KORU Medical Systems(KRMD) - 2020 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Unaudited Q3 2020 financial statements reveal significant asset growth, a net loss from increased expenses, and substantial cash inflow from equity issuance Balance Sheets As of Sep 30, 2020, total assets significantly increased to $45.4 million, driven by cash from an equity offering, with corresponding growth in equity Balance Sheet Summary (as of Sep 30, 2020 vs. Dec 31, 2019) | Metric | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $32,433,811 | $5,870,929 | | Total Current Assets | $42,648,042 | $11,881,323 | | Total Assets | $45,434,452 | $13,881,861 | | Liabilities & Equity | | | | Total Current Liabilities | $5,361,430 | $2,406,289 | | Total Liabilities | $5,493,073 | $2,645,781 | | Total Stockholders' Equity | $39,941,379 | $11,236,080 | Statements of Operations Q3 2020 saw decreased net sales and net income, while nine-month sales increased but resulted in a net loss due to higher operating and litigation expenses Q3 2020 vs Q3 2019 Performance | Metric | Q3 2020 | Q3 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Net Sales | $6.1M | $6.6M | (8.1%) | | Gross Profit | $3.9M | $4.4M | (10.1%) | | SG&A Expenses | $3.1M | $2.4M | 26.0% | | Litigation Expenses | $675 | $0.9M | (99.9%) | | R&D Expenses | $0.4M | $0.2M | 129.3% | | Net Income | $0.2M | $0.7M | (61.8%) | Nine Months 2020 vs 2019 Performance | Metric | Nine Months 2020 | Nine Months 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Net Sales | $20.1M | $16.9M | 18.8% | | Gross Profit | $12.6M | $10.9M | 15.9% | | SG&A Expenses | $9.0M | $7.0M | 29.6% | | Litigation Expenses | $2.45M | $2.48M | (1.4%) | | R&D Expenses | $0.9M | $0.5M | 109.7% | | Net (Loss)/Income | ($0.4M) | $0.6M | (158.6%) | Statements of Cash Flows Nine-month cash flow from operations turned positive, investing activities used $1.0 million, and financing provided $26.6 million from equity, significantly boosting cash reserves Cash Flow Summary (Nine Months Ended Sep 30) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $968,437 | ($502,014) | | Net Cash from Investing Activities | ($1,007,539) | $1,389,281 | | Net Cash from Financing Activities | $26,601,984 | $502,958 | | Net Increase in Cash | $26,562,882 | $1,390,225 | | Cash at End of Period | $32,433,811 | $5,129,028 | Notes to Financial Statements Notes detail accounting policies, including a $2.2 million non-cash litigation settlement, a $26.5 million equity offering, and a subsequent five-year manufacturing agreement - The company settled litigation with competitor EMED, resulting in a non-cash expense of $2.2 million in the second quarter of 2020. The settlement involved issuing restricted stock units and an option to purchase common stock[53] - In June 2020, the company completed an equity offering, selling over 3.5 million shares of common stock and raising net proceeds of $26.5 million after discounts and expenses[75] - Subsequent to the quarter end, on November 11, 2020, the company entered into a five-year Manufacturing and Supply Agreement with Command Medical Products, Inc. to manufacture and supply subassemblies, needle sets, and tubing products[76] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 2020 sales decline and nine-month net loss due to litigation and expenses, offset by strengthened liquidity from a $26.5 million capital raise, with COVID-19 impact remaining uncertain - The company's operations have been modified due to COVID-19, with non-production staff working remotely. The pandemic's ultimate impact on product demand and financial results remains uncertain, with potential negative effects on new prescriptions for PIDD and CIDP[84] - The company's liquidity position is strong, with $32.4 million in cash as of September 30, 2020, bolstered by net proceeds of $26.5 million from a recent capital raise. Management believes this is sufficient to fund operations and strategic initiatives for the next 12 months[102][109] Results of Operations Q3 2020 saw an 8.1% sales decline and reduced net income, while nine-month sales grew 18.8% but resulted in a net loss due to a 25.5% increase in operating expenses, including a litigation settlement Q3 2020 vs Q3 2019 Results Summary | Metric | Q3 2020 | Q3 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Net Sales | $6.1M | $6.6M | (8.1%) | | Gross Profit | $3.9M | $4.4M | (10.1%) | | SG&A Expenses | $3.1M | $2.4M | 26.0% | | Litigation Expenses | $675 | $0.9M | (99.9%) | | R&D Expenses | $0.4M | $0.2M | 129.3% | | Net Income | $0.2M | $0.7M | (61.8%) | Nine Months 2020 vs 2019 Results Summary | Metric | Nine Months 2020 | Nine Months 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Net Sales | $20.1M | $16.9M | 18.8% | | Gross Profit | $12.6M | $10.9M | 15.9% | | SG&A Expenses | $9.0M | $7.0M | 29.6% | | Litigation Expenses | $2.45M | $2.48M | (1.4%) | | R&D Expenses | $0.9M | $0.5M | 109.7% | | Net (Loss)/Income | ($0.4M) | $0.6M | (158.6%) | Liquidity and Capital Resources Liquidity is strong with $32.4 million cash, boosted by a $26.5 million capital raise, with operating activities generating $1.0 million cash and financing providing $26.6 million - Net cash from operating activities was $1.0 million for the nine months ended Sep 30, 2020, compared to a use of $0.5 million in the prior year period. The improvement was largely due to non-cash charges for stock-based compensation and litigation settlement ($2.5 million)[103][104] - Net cash from financing activities was $26.6 million for the nine months ended Sep 30, 2020, primarily from a $26.5 million capital raise, net of expenses[103][107] Non-GAAP Financial Measures The company uses Adjusted EBITDA, defined as net income before specific adjustments, as a non-GAAP measure, which was $3.9 million for the nine months ended September 30, 2020 Reconciliation of GAAP Net Income/(Loss) to Non-GAAP Adjusted EBITDA | Metric | Nine Months 2020 | Nine Months 2019 | | :--- | :--- | :--- | | GAAP Net (Loss)/Income | ($377,435) | $644,606 | | Income Tax Expense | $316,200 | $189,265 | | Depreciation and Amortization | $297,801 | $252,594 | | Litigation | $2,446,747 | $2,481,471 | | Stock Option Expense | $1,011,140 | $640,775 | | Other Adjustments | $192,840 | $516,221 | | Non-GAAP Adjusted EBITDA | $3,936,885 | $4,624,932 | - Management uses Adjusted EBITDA as a supplemental measure for internal planning, forecasting, and evaluating performance, and it is a significant criterion for determining annual cash incentive compensation[112] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section is marked as not applicable - Not applicable[120] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2020, with no material changes to internal control over financial reporting - The Principal Executive Officer and Principal Financial Officer concluded that the Company's disclosure controls and procedures were effective as of September 30, 2020[121] - No changes in internal control over financial reporting occurred during the third quarter of 2020 that have materially affected, or are reasonably likely to materially affect, these controls[122] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is not currently involved in material legal proceedings, with prior litigation against EMED Technologies Corporation having been dismissed - The company is not currently a party to any legal proceedings that are believed to be material to its financial condition[127] - The report refers to a prior filing for details on the dismissed case with competitor EMED Technologies Corporation[128] Item 1A. Risk Factors The COVID-19 pandemic is a significant risk factor, posing uncertainties for business operations, financial results, supply chain, and product demand, with its long-term impact remaining highly uncertain - The COVID-19 pandemic is identified as a significant risk factor that could adversely affect the company's business and financial condition[130] - Key uncertainties include the impact on employees, supply chain disruptions, delays in clinical trials, and changes in customer purchasing patterns and new prescriptions[130] - The pandemic has led to significant disruption of global financial markets, which could reduce the company's ability to access capital and negatively affect liquidity[130] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company issued common stock to directors for compensation and restricted stock units/options to EMED as part of a litigation settlement, all as unregistered sales - The company issued an aggregate of 6,681 shares of common stock to its non-employee directors for the three months ended September 30, 2020, as part of their compensation[132] - As part of the litigation settlement with EMED, the company issued 95,238 restricted stock units (vested May 21, 2020), another 95,238 restricted stock units (vesting Jan 1, 2021), and an option to purchase up to 400,000 shares[134] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including a manufacturing agreement and Sarbanes-Oxley certifications - A key exhibit filed is the Manufacturing and Supply Agreement dated November 11, 2020, between the company and Command Medical Products[138] - Standard certifications from the CEO and CFO under Sections 302 and 906 of the Sarbanes-Oxley Act were also filed as exhibits[138]