KORU Medical Systems, Inc. (Repro Med Systems, Inc.) — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The company designs, manufactures and markets portable medical devices primarily for ambulatory infusion. Financial statements are unaudited.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $6.08 million | $6.62 million | $20.12 million | $16.94 million |
| Gross profit | $3.94 million | $4.38 million | $12.64 million | $10.91 million |
| Gross margin | 64.8% | 66.2% | 62.8% | 64.4% |
| Net income (loss) | $249,175 | $651,813 | ($377,435) | $644,606 |
| Adjusted EBITDA (non-GAAP) | $897,887 | $2.21 million | $3.94 million | $4.62 million |
Q3 net sales declined 8.1% year over year, while nine-month sales grew 18.8%. Nine-month domestic sales rose 22.0%; international sales rose 1.1%. Q3 net income was 4.1% of sales versus 9.9% a year earlier; the nine-month net loss was 1.9% of sales versus prior-year income of 3.8%.
Cash, liquidity and capital
- Cash and cash equivalents were $32.4 million at September 30, 2020, versus $5.9 million at December 31, 2019. Current assets were $42.6 million and current liabilities $5.4 million.
- Nine-month operating cash flow was positive $968,000, compared with negative $502,000 in 2019. Investing used $1.01 million; financing provided $26.60 million. The increase in inventory used $3.24 million of cash.
- The company raised approximately $26.5 million net in a June share offering. Shares outstanding increased to 43.9 million at September 30 from 39.5 million at year-end 2019.
- The company drew $3.5 million on its KeyBank line of credit in Q2 and repaid it in Q3. No line-of-credit balance was outstanding at September 30. The $3.5 million facility matures June 1, 2021 and is secured by substantially all company assets. Finance and operating lease liabilities totaled approximately $275,000.
Material changes and management commentary
- Q3 sales fell chiefly because of approximately $0.4 million less U.S. clinical-trial activity, increased customer rebates, discounts and distributor fees, and lower international sales. Q3 2019 included two unusually large orders.
- Q3 2020 included a $1.0 million order from the largest distributor placed early for a nominal discount; management said this could affect Q4 sales. Nine-month growth also reflected higher product volume and clinical-trial activity, which management associated in part with increased PIDD and CIDP diagnoses.
- Q3 gross margin decreased 1.4 percentage points year over year. For the nine months, management cited COVID-related overtime and an obsolescence reserve for a discontinued product line as offsets to sales growth and favorable Q3 production variances.
- SG&A rose 29.6% for the nine months, mainly from compensation, recruiting, consulting, director fees and insurance. R&D rose 109.7%, reflecting additional staffing and testing.
- The EMED litigation settlement resulted in a reported $2.2 million non-cash expense in Q2. It included restricted stock units and an option to purchase up to 400,000 shares, or a cash settlement at the company’s discretion subject to a cap. The settlement resolved pending claims and included mutual releases and other covenants.
Outlook, risks and other notable items
- Management stated that cash on hand and expected operating cash generation should fund operations, R&D and capital expenditures for at least the next 12 months and support strategic initiatives. No numerical sales or earnings guidance was provided.
- COVID-19 had made customer purchasing patterns and clinical-trial activity less predictable. Risks cited include fewer new prescriptions, restricted in-person sales activity, supply-chain or staffing disruptions, manufacturing constraints and broader economic and capital-market effects. The company reported no significant manufacturing disruption in Q3.
- On November 11, 2020, the company entered a five-year manufacturing and supply agreement with Command Medical Products for subassemblies, needle sets and tubing. Early termination by the company within the first three years may trigger a fee.
- The company said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. It reported no other litigation believed material to its financial condition, apart from the previously disclosed, settled EMED matter.
Important facts for investors to verify
- Whether the early $1.0 million distributor order, rebates and discount terms materially shift revenue or margins between Q3 and Q4.
- Whether sales growth in PIDD and CIDP markets persists amid COVID-related changes to prescriptions, clinical activity and customer access.
- How the inventory build, discontinued-product reserve and manufacturing investments affect cash conversion, margins and future demand.
- The potential dilution and cash-settlement exposure from outstanding options and the EMED settlement awards.
- Execution, supply continuity and potential early-termination costs under the Command agreement, and continued sufficiency of liquidity as strategic spending proceeds.