Retractable Technologies, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The company designs, manufactures and markets safety syringes and other safety medical products. Financial statements are unaudited.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $9.86 million | $10.41 million | $25.01 million | $24.98 million |
| Gross profit / margin | $2.80 million / 28.4% | $3.26 million / 31.3% | $7.72 million / 30.9% | $7.79 million / 31.2% |
| Operating loss | $60,226 | $32,858 | $1.16 million | $2.49 million |
| Net loss | $63,417 | $66,626 | $1.19 million | $2.61 million |
| Loss applicable to common shareholders | $239,666 | $242,875 | $1.72 million | $3.13 million |
- Cash flow: Nine-month operating cash use was $439,918; investing cash use was $290,153 and financing cash use was $507,132. Cash declined $1.24 million to $13.64 million.
- Liquidity: Current assets were $25.91 million and current liabilities $8.53 million, yielding working capital of about $17.38 million. Management reported working capital down $1.3 million from year-end 2017.
- Debt: Balance-sheet debt totaled about $3.15 million, including $424,421 current. The bank note was renewed in April, matures in 2028, is secured by land and buildings, and carries an adjustable rate of prime plus 0.25% (5.5% at September 30).
- Balance sheet: Total assets were $37.07 million and stockholders’ equity $25.82 million. Inventory rose to $7.39 million from $6.21 million at year-end.
Material changes versus the prior comparable period
- Q3 sales fell 5.3%, while nine-month sales were essentially flat. In Q3, U.S. revenue increased 4.7%, supported by EasyPoint needles, but international revenue fell 45.7%. For nine months, U.S. revenue rose 6.4% and international revenue fell 27.6%.
- EasyPoint needles represented 10.1% of nine-month revenue, versus 4.9% in the prior-year period. Safety syringes accounted for 85.5% of nine-month sales.
- Q3 gross profit fell 14.2%, primarily due to lower average selling prices; nine-month gross profit declined 0.9%. Operating expenses decreased 13.3% in Q3 and 13.7% for nine months, reflecting lower legal and employee costs and, year to date, lower bonuses and share-based compensation.
- Nine-month operating cash use improved from $2.02 million to $440,000, but inventory growth was the main cash-use factor in 2018. The prior-year period included $2.35 million of stock-sale proceeds; there were no such proceeds in 2018.
Outlook, commentary, risks and unusual items
- Management provided no numerical earnings or revenue guidance. It said positive or break-even quarters require better access to hospital markets, which has been difficult, and cited efforts to grow sales, introduce products and improve manufacturing efficiency.
- Management said cash reserves, operations and debt financing, when available, are expected to fund ongoing needs; the ability to obtain additional loans is uncertain. It does not currently intend to raise public equity. No material Q3 capital-expenditure commitments were reported.
- On November 8, 2018, the company terminated approximately 20 employees with annual compensation of about $1.1 million. Proposed severance costs were expected to be no more than $250,000; some positions may later be refilled.
- Chinese manufacturers supplied about 85.1% of products in the first nine months of 2018. Loss of those suppliers could require alternate sourcing or increased domestic production and raise costs. Management also identified potential tariffs, supplier and raw-material costs, transportation costs, market access and competition as risks; syringes were not among the Chinese products then proposed for U.S. tariffs.
- Three significant customers represented 55.2% of Q3 sales; two represented 39.9% of nine-month sales. The company also noted possible seasonality from flu-season demand.
- The BD antitrust/false-advertising case remained on appeal; oral argument took place October 3, 2018. A separate patent case remained stayed. No recovery from the litigation is reflected in the reported results.
- Hail-damage repairs were partly offset by insurance proceeds; the company expected remaining proceeds to be recognized as income in Q4 2018, but the filing text does not provide a clear amount. The filing reports $203,289 of repairs in the first nine months of 2018, offset by insurance proceeds.
- Preferred dividend arrears for Series III, IV and V totaled approximately $11.65 million at September 30, 2018. The company reported no arrears for Series I or II. The quarterly dividend payable of $55,113 was paid October 23.
Important facts for investors to verify
- Whether sales growth in EasyPoint and domestic markets can offset declining international sales and lower average selling prices.
- Whether the company can improve hospital-market access and sustain lower operating expenses while reducing operating losses and cash use.
- Inventory levels, future cash flow, available borrowing capacity and the effect of the bank loan’s variable interest rate.
- Exposure to Chinese manufacturing concentration, possible tariffs, supplier continuity and any resulting cost or capacity changes.
- Developments in the BD appeal and stayed patent case; any damages or litigation-related financial impact remains uncertain.
- Actual severance costs and realized savings from the November workforce reduction, as well as the timing and amount of remaining insurance proceeds.
- Preferred dividend arrears and the terms affecting payments to common shareholders.