KORU Medical Systems, Inc. (Repro Med Systems, Inc.) — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019, compared with FY 2018. This is an annual report, not a quarterly filing. The registrant is Repro Med Systems, Inc., doing business as KORU Medical Systems (Nasdaq: KRMD).
Business context
KORU designs, manufactures and sells portable mechanical infusion systems and related needle sets and tubing, primarily for home and alternate-site infusion therapy. Its FREEDOM System serves subcutaneous immunoglobulin (SCIg) and other infusion applications. Management’s strategy focuses on SCIg, neurology and home-care markets, product development, and expansion through specialty-pharmacy and home-infusion channels.
FY 2019 financial results
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Net sales | $23.16 million | $17.35 million | +33.5% |
| Gross profit / margin | $14.85 million / 64.1% | $10.81 million / 62.3% | Margin +1.8 percentage points |
| Operating expenses | $14.27 million | $9.65 million | +47.9% |
| Operating profit | $0.59 million | $1.16 million | Lower |
| Net income | $0.56 million | $0.91 million | −38.0% |
| Net income margin | 2.4% | 5.2% | −2.8 percentage points |
| Net cash from operating activities | $0.32 million | $1.48 million | Lower |
| Cash and cash equivalents at year-end | $5.87 million | $3.74 million | Up $2.13 million |
Domestic sales increased 36.8% to $19.47 million; international sales rose 18.5% to $3.69 million. Management attributed growth to higher volume across pumps, tubing and needle sets, customer clinical trials, price increases, increased PIDD diagnoses and broader use of Hizentra for CIDP. Gross-margin improvement was attributed mainly to higher volume and, to a lesser extent, price increases.
Net income fell despite record sales, principally because litigation expense rose to $3.42 million from $0.90 million, while SG&A increased 19.2% to $9.77 million and R&D rose to $0.74 million from $0.24 million. R&D investment was $0.7 million, and the company said it planned further investment over the following 12 months.
Cash, liquidity and debt
Year-end current assets were $11.88 million and current liabilities were $2.41 million. The company had no borrowings under its $1.5 million revolving line of credit at year-end. Total liabilities were $2.65 million, including operating and finance lease liabilities; the filing reports no outstanding line-of-credit debt. Cash from operations decreased as accounts receivable increased by $1.80 million and inventory increased by $0.28 million. Investing cash flow was positive $1.31 million, mainly reflecting maturity of a $1.52 million certificate of deposit and proceeds from selling a house, partly offset by capital spending and patent costs. Financing cash flow was positive $0.50 million, mainly from warrant and option exercises.
Management believed cash and expected operating cash generation would fund operations, R&D and capital expenditures for at least 12 months. Adjusted EBITDA, a non-GAAP measure, was $5.61 million versus $3.60 million in 2018; it excludes litigation, stock-option expense and reorganization charges, among other items, and should not be treated as GAAP earnings or operating cash flow.
Material developments, outlook and risks
- The Board approved a strategic plan targeting, through 2022, a $50 million net-revenue run rate, gross margins above 70%, and annual organic revenue growth above 20%. These are goals, not assurances; the filing also warns the company may not achieve its publicly announced targets.
- The company received FDA 510(k) clearance for its High-Flo Super26 subcutaneous needle sets, uplisted to the Nasdaq Capital Market and adopted the KORU Medical Systems brand.
- Customer and channel concentration is significant: one customer generated approximately 53% of FY 2019 net product revenue, and the four principal distributors together represented about 67% of net revenue. The largest customer’s year-end receivable was $1.9 million.
- EMED litigation remains a major contingency. KORU obtained favorable judgments in two patent matters, but EMED appealed; other litigation, including antitrust and business-tort claims, remained pending. The filing says outcomes cannot be predicted and could materially affect results, liquidity and cash flows. KORU reported $3.42 million of litigation expense in 2019. Potential damages are disputed, and no clear total exposure or final resolution is provided.
- Supply-chain risks include reliance on single-source suppliers for certain subassemblies, molded plastic parts and tubing, without long-term agreements in place with those suppliers. Manufacturing is concentrated at one facility in Chester, New York; the company was exploring a larger location and anticipated additional occupancy, construction and regulatory-compliance costs.
- Other identified risks include medical-device regulation and possible FDA 510(k) pathway changes, product quality and liability, availability of immunoglobulin drugs, reimbursement and pricing pressure, foreign exchange and international operations, and litigation and intellectual-property challenges. The company also disclosed that cash held at a depository exceeded FDIC insurance limits.
- Management reported effective disclosure controls and internal control over financial reporting at December 31, 2019. The auditor issued an unqualified opinion on the financial statements but was not engaged to audit internal control.
Investor facts to verify
- Track whether sales growth converts into operating cash flow, particularly as receivables rise, and monitor major-customer concentration and collection timing.
- Follow EMED appeals, remaining claims, fee motions and any change in the company’s assessment or recognition of litigation exposure.
- Assess progress toward the 2022 strategic-plan goals against actual revenue growth, gross margin and the costs of scaling production.
- Monitor supplier diversification, manufacturing-capacity plans and the costs and timing of any facility move.
- Review dilution from stock options, warrants and equity compensation; shares outstanding increased during 2019, and the company does not plan to pay dividends in the foreseeable future.