for the FREEDOM System; no numerical revenue or earnings guidance was provided.
- The company remained in patent and unfair-business-practices litigation with EMED. A court denied EMED’s request for a preliminary injunction against sales of three products in California; PTAB decisions invalidated asserted patent claims, but appeals and other proceedings remained unresolved. The company said litigation outcomes were uncertain and an adverse outcome could materially harm business, results, financial condition, and cash flows.
- Following a 2015 FDA inspection, a Warning Letter and Form 483, the company said it had addressed the cited issues. The FDA conducted a further inspection on October 2, 2017; management anticipated closure of the Warning Letter, but it was not yet reported as closed.
- The company was negotiating an extension of its facility lease while evaluating future expansion needs. It paused share repurchases for an undetermined period to preserve cash for capital investment.
- Key stated risks included FDA and other regulatory requirements, product demand and market acceptance, reimbursement, competition, access to capital, key-personnel dependence, and litigation. The filing reported disclosure controls as effective and no material change in internal control over financial reporting during the quarter.
Investor verification points
- Track whether sales growth continues after the backorder benefit and whether large customer orders or international expansion are recurring.
- Verify improvement in gross margins as the nondestructive testing protocol is implemented and production capacity is expanded.
- Monitor collection of the international customer receivable and the adequacy of the doubtful-account allowance.
- Check the outcome of the FDA follow-up inspection and formal closure of the Warning Letter.
- Follow EMED litigation, including the patent appeal and California proceedings, for potential business or financial effects.
- Confirm the impact of the December 31 fiscal year-end change and the company’s planned adoption of the revenue recognition standard in 2018.