KORU Medical Systems, Inc. (filed as Repro Med Systems, Inc.) — Q2 2019 Form 10-Q
Period: Quarter and six months ended June 30, 2019; financial statements are unaudited. The filing identifies the registrant as Repro Med Systems, Inc., not KORU Medical Systems, Inc.
Business context and performance
The company designs, manufactures and markets portable medical devices, primarily for ambulatory infusion. Management attributed sales growth to needle, tubing and pump volume, increased diagnosis of primary immunodeficiency disease (PIDD), and expansion into neurology following the expanded Hizentra indication for CIDP.
- Q2 revenue: $5.35 million, up 18.8% year over year. Domestic sales rose 27.6% to $4.57 million; international sales fell 15.3% to $0.78 million, attributed mainly to a clinical trial in the prior-year quarter.
- First-half revenue: $10.32 million, up 20.9%. Domestic sales increased 21.5% to $8.45 million; international sales increased 18.5% to $1.87 million.
- Gross profit and margin: Q2 gross profit was $3.48 million, up 26.9%, with a 65.0% margin versus 60.9%. First-half gross profit was $6.52 million, up 25.3%, with a 63.2% margin versus 61.0%. Management cited higher sales and production-cost leverage.
Profitability, cash flow and financial position
- Q2 earnings: Operating profit was $35,878 and net income was $78,183, versus $617,012 and $475,723, respectively, in Q2 2018. Net margin declined to 1.5% from 10.6%.
- First-half earnings: Operating loss was $79,161 and net loss was $7,207, compared with operating profit of $1.12 million and net income of $879,150 in first-half 2018.
- Expenses: Q2 SG&A rose 57.0% to $3.18 million, primarily reflecting a $1.0 million increase in litigation expense and higher executive compensation. First-half SG&A rose 57.7% to $6.15 million; management cited litigation and legal support, management changes, bonuses, investor relations and director fees. First-half R&D increased to $280,194 from $33,811, reflecting headcount and product development.
- Cash flow: First-half operating cash flow was negative $1.48 million versus positive $955,787 a year earlier. Higher receivables (up $1.87 million) reflected a major customer’s payment terms changing from net 30 to net 60; inventory increased $468,000. Investing cash flow was positive $1.53 million, largely from a matured $1.52 million certificate of deposit and sale of a house for about $218,000. Financing cash flow was positive $19,811.
- Liquidity and debt: June 30 cash and cash equivalents were $3.81 million; current assets were $9.93 million and current liabilities $1.87 million. No borrowings were outstanding on the $1.5 million demand line of credit. Management said cash and expected operating cash generation should fund operations, R&D and capital spending for the next 12 months.
- Leases: Adoption of the lease accounting standard added $439,782 of operating right-of-use assets and corresponding lease liabilities. Total liabilities were $2.25 million; the filing reports no outstanding bank debt.
Material changes, outlook and risks
- Management reported record quarterly sales, but sharply higher operating costs reduced Q2 net income and contributed to a first-half net loss. Adjusted EBITDA, a company-defined non-GAAP measure, was $1.49 million for Q2 versus $931,785 and $2.42 million for the first half versus $1.77 million. It excludes litigation, stock-option expense and, where applicable, reorganization costs; these exclusions include costs that may recur.
- No specific revenue or earnings guidance was provided. Management’s stated liquidity outlook was that available cash and expected operating cash generation would cover at least the next 12 months.
- Litigation: In one EMED patent case, the court entered final judgment for the company on June 28, 2019; EMED appealed. The company sought approximately $16,000 in costs and attorney fees that could be material. Other EMED patent, antitrust and business-tort matters remained pending, with damages in some matters unspecified. The company warned adverse outcomes could materially harm its business, results and cash flows.
- Other notable items: The company granted its CEO 1.0 million performance-based options tied to net-sales targets through 2022 and reported increased stock-based compensation. It also sold a company-owned house, generating approximately $218,000 in proceeds and a roughly $50,000 gain.
- Management listed risks including FDA and other regulation, product demand and market penetration, reimbursement, competition, patent matters, R&D execution, access to capital, key-person dependence and litigation. It reported no material changes to the risk factors in its 2018 Form 10-K and concluded disclosure controls were effective.
Important facts for investors to verify
- Confirm the registrant identity and whether this Repro Med Systems filing corresponds to the requested KORU Medical Systems entity.
- Track receivables collection after the major customer’s payment terms extended to net 60, and assess whether operating cash flow improves.
- Monitor whether sales growth and improved gross margin persist while SG&A, litigation and R&D costs remain elevated.
- Follow EMED appeals and remaining litigation, including potential exposure, legal costs and any recovery of fees or costs.
- Review the effect of outstanding and performance-based options on compensation expense and potential dilution.
- Assess the company’s 12-month liquidity outlook against cash burn, inventory needs and the availability and terms of its demand credit line.