KORU Medical Systems(KRMD) - 2020 Q1 - Quarterly Report

PART I PART I – FINANCIAL INFORMATION Financial Statements The company reported strong Q1 2020 financial performance with increased net sales, a shift from net loss to net income, and positive operating cash flow, supported by asset growth Balance Sheets Total assets increased to $16.6 million as of March 31, 2020, driven by higher cash and inventory, while liabilities rose due to a new line of credit Balance Sheet Summary (Unaudited) | Account | March 31, 2020 ($) | December 31, 2019 ($) | | :--- | :--- | :--- | | Total Current Assets | $14,479,830 | $11,881,323 | | Cash and cash equivalents | $7,427,679 | $5,870,929 | | Total Assets | $16,603,099 | $13,881,861 | | Total Current Liabilities | $4,267,683 | $2,406,289 | | Line of credit payable | $1,500,000 | $0 | | Total Liabilities | $4,471,123 | $2,645,781 | | Total Stockholders' Equity | $12,131,976 | $11,236,080 | Statements of Operations Net sales increased by 27.3% to $6.3 million in Q1 2020, leading to a net income of $449,428, a significant improvement from a prior-year net loss Statement of Operations Highlights (Unaudited) | Metric | Three Months Ended Mar 31, 2020 ($) | Three Months Ended Mar 31, 2019 ($) | | :--- | :--- | :--- | | Net Sales | $6,330,009 | $4,974,278 | | Gross Profit | $3,788,210 | $3,047,954 | | Total Operating Expenses | $3,205,387 | $3,162,993 | | Net Operating Profit/(Loss) | $582,823 | ($115,039) | | Net Income/(Loss) | $449,428 | ($85,390) | | Diluted EPS | $0.01 | $0.00 | Statements of Cash Flows Operating activities generated $153,236 in cash for Q1 2020, a significant improvement, with overall cash and cash equivalents increasing to $7.4 million primarily due to financing activities Cash Flow Summary (Unaudited) | Activity | Three Months Ended Mar 31, 2020 ($) | Three Months Ended Mar 31, 2019 ($) | | :--- | :--- | :--- | | Net Cash Provided By/(Used In) Operating Activities | $153,236 | ($1,045,233) | | Net Cash Used In Investing Activities | ($180,138) | ($96,833) | | Net Cash Provided By/(Used In) Financing Activities | $1,583,652 | ($3,848) | | Net Increase/(Decrease) in Cash | $1,556,750 | ($1,145,914) | | Cash and Cash Equivalents, End of Period | $7,427,679 | $2,592,889 | Notes to Financial Statements Notes to financial statements detail accounting policies, ongoing litigation, and significant post-quarter financing activities, including an expanded credit line and a favorable legal ruling - The company designs, manufactures, and markets proprietary portable medical devices for the ambulatory infusion market under FDA and international quality standards[14] - The company is involved in several ongoing lawsuits with its principal competitor, EMED Technologies Corporation, concerning patent infringement and other claims. The company believes it has meritorious defenses but notes that a negative outcome could have a material adverse effect[41][51] - Subsequent to the quarter end, the company secured additional liquidity by extending its line of credit to $3.5 million, obtaining a $1.48 million PPP loan, and entering a $2.5 million equipment financing agreement[69][71][73] - On April 9, 2020, the U.S. Court of Appeals affirmed a summary judgment of non-infringement in favor of KORU Medical in a patent case brought by EMED[74] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the 27.3% Q1 2020 revenue growth driven by market expansion, improved net income, and strategic liquidity actions taken in response to COVID-19 uncertainty Overview and Recent Developments Q1 2020 net sales grew 27.3% to $6.3 million driven by core market expansion, with the company proactively securing additional liquidity in response to COVID-19 - Q1 2020 net sales grew 27.3% to $6.3 million, driven by higher sales volume in needle sets, tubing, and pumps, linked to growth in PIDD diagnosis and expansion into the neurology (CIDP) market[82] - In response to COVID-19 uncertainty, the company drew $1.5 million from its line of credit in March 2020[81] - Post-quarter, the company extended its line of credit to $3.5 million and secured a $1.5 million PPP loan under the CARES Act[86][87] Results of Operations Q1 2020 net sales increased 27.3% to $6.3 million, driven by strong domestic growth, while a reduction in litigation expenses contributed to a net income of $0.4 million Net Sales Breakdown (Q1 2020 vs Q1 2019) | Region | Q1 2020 Sales ($) | Q1 2019 Sales ($) | Change (%) | | :--- | :--- | :--- | :--- | | Domestic | $5,340,866 | $3,883,565 | +37.5% | | International | $989,143 | $1,090,713 | -9.3% | | Total | $6,330,009 | $4,974,278 | +27.3% | - Gross margin declined from 61.3% to 59.9% YoY, primarily due to an obsolescence reserve for a discontinued product line and increased overtime, partially offset by price increases[89] - Litigation fees decreased by $0.4 million (-79.9%) YoY, while R&D expenses increased by $0.2 million (+151.1%) due to higher headcount for development initiatives[92][93] - Net income for Q1 2020 was $449,428, compared to a net loss of $85,390 in Q1 2019[95] Liquidity and Capital Resources The company maintained $7.4 million in cash as of March 31, 2020, with management confident in sufficient liquidity for the next 12 months, supported by positive operating cash flow - The company's principal source of liquidity is $7.4 million cash on hand as of March 31, 2020, which includes a $1.5 million draw against its line of credit[96] - Management believes current cash and expected cash from operations are sufficient to fund operations, R&D, and capital expenditures for the next 12 months[98] Cash Flow Summary (Q1 2020 vs Q1 2019) | Cash Flow Activity | Three Months Ended Mar 31, 2020 ($) | Three Months Ended Mar 31, 2019 ($) | | :--- | :--- | :--- | | Net cash provided by/(used in) operating activities | $153,236 | ($1,045,233) | | Net cash used in by investing activities | ($180,138) | ($96,833) | | Net cash provided by/(used in) financing activities | $1,583,652 | ($3,848) | Non-GAAP Financial Measures The company utilizes Adjusted EBITDA as a non-GAAP measure, which increased to $1.3 million in Q1 2020, reflecting adjustments for various non-operating expenses Reconciliation of GAAP Net Income to Non-GAAP Adjusted EBITDA | Reconciliation Item | Three Months Ended Mar 31, 2020 ($) | Three Months Ended Mar 31, 2019 ($) | | :--- | :--- | :--- | | GAAP Net Income/(Loss) | $449,428 | ($85,390) | | Tax Expense/(Benefit) | $141,928 | ($22,099) | | Depreciation/Amortization | $87,224 | $83,651 | | Litigation Expenses | $99,158 | $492,515 | | Stock Compensation Expense | $300,966 | $121,875 | | Other Adjustments | $190,331 | $337,446 | | Non-GAAP Adjusted EBITDA | $1,279,035 | $927,998 | - Management uses Adjusted EBITDA as a supplemental measure for internal planning, forecasting, and evaluating performance for incentive compensation[110] Quantitative and Qualitative Disclosures About Market Risk The company has indicated that disclosures regarding quantitative and qualitative market risk are not applicable - The company has indicated that Quantitative and Qualitative Disclosures About Market Risk are not applicable[117] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2020, with no material changes to internal control over financial reporting - Management concluded that as of the end of the reporting period, the Company's disclosure controls and procedures were effective[118] - No changes in internal control over financial reporting occurred during the quarter ended March 31, 2020, that have materially affected, or are reasonably likely to materially affect, these controls[119] PART II PART II – OTHER INFORMATION Legal Proceedings The company is involved in complex, ongoing legal proceedings with its main competitor, EMED, concerning patent infringement and other claims, with uncertain outcomes despite some favorable rulings - The company is involved in several lawsuits with its principal competitor, EMED Technologies Corporation, concerning patent infringement, antitrust violations, and other business tort claims[120] - The company is vigorously defending against all claims and believes it has meritorious defenses, but the outcomes cannot be predicted with certainty and could have a material adverse effect on the business[131] - A recent development includes a unanimous decision on April 9, 2020, by the Court of Appeals for the Federal Circuit (CAFC) affirming a district court's judgment of non-infringement in favor of KORU Medical[128] Risk Factors A material new risk factor is the uncertainty related to the COVID-19 pandemic, which could severely impact future operations and financial condition through various disruptions - A material new risk factor is the uncertainty related to the COVID-19 pandemic[132][133] - Potential impacts from COVID-19 include disruptions to employees, suppliers, business operations, and the availability of drugs administered by the company's products, which could severely impact financial results[133] Unregistered Sales of Equity Securities and Use of Proceeds During Q1 2020, the company issued common stock to non-employee directors and facilitated the exercise of options by its COO, all under registration exemptions - The company issued 9,189 shares of common stock to non-employee directors as compensation during the three-month period ended March 31, 2020[134] - On January 7, 2020, the company's COO, Manuel Marques, exercised options for 175,000 shares of common stock for an aggregate exercise price of $85,500[135] Exhibits This section lists exhibits filed with the Form 10-Q, including required certifications by executive officers and Interactive Data Files for financial statements - Exhibits filed include CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[138] - Exhibit 101 contains the Interactive Data Files (XBRL) for the financial statements and notes[137][138]