Retractable Technologies, Inc. — Q1 2020 Form 10-Q
Business and period. The company designs, manufactures and markets safety syringes and other medical products. This unaudited filing covers the three months ended March 31, 2020, compared with Q1 2019; balance-sheet figures are compared with December 31, 2019.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Net sales | $11.20 million | $7.93 million |
| Gross profit; gross margin | $3.53 million; 31.5% | $2.49 million; 31.4% |
| Operating income (loss) | $481,000 | ($175,000) |
| Net income (loss) | $323,000 | ($129,000) |
| Income applicable to common shareholders | $149,000; reported EPS $0.00 | ($305,000); reported EPS ($0.01) |
| Net cash from (used in) operations | $2.09 million | ($716,000) |
| Cash and cash equivalents | $7.61 million | $5.93 million at Dec. 31, 2019 |
| Working capital | $20.4 million | $20.2 million at Dec. 31, 2019 |
| Total debt | $2.57 million | $2.64 million at Dec. 31, 2019 |
Sales increased 41.2% year over year. The gross margin was broadly stable; operating expenses rose 14.4% to $3.05 million. Cash increased by $1.67 million during the quarter, with operating cash generation mainly reflecting lower receivables and inventories. Investing activities used $228,000 and financing activities used $194,000. Cash plus investments in debt and equity securities totaled approximately $15.25 million at quarter-end. The company reported no material capital expenditure commitments for Q1.
Material changes and operating trends
- Management attributed higher sales to volume growth: overall units increased 39.2%, domestic units 31.4%, and international units 56.8%. Domestic revenue rose 35.8%; international revenue rose 59.9%, with international orders subject to significant fluctuation.
- Gross profit grew 41.8%, primarily on higher volume and average unit pricing. Manufactured-product costs increased 42.4% with higher unit sales and product mix; royalty expense to a shareholder increased 30.6% with gross sales.
- Sales and marketing, R&D, and general and administrative expenses together increased $385,000, mainly from payroll and employee-related costs.
- Investment losses of $164,000, versus investment gains of $43,000 in Q1 2019, contributed to a shift in interest and other income (expense) from $91,000 of income to $141,000 of expense.
- VanishPoint syringes represented 81.6% of sales and EasyPoint needles 6.9%. Three significant customers accounted for 48.2% of sales, versus 48.6% a year earlier.
Outlook, risks and unusual items
- Major subsequent order: On May 1, 2020, the company received a U.S. Department of Health and Human Services delivery order for automated-retraction safety syringes with a fixed price of $83.79 million. The company expected performance during 2020 and part of 2021, with added personnel and increased domestic and foreign production. Management cautioned that capacity ramp-up could affect timely performance and service to existing customers. This order was awarded after the reporting period.
- PPP loan: On April 17, 2020, the company obtained a $1.363 million unsecured loan at 1% interest, maturing April 17, 2022. Some or all may be forgiven subject to program requirements; forgiveness was not established in this filing.
- COVID-19 and supply chain: The Texas facility continued operating at normal manufacturing capacity as an essential business, and management said it had sufficient inventory and capacity for current demand. The company could not predict pandemic effects on operations, workforce, transportation, sourcing or demand. Chinese manufacturers supplied approximately 80.3% of products in Q1, compared with 76.1% a year earlier; inability to source from China could require alternative suppliers or more domestic production, potentially raising costs.
- Liquidity and market access: Management reported sufficient cash reserves, access to investments and recent operating profits, but said access to traditional loans was uncertain and it did not intend to raise public equity. Routine positive or break-even quarters depend in part on improved access to hospital markets, which management said has been difficult.
- Legal contingency: The company’s malpractice and related lawsuit against Locke Lord LLP and Roy Hardin sought damages and other relief; defendants had moved to dismiss, with a hearing scheduled for June 3, 2020. The filing does not provide a clear estimate of any potential recovery.
- Preferred stock: Q1 included a $75,000 cash payment and issuance of 7,500 common shares to repurchase preferred stock; holders waived $149,795 of dividend arrears. At March 31, 2020, disclosed arrears remained $4.38 million for Series III, $6.81 million for Series IV and $1.02 million for Series V.
- No formal financial guidance was provided. Management said sales could be affected by pandemic-related disruption, seasonality and the ability to scale production; it could not predict whether usual flu-season trends would hold.
Important facts for investors to verify
- Execution, production capacity, timing, costs and cash collection associated with the $83.79 million government order, and its effect on existing customers.
- PPP loan eligibility, qualifying expenditures and any forgiveness; the loan was obtained after quarter-end.
- China sourcing exposure, alternative manufacturing readiness and any pandemic-related supply or transportation disruption.
- Customer concentration, sales growth sustainability, product mix and whether gross margins hold as production scales.
- Status and potential financial impact of the Locke Lord litigation, and preferred-stock dividend arrears and restrictions.