Business context and reporting period
Repro-Med Systems, Inc. (now associated with the KORU Medical Systems name) filed this unaudited Form 10-Q for the quarter and six months ended August 31, 2011. The company develops and sells medical devices, notably the Freedom60 syringe infusion system and RES-Q-VAC portable suction system. The filing compares the quarter and six-month period with the corresponding 2010 periods; its fiscal year began March 1.
Financial performance and position
| Metric | Three months ended Aug. 31, 2011 | Three months ended Aug. 31, 2010 | Six months ended Aug. 31, 2011 | Six months ended Aug. 31, 2010 |
|---|---|---|---|---|
| Net sales | $1,362,217 | $1,079,388 | $2,856,187 | $2,062,330 |
| Gross profit margin | 63.8% | 66.1% | 63.8% | 64.6% |
| Operating profit | $178,887 | $179,028 | $510,848 | $315,067 |
| Net income | $118,073 | $101,232 | $316,032 | $189,652 |
| Operating cash flow | Not separately presented for the quarter | $171,788 | $428,724 |
Quarterly sales rose 26.2%, while net income grew 16.6%; six-month sales increased 38.5% and net income 66.6%. Six-month basic and diluted EPS were both reported as $0.01. Quarterly EPS is shown as a dash in the statements and as $0.00 in the notes.
At August 31, cash was $1.709 million and certificates of deposit were $152,399, compared with cash of $1.322 million at February 28. Current assets were $3.692 million and current liabilities $426,598. Total liabilities were $1.034 million; reported notes payable totaled $503,580, including $499,046 owed to a director. Stockholders’ equity was $3.120 million. The company also disclosed $993,780 of future minimum rent under its operating lease.
Changes and notable items
- Freedom60 sales drove growth: management reported increases of 20.4% year over year for the quarter and 36.5% for the six-month period. RES-Q-VAC sales also increased, by 52% for the quarter and 40% for the six months.
- Gross margin declined, reflecting cost of goods sold rising faster than sales. SG&A increased 29.2% for the quarter and 28.3% for the six months, attributed to additional staff, payroll, bonuses and marketing. R&D increased 29.0% for the six months.
- A $150,000 cash bonus was paid to the President during the quarter; management said its net-of-tax effect reduced net income by $92,603. The board was discussing an employment agreement expected to include a salary increase and additional bonus.
- Operating cash flow fell year over year, primarily because inventory increased $421,743 (63.1%), including inventory for the new RMS High-Flo needle sets. Investing activities used $88,676, mainly for property and equipment.
- Financing activities provided $303,418, including $121,500 from common stock issuance and a $202,076 excess tax benefit related to stock-option exercises. The filing reports 2,025,000 options exercised during the period and a $546,750 intrinsic value; shares outstanding rose from 36,577,667 at February 28 to 38,602,667 at August 31.
Outlook, commentary and risks
Management stated that rising sales and available capital were expected to meet or exceed liquidity needs for the next 12 months. The company had received FDA approval in May 2011 to market High-Flo needle sets domestically and expected domestic sales results in the next quarter. It also described ongoing marketing and expansion of Freedom60 uses and RES-Q-VAC distribution.
Risks identified include reimbursement changes or loss of Medicare coverage, competition and market acceptance, FDA and other government regulation, product development, ability to raise sufficient capital, and dependence on key personnel. Management noted that newer drugs could alter demand for infusion devices. Ordinary-course claims and suits, including personal injury and employment matters, may arise; no specific material proceeding was described. The filing says disclosure controls were effective and there were no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales growth and the anticipated High-Flo launch translated into sustained revenue and cash generation after the reporting period.
- Whether inventory buildup was converted to sales without excess, obsolescence or working-capital pressure.
- The nature, tax treatment and repeatability of the $202,076 option-related tax benefit, and the resulting dilution from option exercises.
- The impact and governance context of the President’s bonus and the proposed employment agreement, including any additional compensation.
- Current Medicare reimbursement terms, competitive developments, and the company’s ability to maintain adequate liquidity while servicing debt and lease commitments.