KORU Medical Systems, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. KORU designs, manufactures and markets portable medical devices, primarily for subcutaneous drug delivery, including the FREEDOM Infusion System. Results are unaudited.
Financial results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $7.39 million | $6.24 million | Up 18.4% |
| Gross profit / margin | $4.15 million / 56.1% | $3.62 million / 58.0% | Profit up 14.5%; margin down 1.9 percentage points |
| Operating expenses | $7.20 million | $6.75 million | Up $0.46 million |
| Operating loss | $3.06 million | $3.13 million | Loss narrowed $0.07 million |
| Net loss | $2.41 million | $2.54 million | Loss narrowed $0.13 million |
| Net loss per diluted share | $0.05 | $0.06 | Loss per share narrowed |
| Cash used in operating activities | $4.66 million | $1.75 million | Use increased $2.91 million |
| Cash and cash equivalents | $12.22 million at March 31 | $17.41 million at December 31, 2022 | Down $5.18 million |
Domestic core sales were $5.72 million, up 14.5%; international core sales were $1.10 million, up 22.6%; and novel therapies sales were $0.58 million, up 61.9%. Novel therapies growth was primarily tied to engineering services under a pharmaceutical customer development agreement.
Gross margin declined mainly because of higher labor and material costs, partly offset by higher average selling prices. Research and development expense increased 36.3% to $1.56 million, primarily reflecting compensation, stock compensation and recruiting for innovation hires. Selling, general and administrative expense decreased 1.2% to $5.43 million.
Balance sheet and liquidity
At March 31, 2023, total assets were $38.25 million, total liabilities $8.46 million and stockholders’ equity $29.80 million. Current assets were $25.21 million and current liabilities $4.52 million. Inventory was $6.64 million, up $0.23 million from year-end. The company reported no borrowings on its $3.5 million revolving credit line; the disclosed facility maturity was June 1, 2023.
Other debt included an insurance-premium financing note with a $0.22 million balance. Finance lease liabilities totaled $0.47 million and operating lease liabilities $3.91 million. Operating cash outflow reflected the net loss and working-capital uses, including lower accrued expenses and accounts payable and higher receivables and inventory. Investing cash outflow was $0.28 million, mainly for equipment; financing cash outflow was $0.24 million.
Material developments, outlook and risks
- The company completed the transition of needle and tubing-set finished-goods manufacturing to Command Medical Products in March 2023, providing a dual-source capability and expected cost improvements. Management expects to significantly reduce inventory during the remaining quarters of 2023.
- Manufacturing operations moved to the new Mahwah, New Jersey facility during Q1 2023. The filing attributes increased depreciation and amortization partly to prior investments associated with the relocation; it also reports a write-off of leasehold improvements at the closed Chester location.
- Management stated that cash on hand, operating cash flows and available financing are expected to meet requirements at least through March 31, 2024. Longer-term plans may require additional debt or equity financing; the filing gives no specific revenue or earnings guidance.
- Management cites risks including inflation, geopolitical events, customer ordering patterns, raw-material and labor availability and costs, inventory conversion to cash, growth in the SCIg market, novel-therapy partnerships, regulatory matters, competition, reimbursement, and access to future capital.
- Cash deposits exceed FDIC insurance limits; the company warns that financial-institution disruptions could impair access to cash or credit. It also holds a significant portion of cash balances in U.S. Treasury-based funds through sweep arrangements.
- The company expects to receive a $0.7 million Employee Retention Credit receivable before the end of 2023. It reported no litigation believed material to its financial condition and no impairment losses through March 31, 2023.
Investor verification points
- Verify that the revolving credit facility was renewed, replaced or otherwise addressed before its disclosed June 1, 2023 maturity.
- Track operating cash use and cash balances, particularly whether inventory reduction proceeds as management expected.
- Assess whether the manufacturing transition delivers the expected cost improvements and supports recovery in gross margin.
- Monitor whether novel-therapy revenue growth is sustained, given the filing’s warning that these revenues may fluctuate and are not expected to recur consistently.
- Confirm receipt of the expected $0.7 million Employee Retention Credit and review the company’s ongoing exposure to uninsured deposits and financing needs.