KORU Medical Systems, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing; the supplied filing does not present standalone fourth-quarter results. The registrant is Repro Med Systems, Inc., doing business as KORU Medical Systems (Nasdaq: KRMD).
Business context
KORU designs, manufactures and sells portable infusion devices, needle sets and tubing, primarily for home and alternate-site delivery of subcutaneous immunoglobulin therapies. Its FREEDOM System serves patients with conditions including primary immunodeficiency disease (PIDD) and chronic inflammatory demyelinating polyneuropathy (CIDP). Revenue is reported across domestic core, international core and novel therapies, which includes clinical-trial use.
Key financial results
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $24.18 million | $23.16 million |
| Gross profit / gross margin | $14.94 million / 61.8% | $14.85 million / 64.1% |
| Operating income (loss) | $(1.25) million | $0.59 million |
| Net income (loss) | $(1.21) million | $0.56 million |
| Operating cash flow | $(0.74) million | $0.32 million |
| Adjusted EBITDA (non-GAAP) | $3.66 million | $6.16 million |
Sales rose 4.4%. Domestic sales increased 6.2% to $20.68 million, while international sales declined 5.3% to $3.50 million. Domestic novel-therapy revenue grew to $1.78 million from $1.01 million; international core sales fell 8.6%. Cash and cash equivalents were $27.32 million at year-end, compared with $5.87 million a year earlier. Current assets were $37.53 million and current liabilities $3.67 million. Total liabilities were $3.76 million, including lease liabilities; the company had no amount outstanding on its line of credit at year-end.
Changes and notable items
- Despite sales growth, gross margin fell 2.3 percentage points. Management cited higher rebates and other customer allowances, COVID-related overtime, and an obsolescence reserve for a discontinued product line.
- SG&A rose 23.1% to $12.03 million, primarily due to salaries and recruiting, consulting, director fees and insurance. R&D increased 75.1% to $1.30 million.
- The company recorded a $2.2 million non-cash expense related to its May 2020 settlement with competitor EMED. Litigation expense overall was $2.45 million, down from $3.42 million in 2019. The settlement resolved the parties’ litigation and provided KORU freedom to operate under EMED’s existing patent portfolio, subject to settlement terms.
- Inventory increased to $6.83 million from $2.39 million, mainly to support order fulfillment during the transition of needle-set and tubing production to Command Medical Products. Management expects this inventory to convert to cash as the transition is completed.
- The June equity offering generated $26.6 million net proceeds. KORU repurchased 683,271 shares for approximately $3.5 million during 2020 under a program authorizing purchases of up to $10 million through December 31, 2021.
- Operating cash flow was negative, with the inventory build a significant cash use. Investing activities used $1.04 million, largely for capital expenditures. Financing activities provided $23.22 million, mainly from the equity offering.
Outlook, risks and contingencies
Management said cash on hand and expected operating cash generation should fund operations, R&D and capital expenditures for the next 12 months. No specific revenue or earnings guidance is provided. Strategic-plan financial goals remain unchanged, but management pushed out their expected timing and said the plan would be revisited with the incoming CEO. 2021 priorities include customer experience, product development, expanding therapies and international sales, secondary sourcing, and finding a larger manufacturing facility and headquarters.
COVID-19 made customer purchasing, clinical-trial activity and new patient starts less predictable; management warned that reduced care-seeking and fewer new PIDD/CIDP prescriptions could affect future sales. Other material risks include reliance on a few distributors (four represented about 69% of net revenue; one U.S. distributor about 51%), single-source components, dependence on immunoglobulin drug and plasma supply, regulatory requirements, reimbursement and pricing pressure, and competition. Command’s manufacturing and supply arrangement has a five-year term and an early-termination fee may apply in certain circumstances. The company also cited potential supply disruption associated with production in Nicaragua and local civil unrest.
The company drew its $3.5 million line of credit in response to COVID-19 concerns and repaid it in July 2020. It returned a $1.48 million Paycheck Protection Program loan in May 2020. In January 2021, CEO Donald Pettigrew resigned and James Beck became interim CEO; Linda Tharby was appointed to become CEO effective April 12, 2021. KORU extended its facility lease through August 2022 and is evaluating a larger location, which could require added construction and regulatory-compliance costs.
Important facts for investors to verify
- Whether revenue growth and domestic demand continue, particularly given lower international sales and the impact of COVID-19 on patient starts.
- Whether gross margin recovers as customer allowances, manufacturing costs and product-transition expenses evolve.
- Whether the inventory build is converted to cash and Command successfully provides reliable secondary supply.
- How much of reported adjusted EBITDA reflects recurring operations: it is a non-GAAP measure that excludes, among other items, litigation, stock compensation and manufacturing-initiative expenses.
- The financial and dilution effects of the 2020 equity issuance, share repurchases, outstanding options and CEO compensation awards; also monitor distributor concentration and any additional capital needs.