KORU MEDICAL SYSTEMS, INC. This Quarterly Report on Form 10-Q contains certain "forward-looking" statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) and information relating to us that are based on the beliefs of the management, as well as assumptions made and information currently available.
Our actual results may vary materially from the forward-looking statements made in this report due to important factors such as uncertainties associated with COVID-19, customer ordering patterns, availability and costs of raw materials and labor and our ability to recover such costs, our ability to convert inventory to a source of cash, future operating results, growth of new patient starts,Food and Drug Administration and foreign authority regulations and the outcome of regulatory audits, introduction of competitive products, acceptance of and demand for new and existing products, ability to penetrate new markets, success in enforcing and obtaining patents, reimbursement related risks, government regulation of the home health care industry, success of our research and development effort, expanding the market of FREEDOM60® demand in the SCIg market, availability of sufficient capital if or when needed, dependence on key personnel, and the impact of recent accounting pronouncements. When used in this report, the words "estimate," "project," "believe," "may," "will," "anticipate," "intend," "expect" and similar expressions are intended to identify forward-looking statements. Such statements reflect current views with respect to future events based on currently available information and are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company does not undertake any obligation to release publicly any revision to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Throughout this report, the "Company," "KORU Medical," "we," "us" or "our"
refers to
OVERVIEW
The Company designs, manufactures and markets proprietary portable and
innovative medical devices primarily for the ambulatory infusion market as
governed by the
KORU Medical continues to monitor its operations and government recommendations
as they relate to the COVID-19 pandemic. We cannot predict the effects the
pandemic may have on our business, in particular with respect to demand for our
products, our strategy, and our prospects, the effects on our customers, or the
impact on our financial results. For example, our future net sales growth may
continue to be impacted due to fewer new prescriptions for individuals with
Primary Immune Deficiency Disease ("PIDD") and Chronic Inflammatory
Demyelinating Polyneuropathy ("CIDP") as a result of patients not seeking care
during the pandemic. We believe that the pandemic has precipitated limited
availability and rising costs of raw materials and labor, which may impact our
financial results if current trends continue.
Our revenues derive from three business sources: (i) domestic core, (ii)
international core, and (iii) novel therapies. Our core revenues consist of
sales of our products for the delivery of SCIg to treat PIDD, CIDP, and other
disease states that are FDA cleared for use with the KORU Medical syringe
driver. Novel therapies consist of revenues from clinical trials, which consist
of sales of syringe drivers, tubing and needles, as well as non-recurring
engineering services.
Total net sales were $6.0 million for the third quarter of 2021, nearly even
with the same period last year, which included inventory stocking of $0.6
million last year. Sequential quarter net sales from the three months ended June
30, 2021 , grew 9%, driven by domestic core growth of 10%.
Our gross margin, which is our gross profit, stated as a percentage of net
sales, for the period was 57.9%, a decline from prior year of 64.8%. The
majority of the decline, or (9.2) percentage points, was driven by delays in the
transition to our secondary manufacturing source. We also recorded a reserve for
in-process material scrap, or (3.6) percentage points. This was partially offset
by 5.7 percentage points of favorability mostly due to price/mix as we sold more
pumps and needles when compared to last year.
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--------------------------------------------------------------------------------RESULTS OF OPERATIONS
Three months ended
Net Sales
The following table summarizes our net sales for the three months ended
Three Months Ended September 30, Change from Prior Year % of Net Sales
2021 2020 $ % 2021 2020
Net Sales
Domestic Core $ 5,076,294 $ 5,289,076 $ (212,782 ) (4.0% ) 84.0% 87.0%
Novel
Therapies 178,042 83,460 94,582 113.3% 2.9% 1.4%
Total
Domestic 5,254,336 5,372,536 (118,200 ) (2.2% ) 87.0% 88.4%
International
Core 747,281 702,034 45,247 6.4% 12.4% 11.5%
Novel
Therapies 38,927 5,745 33,182 577.6% 0.6% 0.1%
Total
International 786,208 707,779 78,429 11.1% 13.0% 11.6%
Total $ 6,040,544 $ 6,080,315 $ (39,771 ) (0.7% )
Total net sales decreased $39,771 , or 0.7%, for the three months ended September
30, 2021 , as compared with the same period last year, which included
approximately $0.6 million of inventory stocking related net sales.
International core net sales for the three months ended September 30, 2021 , grew
6.4% as compared with the same period last year driven by increased consumables
sales. Novel therapies sales also increased for the three months ended September
30, 2021 , as compared with the same period last year, as we continue to expand
our pharmaceutical pipeline.
Gross Profit
Our gross profit for the three months ended September 30, 2021 , and 2020 is as
follows:
Three Months Ended September 30, Change from Prior Year
2021 2020 $ %
Gross Profit $ 3,495,750 $ 3,940,723 $ (444,973 ) (11.3% )
Stated as a
Percentage of Net
Sales 57.9% 64.8%
Gross profit decreased
Gross profit, stated as a percentage of sales, which is referred to as gross margin, declined (6.9) percentage points. The majority of the decline, (9.2) percentage points, was driven by delays in the transition to our secondary manufacturing source. We also recorded a reserve for in-process material scrap of (3.6) percentage points. This was partially offset by 5.7 percentage points of favorability due to price/mix.
Selling, general and administrative, Litigation and Research and development
Our selling, general and administrative, litigation and research and development costs for the three months endedSeptember 30, 2021 , and 2020 are as follows: Three Months Ended September 30, Change from Prior Year 2021 2020 $ % Selling, general and 3,901,830 3,075,169 826,661 26.9% administrative $ $ $ Litigation - 675 (675 ) (100.0% ) Research and 800,020 390,416 409,604 104.9% development$ 4,701,850 $ 3,466,260 $ 1,235,590 35.6% Stated as a Percentage of Net 77.8% 57.0% Sales Selling, general and administrative expenses increased$0.8 million , or 26.9%, during the three months endedSeptember 30, 2021 compared to the same period last year, due primarily to higher salary and related benefits as we build our executive team, as well as consulting fees for our 510K filings and commercialization efforts, in aggregate$0.6 million . The remaining amount was related to higher board of director fees and related liability insurance in aggregate$0.2 million . - 19 -
-------------------------------------------------------------------------------- Research and development expenses increased$0.4 million during the three months endedSeptember 30, 2021 , compared with the same period last year as we have higher salary and related expenses due to building our internal research and development team and consulting fees to support product development for novel therapies, as well as the disposal of expired samples of$0.2 million .
Depreciation and amortization
Depreciation and amortization expense increased by 0.3 % to
Net (Loss)/Income
Three Months Ended September 30, Change from Prior Year
2021 2020 $ %
Net (Loss)/Income $ (1,093,778 ) $ 249,175 $ (1,342,953 ) (539.0% )
Stated as a Percentage
of Net Sales (18.1% ) 4.1%
Our net loss was $1.1 million in the three months ended September 30, 2021 ,
compared with net income of $0.2 million in same period last year mostly driven
by lower gross profit, higher selling, general and administrative expenses and
higher research and development expenses, all as described above. A favorable
tax benefit for the period resulting from the loss was also recognized during
the three months ended September 30, 2021 .
Nine months ended
Net Sales
The following table summarizes our net sales for the nine months ended
Nine Months Ended September 30, Change from Prior Year % of Net Sales
2021 2020 $ % 2021 2020
Net Sales
Domestic Core $ 14,084,552 $ 15,719,419 $ (1,634,867 ) (10.4% ) 82.9% 78.1%
Novel
Therapies 262,343 1,739,793 (1,477,450 ) (84.9% ) 1.5% 8.6%
Total
Domestic 14,346,895 17,459,212 (3,112,317 ) (17.8% ) 84.4% 86.8%
International
Core 2,585,881 2,539,944 45,937 1.8% 15.2% 12.6% Novel Therapies 66,893 120,072 (53,179 ) (44.3% ) 0.4% 0.6% Total International 2,652,774 2,660,016 (7,242 ) (0.3% ) 15.6% 13.2% Total$ 16,999,669 $ 20,119,228 $ (3,119,559 ) (15.5% ) Total net sales decreased$3.1 million or 15.5% for the nine months endedSeptember 30, 2021 , as compared to the prior year period, driven primarily by lower novel therapies sales of$1.5 million compared with last year mostly due to a non-recurring clinical trial last year and lower domestic core net sales driven by what we believe to be inventory stocking and an early order$1.3 million last year at our largest distributor. International core net sales were$2.6 million , 1.8% higher than with the same period last year, driven by our European expansion activity. Gross Profit Our gross profit for the nine months endedSeptember 30, 2021 , and 2020 is as follows: Nine Months Ended September 30, Change from Prior Year 2021 2020 $ % Gross Profit$ 9,937,788 $ 12,638,813 $ (2,701,025 ) (21.4% ) Stated as a Percentage of Net Sales 58.5% 62.8% Gross profit decreased$2.7 million or 21.4% in the nine months endedSeptember 30, 2021 , as compared to the same period last year. Gross margin declined (4.3) percentage points. The majority of the decline, (2.8) percentage points, was driven by a delay in the transition to our secondary manufacturing source and unfavorable mix impact of (2.1) percentage points driven by lower pump sales compared to last year due what we believe to be covid related stocking last year. - 20 -
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Selling, general and administrative, Litigation and Research and development
Our selling, general and administrative expenses, litigation and research and development costs for the nine months endedSeptember 30, 2021 , and 2020 are as follows: Nine Months Ended September 30, Change from Prior Year 2021 2020 $ % Selling, general and 12,980,604 9,039,980 3,940,624 43.6% administrative $ $ $ Litigation - 2,446,747 (2,446,747 ) (100.0% ) Research and 1,523,739 944,637 579,102 61.3% development$ 14,504,343 $ 12,431,364 $ 2,072,979 16.7% Stated as a Percentage of Net 85.3% 61.8% Sales Selling, general and administrative expenses increased$3.9 million , or 43.6%, during the nine months endedSeptember 30, 2021 , compared to the same period last year, due primarily to$1.6 million in costs associated with the departure and replacement of the former chief executive officer and the recruitment of two new Board members, which includes non-cash equity expense of$0.4 million . Further contributing to the increase was higher salary and related benefits of$1.0 million from new hires in the second half of last year to support commercialization, business development and medical affairs for our novel therapies initiatives, as well as infrastructure. Market research, testing and consulting fees to support commercialization and regulatory filings of$0.9 million and higher director fees and director and officer liability insurance of$0.6 million also contributed. Offsetting these expenses were the Covid-related heroes bonus paid last year and lower other miscellaneous expenses, in aggregate$0.2 million .
Litigation expense was lower by
Research and development expenses increased$0.6 million during the nine months endedSeptember 30, 2021 , compared with the same period last year mostly due to increases to support product development for novel therapies as well as the write-off of expired samples.
Depreciation and amortization
Depreciation and amortization expense increased by 17.5% to$349,822 in the nine months endedSeptember 30, 2021 , compared with$297,801 in the nine months endedSeptember 30, 2020 . We continue to invest in capital assets, mostly related to manufacturing and computer equipment. Net (Loss)/Income Nine Months Ended September 30, Change from Prior Year 2021 2020 $ % Net Loss$ (3,494,465 ) $ (377,435 ) $ (3,117,030 ) 825.8% Stated as a Percentage of Net Sales (20.6% ) (1.9% ) Our net loss for the nine months endedSeptember 30, 2021 , was$3.5 million compared to net loss of$0.4 million for the nine months endedSeptember 30, 2020 , driven by lower gross profit, higher selling, general and administrative expenses and research and development expenses, offset by litigation expenses incurred last year, all as described above. Offsetting the loss was a tax benefit of$0.5 million resulting from book to tax differences related to stock option expense.
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of liquidity is our cash on hand of$26.2 million as ofSeptember 30, 2021 . Our principal source of operating cash inflows is from sales of our products to customers. Our principal cash outflows relate to the purchase and production of inventory and related costs, and selling, general and administrative expenses. - 21 -
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Cash Flows
The following table summarizes our cash flows:
Nine Months Ended Nine Months Ended
September 30, 2021 September 30, 2020
Net cash (used in)/provided by (3,602,378 ) 968,437
operating activities $ $ Net cash used in investing activities $ (318,493 ) $ (1,007,539 ) Net cash provided by financing 2,838,996 26,601,984 activities $ $ Operating Activities Net cash used in operating activities of$3.6 million for the nine months endedSeptember 30, 2021 was primarily due to the net loss of$3.5 million , working capital changes which included an increase in accounts receivable of$0.5 million due to timing, an increase in prepaids of$0.5 million due to insurance renewals, and a decrease in accrued expenses of$0.6 million most of which was non-cash activity related to the issuance of common stock in settlement of litigation. Further contributing were deferred tax assets of$1.4 million mostly increased for book to tax differences related to stock option expense.
Offsetting these were an increase in accounts payable of
Net cash provided by operating activities of$1.0 million for the nine months endedSeptember 30, 2020 , was mostly attributable to non-cash charges for stock-based compensation and litigation settlement expense of$2.5 million , an increase in accounts payable, accrued expenses and accrued payroll of$2.8 million , driven by the litigation settlement with EMED, the capital raise and customer rebates. Further adding to the increase was an increase in depreciation and amortization of$0.3 million and an increase in the accrued tax liability of$0.2 million , resulting from book to tax differences related to stock option expense. Offsetting these were primarily working capital changes which include an increase in inventory of$3.2 million as we built inventory to keep pace with sales growth and to insure timely order fulfillment, an increase in accounts receivable of$0.5 million due to timing of collections, and an increase in prepaid expenses and other assets of$0.5 million relating to increased insurance premiums. Investing Activities Net cash used in investing activities of$0.3 million for the nine months endingSeptember 30, 2021 , was for capital expenditures for manufacturing and office equipment.
Net cash used in investing activities of
Financing Activities The$2.8 million provided by financing activities for the nine months endedSeptember 30, 2021 , is from options exercised, the non-cash activity related to the issuance of common stock in settlement of litigation and a note payable for insurance premium financing.
Net cash provided by financing activities for the nine months ended
ACCOUNTING PRONOUNCEMENTS RECENTLY ADOPTED
Refer to "NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES" in the accompanying financial statements, which is incorporated herein by reference.
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
Refer to "NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES" in the accompanying financial statements, which is incorporated herein by reference.
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