KORU Medical Systems(KRMD) - 2020 Q2 - Quarterly Report

PART I Financial Statements Unaudited Q2 2020 financial statements show total assets grew to $47.7 million due to cash, with a $1.1 million net loss from a litigation settlement Balance Sheets As of June 30, 2020, total assets increased to $47.7 million from $13.9 million, primarily due to a rise in cash and cash equivalents to $38.1 million Balance Sheet Comparison (in thousands) | Account | June 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Current Assets | $45,306 | $11,881 | | Cash and cash equivalents | $38,129 | $5,871 | | Total Assets | $47,711 | $13,882 | | Total Current Liabilities | $8,296 | $2,406 | | Line of credit payable | $3,500 | $0 | | Total Liabilities | $8,463 | $2,646 | | Total Stockholders' Equity | $39,247 | $11,236 | Statements of Operations Q2 2020 net sales grew 44.1% to $7.7 million, but a $2.3 million litigation expense led to a $1.1 million net loss Quarterly Performance (Three Months Ended June 30, in dollars) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Net Sales | $7,708,904 | $5,348,812 | | Gross Profit | $4,909,880 | $3,475,664 | | Litigation Expense | $2,346,914 | $1,124,947 | | Net (Loss)/Income | $(1,076,038) | $78,183 | | Diluted EPS | $(0.03) | $0.00 | Semi-Annual Performance (Six Months Ended June 30, in dollars) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Net Sales | $14,038,913 | $10,323,090 | | Gross Profit | $8,698,090 | $6,523,618 | | Net (Loss)/Income | $(626,610) | $(7,207) | | Diluted EPS | $(0.02) | $0.00 | Statements of Cash Flows For the six months ended June 30, 2020, cash from operations was $2.7 million, with $30.1 million from financing, increasing total cash to $38.1 million Cash Flow Summary (Six Months Ended June 30, in dollars) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $2,707,549 | $(1,483,909) | | Net Cash from Investing Activities | $(513,273) | $1,532,487 | | Net Cash from Financing Activities | $30,064,144 | $19,811 | | Net Increase in Cash | $32,258,420 | $68,389 | | Cash at End of Period | $38,129,349 | $3,807,192 | Notes to Financial Statements Notes detail the May 2020 EMED litigation settlement via non-cash equity, a $3.5 million credit line expansion, and a June 2020 public offering raising $26.5 million - The company designs, manufactures, and markets proprietary portable medical devices for the ambulatory infusion market[14] - On May 26, 2020, the company settled all litigation with competitor EMED, involving an equity payment including restricted stock units and an option to purchase 400,000 shares, providing KORU Medical with freedom to operate under EMED's patent portfolio[41][53] - The company increased its revolving line of credit with KeyBank to $3.5 million in April 2020 and drew the full amount[67][69] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes 44% Q2 2020 net sales growth to at-home infusion demand, despite a $1.1 million net loss from a $2.2 million litigation expense, while liquidity was significantly strengthened by a $26.5 million equity offering and $3.5 million credit line draw Overview Key Q2 2020 events include settling EMED litigation for $2.2 million (non-cash), raising $26.5 million from an equity offering, drawing the full $3.5 million from a credit line, and achieving 44% net sales growth to $7.7 million due to at-home infusion demand - Settled all litigation with EMED through a non-cash agreement, recognizing a $2.2 million expense[84] - Raised $26.5 million in net proceeds from an equity offering in June 2020[85] - Q2 2020 net sales reached $7.7 million, a 44% increase from the prior year, driven by demand for at-home infusion therapy and response to COVID-19 uncertainties[86] Results of Operations Q2 2020 net sales rose 44.1% to $7.7 million, but gross margin declined to 63.7% due to COVID-related overtime, and operating expenses surged 74.3% primarily from a $2.2 million non-cash litigation settlement Net Sales (Three Months Ended June 30, in dollars) | Region | 2020 | 2019 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Domestic | $6,745,810 | $4,569,226 | $2,176,584 | 47.6% | | International | $963,094 | $779,586 | $183,508 | 23.5% | | Total | $7,708,904 | $5,348,812 | $2,360,092 | 44.1% | - Gross margin for Q2 2020 was 63.7%, down from 65.0% in Q2 2019, mainly due to overtime costs related to COVID-19 absenteeism[91] - Litigation expenses for Q2 2020 increased by $1.2 million year-over-year, primarily due to a non-cash expense of $2.2 million from the EMED settlement[93] Net Sales (Six Months Ended June 30, in dollars) | Region | 2020 | 2019 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Domestic | $12,086,676 | $8,452,791 | $3,633,885 | 43.0% | | International | $1,952,237 | $1,870,299 | $81,938 | 4.4% | | Total | $14,038,913 | $10,323,090 | $3,715,823 | 36.0% | Liquidity and Capital Resources As of June 30, 2020, liquidity was strong with $38.1 million in cash, boosted by a $26.5 million stock offering and $3.5 million credit line draw, with cash from operations positive at $2.7 million for the first six months - Principal source of liquidity is cash on hand of $38.1 million as of June 30, 2020, which includes $26.5 million from a recent capital raise and a $3.5 million draw on its line of credit[103] - The litigation settlement with EMED was a non-cash transaction involving the issuance of equity, which resulted in a $2.2 million expense in Q2 2020[105] Cash Flow Summary (Six Months Ended June 30, in dollars) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by/(used in) operating activities | $2,707,549 | $(1,483,909) | | Net cash (used in)/provided by investing activities | $(513,273) | $1,532,487 | | Net cash provided by financing activities | $30,064,144 | $19,811 | Non-GAAP Financial Measures The company uses Adjusted EBITDA, a non-GAAP measure, to supplement GAAP results, reporting $1.8 million for Q2 2020 (up from $1.5 million) and $3.0 million for the six-month period (up from $2.4 million) Reconciliation of GAAP Net (Loss)/Income to Non-GAAP Adjusted EBITDA (in dollars) | | Three Months Ended June 30, | Six Months Ended June 30, | | :--- | :--- | :--- | | | 2020 | 2019 | 2020 | 2019 | | GAAP Net (Loss)/Income | $(1,076,038) | $78,183 | $(626,610) | $(7,207) | | Litigation Expenses | $2,346,914 | $1,124,947 | $2,446,072 | $1,617,462 | | Stock Option Expense | $363,851 | $194,765 | $664,817 | $316,640 | | Non-GAAP Adjusted EBITDA | $1,759,964 | $1,490,504 | $3,038,998 | $2,418,502 | - Adjustments to calculate Adjusted EBITDA include excluding expenses for litigation, stock options, discontinued products, and manufacturing initiatives, which management believes provides a better understanding of ongoing business performance[119][120][122] Quantitative and Qualitative Disclosures About Market Risk The company has indicated that this section is not applicable for the reporting period - The company states that Quantitative and Qualitative Disclosures About Market Risk are not applicable[125] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal control over financial reporting during the quarter - The Principal Executive Officer and Principal Financial Officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2020[126] - No material changes were made to the company's internal control over financial reporting during the quarter ended June 30, 2020[127] PART II – OTHER INFORMATION Legal Proceedings In May 2020, the company successfully resolved all litigation with EMED Technologies Corporation through an equity payment, gaining freedom to operate under EMED's patent portfolio and dismissing all claims - On May 26, 2020, the company announced a settlement of all litigation with its competitor, EMED Technologies Corporation, which had been ongoing since 2013[128] - The settlement agreement provides KORU Medical with freedom to operate under EMED's patent portfolio, dismissal of all litigation, and involved an equity payment by KORU Medical to EMED[128] Risk Factors The COVID-19 pandemic is highlighted as a material risk factor, potentially adversely affecting business operations, employee health, supply chain, and financial condition, including manufacturing disruptions and liquidity impacts - The COVID-19 pandemic is identified as a significant risk factor that could adversely affect business, operations, and financial condition[138] - Specific pandemic-related risks include disruptions to the supply chain, limitations on the ability to manufacture products, reduced sales force effectiveness due to travel restrictions, and potential negative impacts on liquidity from financial market disruption[138][139] Unregistered Sales of Equity Securities and Use of Proceeds During the quarter, the company issued unregistered securities, including 7,999 common shares to directors, 710,000 shares from executive option exercises, and 95,238 restricted stock units plus an option for 400,000 shares to EMED as part of a settlement - Issued an aggregate of 17,188 shares of common stock to non-employee directors during the six-month period ended June 30, 2020, as part of their compensation[140] - Issued 95,238 restricted stock units and an option to purchase up to 400,000 shares to EMED as part of the litigation settlement on May 20, 2020[142] Exhibits This section lists exhibits filed with Form 10-Q, including SOX certifications from the Principal Executive and Financial Officers, and Interactive Data Files (XBRL) of the financial statements - The report includes certifications from the Principal Executive Officer and Principal Financial Officer as required by the Sarbanes-Oxley Act[146] - Interactive Data Files (XBRL) are furnished as Exhibit 101[145][146]