KORU Medical Systems, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. KORU designs, manufactures and markets portable medical devices primarily for subcutaneous drug delivery, including products used to deliver immunoglobulin. It reports as one operating segment.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $7.76 million | $6.04 million | $20.55 million | $17.00 million |
| Gross profit | $4.32 million | $3.50 million | $11.29 million | $9.94 million |
| Gross margin | 55.7% | 57.9% | 54.9% | 58.5% |
| Operating expenses | $5.85 million | $4.82 million | $19.56 million | $14.85 million |
| Net loss | $1.23 million | $1.09 million | $6.68 million | $3.49 million |
| Net loss per share, basic and diluted | $0.03 | $0.02 | $0.15 | $0.08 |
Q3 sales rose 28.5%; nine-month sales rose 20.9%. In Q3, domestic core revenue increased 16.2%, international core 46.8%, and novel therapies 251.9%. For the nine months, the respective increases were 12.8%, 13.8%, and 421.8%. Management attributed growth to SCIg market and volume growth, label expansions including prefilled syringes, international volume, and novel-therapy engineering work and clinical product sales.
Despite higher sales, gross margin declined, chiefly from higher labor and material costs, production rework, product mix, and lower-margin NRE revenue; higher average selling prices partly offset these pressures. Q3 net loss widened modestly, while the nine-month net loss increased 91.3%, as selling, general and administrative costs and R&D rose to support commercialization, quality and regulatory functions, innovation, and novel therapies.
Cash, liquidity and obligations
- Cash and cash equivalents were $16.44 million at September 30, 2022, down from $25.33 million at December 31, 2021. Current assets were $30.74 million and current liabilities $6.17 million.
- For the first nine months, operating cash used was $6.74 million, investing cash used was $2.58 million, and financing cash provided was $0.43 million. Investing outflows mainly funded equipment and the new headquarters and manufacturing facility. Receivables increased $1.5 million and inventory increased $0.8 million from year-end.
- The company had no balance drawn on its $3.5 million revolving credit line at quarter-end; the line matures June 1, 2023, bears interest at Prime, and is secured by certain bank accounts. An insurance-premium financing note had a $644,733 balance-sheet amount; the agreement was for $0.8 million at 6.5% annual percentage rate.
- Operating and finance lease liabilities totaled $4.08 million and $0.33 million, respectively. Cash held above FDIC insurance limits is uninsured.
Material changes, outlook and risks
- Management expects cash on hand and operating cash flows to meet requirements for at least the next 12 months, but said longer-term execution may require debt or equity financing after December 31, 2023, or sooner if liquidity proves insufficient. It gave no revenue or earnings guidance.
- Management estimated 2022 operating expenses of $26.5–$27.5 million and capital investments for the new facility of $1.5–$2.0 million, net of expected financing arrangements and leasehold-improvement credits. The filing says these arrangements and credits were expected to be executed in Q4 2022.
- The company expects to reduce excess work-in-process inventory and convert it to cash by year-end 2022. It expects to complete the transition of needle and tubing-set manufacturing to a secondary contract manufacturer by March 31, 2023, and to move manufacturing to its new Mahwah facility by then. These plans remain subject to execution and supply-chain constraints.
- Management cited inflation, supply-chain and labor constraints, COVID-19 and geopolitical uncertainty, customer ordering patterns, the ability to recover higher costs and convert inventory to cash, market growth and product acceptance, regulatory matters, competition, reimbursement, and access to capital as risks. The $0.7 million employee-retention-credit receivable recorded at year-end 2021 had not been received by September 30, 2022.
- No material litigation was pending, according to the filing. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether gross-margin pressure from input costs, rework and sales mix persists, and whether pricing offsets those pressures.
- Whether the company reduces excess inventory and collects receivables as expected, including receipt of the outstanding employee-retention credit.
- Whether the manufacturing-source transition and new-facility move meet the stated timetable and deliver expected cost or operating benefits.
- Whether operating cash burn and planned spending remain consistent with management’s liquidity assessment and whether additional financing becomes necessary.
- Actual 2022 operating expenses and capital spending compared with management’s estimates.