Retractable Technologies, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; financial statements are unaudited. The company designs, manufactures, and markets safety syringes and other safety medical products. Safety syringes represented 99.2% of sales.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Net sales | $7.43 million | $9.75 million; down 23.8% |
| Gross profit / gross margin | $2.84 million / 38.2% | $3.29 million / 33.8% |
| Operating loss | $645,000 | $100,000 loss |
| Net income (loss) | $(714,000) | $1.72 million |
| Loss applicable to common shareholders / diluted EPS | $(944,000) / $(0.04) | $1.38 million / $0.05 |
| Operating cash flow | $146,000 provided | $1.64 million provided |
Cost of sales declined to $4.59 million from $6.46 million. The gross-margin improvement reflected lower manufacturing cost per unit, which fell 2.1%, despite lower sales volume. Operating expenses rose 2.8% to $3.49 million, mainly as sales and marketing costs increased with additional sales staff.
Cash and cash equivalents were $25.59 million at quarter-end, down $87,000 from year-end. Working capital was $29.3 million, down $515,000 from December 31, 2011. Total assets were $48.03 million; total liabilities were $10.09 million, including $4.59 million of long-term debt and its current portion. Current assets were $35.29 million versus current liabilities of $6.02 million. Capital spending was $53,000, and debt repayments were $180,000.
Changes versus the prior comparable period
- Unit sales fell 28.1%. Domestic unit sales declined 24.2%; international unit sales fell 35.2%, with weaker South American sales cited as the principal international factor.
- Domestic revenue declined 18.0%; international revenue declined 41.0%. U.S. sales were $5.99 million, compared with $7.30 million. North and South America sales outside the U.S. fell to $229,000 from $2.26 million, while other international sales rose to $1.21 million from $185,000.
- Q1 2011 included $1.9 million of net litigation-settlement income; Q1 2012 had none. This contributed to the year-over-year swing from net income to net loss.
- Cash from operations declined to $146,000 from $1.64 million. Inventory fell to $5.50 million from $6.24 million, including a 20.2% decrease in finished goods.
Outlook, risks, and unusual items
- No numerical revenue or earnings guidance is provided. Management says consistent break-even quarters require at least minimal access to hospital markets, which it says has been difficult to obtain. It plans to pursue sales efforts, new products, manufacturing improvements, and litigation.
- Management says existing cash reserves, operations, and debt financing are expected to be ongoing funding sources, but further borrowing is uncertain. If operating cash becomes insufficient, possible actions include reducing production or staffing, cutting salaries, and deferring royalty payments.
- Supplier concentration is significant: Double Dove, a Chinese manufacturer, produced about 64.3% of units in Q1. A disruption could require alternative sourcing or increased domestic production; certain products representing about 14.2% of Q1 revenue would be affected by a prolonged disruption.
- Three customers accounted for about 42.7% of Q1 sales. The company also identifies risks from limited market access, litigation outcomes, manufacturing and input costs, supplier arrangements, and the ability to maintain liquidity.
- Patent litigation with Becton, Dickinson and Company (BD) remains active. The company sought U.S. Supreme Court review of an appellate ruling concerning its patent case; the filing says the petition was expected to be accepted or rejected by October 2012. A separate antitrust case was expected to proceed in fall 2012, while another patent case had no trial date and a company summary-judgment motion was pending.
- The filing warns that a 2.3% U.S. medical-device excise tax beginning in 2013 could significantly affect results if the company’s products are subject to it; added costs may not be recoverable through price increases.
- Preferred-stock dividend requirements were $230,000 for the quarter. Reported dividend arrears totaled approximately $10.91 million across the five preferred series. The filing reports no material change in risk factors from the 2011 Form 10-K. Management concluded disclosure controls were effective, and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the company can improve sales volumes and market access sufficiently to reach operating break-even.
- Current status and potential financial consequences of the BD patent and antitrust cases, including the Supreme Court petition.
- Exposure to Double Dove and the feasibility, cost, and timing of substitute supply or expanded domestic production.
- Cash burn and liquidity trends, debt repayment requirements, and the availability of external financing if operations weaken.
- Preferred-stock dividend arrears and any related restrictions, as well as whether the 2013 medical-device excise tax applies to the company’s products.