Retractable Technologies, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. The company designs, manufactures, and sells safety syringes and other safety medical products. Safety syringes represented 93.7% of sales in the first half. EasyPoint retractable needles began selling in Q2.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $7.58 million | $6.72 million | $13.50 million | $12.89 million |
| Gross profit | $2.62 million | $2.60 million | $4.81 million | $5.00 million |
| Gross margin | 34.6% | 38.7% | 35.6% | 38.8% |
| Operating expenses | $3.22 million | $3.84 million | $6.31 million | $7.13 million |
| Operating loss | $(0.61) million | $(1.24) million | $(1.50) million | $(2.14) million |
| Net income (loss) | $(0.66) million | $6.44 million | $(1.60) million | $5.49 million |
| Loss per common share, diluted | $(0.03) | $0.21 | $(0.07) | $0.17 |
Sales increased 12.8% in Q2 and 4.7% for the first half. Domestic sales rose, supported by syringe volume and initial EasyPoint sales; international sales fell due mainly to timing of a major customer’s purchases. First-half gross profit declined as manufacturing costs and unit costs rose while production volumes were lower. Operating expenses fell 16.1% in Q2 and 11.6% for the first half, including lower compensation, professional fees, product donations, and travel costs.
Prior-year earnings included $7.72 million of litigation proceeds from BD; the company recorded no comparable proceeds in 2016. Thus, the large year-over-year swing in net income is not representative of operating performance alone.
Cash, liquidity, and capital
- Cash and cash equivalents were $17.21 million at June 30, down from $18.05 million at December 31, 2015. Working capital was $21.2 million, down approximately $1.5 million.
- First-half operating cash use was $0.51 million; investing cash use was $0.93 million, including $0.93 million of equipment purchases. Financing provided $0.60 million, including $0.84 million from stock-option exercises.
- Total debt was approximately $3.54 million, including $0.26 million current and $3.29 million long-term, versus approximately $3.67 million at year-end.
- The company reported about $1.4 million of equipment and mold purchases for EasyPoint production and a lease financing arrangement of approximately $530,000 for certain molding machines.
- Management said it had sufficient cash reserves and did not intend to raise equity, but additional borrowing availability was uncertain. The company’s financial statements do not recognize the BD judgment award.
Outlook, risks, and unusual matters
- No specific revenue or earnings guidance was provided. Management noted that sales have historically increased during flu season and that access to hospital markets remains difficult; improved market access is needed to routinely achieve break-even or profitable quarters.
- A final district-court judgment against BD awarded approximately $352 million plus post-judgment interest and costs, with injunctive relief. The company had received none of the judgment amounts as of the filing; BD appealed, and the Fifth Circuit had not issued a decision following February 2016 oral argument. The award is not reflected in the financial statements.
- BD’s separate patent-infringement case against the company remained stayed pending resolution of appeals in the antitrust litigation.
- Manufacturing and supply risks include reliance on a primary Chinese manufacturer, which produced approximately 69.8% of VanishPoint syringes in the first half. Customer concentration was also material: two customers accounted for 44.9% of first-half sales.
- Higher production, supplier, petroleum, or transportation costs may not be recoverable through price increases. A shift to domestic production could temporarily raise unit costs. International sales are subject to significant timing fluctuations.
- Disclosure controls were deemed ineffective because of a material weakness in raw-material accounting. Management planned an Oracle inventory system implementation, with full implementation expected in the first half of 2017 after testing.
- Preferred-stock dividend arrearages at June 30 totaled approximately $10.56 million across Series III, IV, and V. No dividends were in arrears for Series I or II.
Most important facts for investors to verify
- Subsequent status and collectability of the BD appeal and judgment, which is not recorded as an asset.
- Whether EasyPoint sales and domestic volume growth can offset weaker international demand and lower gross margins.
- Progress in remediating the raw-material accounting material weakness and implementing the Oracle system.
- Continuity of Chinese manufacturing and key-supplier arrangements, and the cost and capacity implications of alternative production.
- Cash burn, equipment commitments, borrowing availability, and the treatment of preferred dividend arrearages.