KORU Medical Systems, Inc. (then Repro Med Systems, Inc.) — Q3 2019 Form 10-Q
Business context and period: The company designs, manufactures and markets portable medical devices, primarily for ambulatory infusion. This unaudited report covers the quarter and nine months ended September 30, 2019; the company operates as one segment.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $6.62m | $4.55m | $16.94m | $13.08m |
| Gross profit | $4.38m | $2.89m | $10.91m | $8.10m |
| Gross margin | 66.2% | 63.6% | 64.4% | 61.9% |
| Net income | $652k | $387k | $645k | $1.27m |
| Net income per diluted share | $0.02 | $0.01 | $0.02 | $0.03 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $(502)k | $1.35m |
Q3 sales rose 45.5% year over year and net income rose 68.6%. Nine-month sales increased 29.5%, but net income fell 49.1%, as higher selling, general and administrative costs, litigation expense and R&D more than offset revenue and margin growth. Nine-month operating expenses included $2.48m of litigation costs, versus $593k a year earlier.
At September 30, cash and cash equivalents were $5.13m, total current assets $11.87m and current liabilities $2.30m. Total liabilities were $2.71m; there were no borrowings on the $1.5m revolving credit line. Operating lease liabilities totaled $407k. Management said available cash and expected operating cash generation were sufficient for operations, R&D and capital expenditures for the next 12 months.
Nine-month cash flow was affected by a $2.12m increase in accounts receivable, partly related to a major customer’s payment terms moving from net 30 to net 60, and a $635k inventory increase. Investing cash flow was $1.39m, largely reflecting the maturity of a $1.5m certificate of deposit and proceeds from selling a company-owned house. Financing cash flow was $503k, primarily from warrant and option exercises.
Business changes, outlook and risks
- Management attributed growth to higher product volume, price increases, clinical trials and two unusually large orders—one from a domestic distributor and one from a new European customer. Management said it could not predict whether those orders would recur. It reported $0.8m of open orders at quarter-end and said Q3 sales growth exceeded 25% after specified adjustments for large orders, clinical trials and open orders.
- Management linked underlying volume growth to increased diagnosis of primary immunodeficiency diseases and expansion into neurology following an expanded Hizentra indication for CIDP. It provided no formal numerical revenue or earnings guidance.
- EMED litigation remains a material uncertainty. KORU obtained judgments dismissing two patent matters, but EMED appealed both; other proceedings remained pending. The company sought recovery of approximately $2.3m in attorney fees in one matter and at least $1.16m in another; those requests were unresolved. The company cautioned that an adverse outcome could materially affect its business, results, financial condition and cash flows.
- Other disclosed risks include FDA and other regulatory requirements, product demand and competition, market expansion, reimbursement, patent enforcement, access to capital, key-person dependence and litigation. The filing also identifies the risk of Nasdaq delisting if listing standards, including the $1.00 minimum bid-price requirement, are not maintained.
- After quarter-end, the company announced Nasdaq Capital Market listing beginning October 17, 2019 and began using the KORU Medical Systems name and KRMD ticker on October 24, 2019. Management reported disclosure controls were effective and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much future sales depend on unusually large orders, trial activity and the stated open-order pipeline, and whether the reported underlying growth persists.
- Receivables collection and working-capital trends following the customer payment-term change; operating cash flow was negative despite positive net income.
- The status and potential financial exposure of EMED appeals and remaining litigation, including fee-recovery motions and the company’s ability to continue funding legal defense.
- The effect of higher ongoing SG&A, R&D and stock-based compensation on GAAP profitability. Adjusted EBITDA was $2.09m for Q3 and $4.50m for nine months, but excludes litigation, stock-option expense and other items; it is a non-GAAP measure.
- Share dilution: common shares outstanding were 39.49m at September 30, 2019, and 4.90m time-based and performance-based options were outstanding.