Retractable Technologies, Inc. — Q1 2015 Form 10-Q
Business and period: The company designs, manufactures and sells safety syringes and other safety medical products. This unaudited report covers the three months ended March 31, 2015, compared with Q1 2014. Safety syringes represented 97.8% of Q1 2015 sales.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Net sales | $6.18 million | $6.04 million; up 2.3% |
| Gross profit / gross margin | $2.40 million / 38.8% | $1.72 million / 28.5% |
| Operating loss | $895,097 | $1.99 million |
| Net loss | $944,345 | $2.04 million |
| Loss applicable to common shareholders / diluted loss per share | $1.17 million / $0.04 | $2.27 million / $0.08 |
| Operating cash flow | $556,229 provided | $2.66 million used |
- At March 31, cash and cash equivalents were $22.35 million; restricted cash was $601,192. Current assets were $32.90 million and current liabilities $15.00 million, for working capital of approximately $17.90 million. Management reported working capital declined $1.2 million from year-end.
- Total debt was approximately $3.54 million, including $152,050 current and $3.39 million long-term. Total liabilities were $18.38 million.
- Cash increased $216,276 during the quarter. Investing activities used $363,472, mainly for property and equipment; financing activities provided $23,519.
Changes and management commentary
- Domestic sales increased 17.9%, primarily on higher volumes from existing customers; domestic unit sales rose 13.4%. International revenue fell 68.4%, and total unit sales declined 1.8%. U.S. sales were 94.4% of revenue versus 82.0% a year earlier.
- Gross profit rose 39.2%, reflecting a 13.1% reduction in average manufactured-product cost per unit, product mix, higher domestic sales and average selling prices. Operating expenses fell 11.3% ($420,000), mainly due to lower compensation and legal costs, partly offset by additional bad-debt expense.
- Management attributed approximately $400,000 of Q1 cost savings to reduced non-litigation legal costs and workforce reductions. It cited hospital-market access as important to achieving routine break-even or profitable quarters. No formal revenue or earnings guidance was provided.
- The company expected the 2.3% medical-device excise tax to cost approximately $600,000 in 2015, net of expected rebate-credit refunds. It was purchasing two molding machines for $276,000.
Risks, contingencies and unusual items
- BD litigation: A January 2015 final judgment awarded the company $340.5 million in damages, $11.7 million in attorneys’ fees and $295,000 in stipulated litigation costs, plus injunctive relief. An April 23 amended judgment removed prejudgment interest and retained the other stated monetary and injunctive relief. BD appealed to the Fifth Circuit; the company had received none of these judgment amounts as of the filing. The judgment is not reflected as an asset in the financial statements.
- Separate patent case: The company received $7.725 million from BD in 2013 under a stipulation; it remains recorded as a liability pending completion of proceedings. The Supreme Court denied BD’s certiorari petition on April 20, 2015 in that case.
- A separate BD/MDC patent-infringement suit remains pending, with a scheduling and status conference set for June 30, 2015.
- Manufacturing is concentrated: the primary Chinese manufacturer produced approximately 73.8% of VanishPoint units in Q1 2015. Losing that supplier could require finding an alternate source and ramping up U.S. production, with possible cost and capacity effects. Three significant customers represented 57.4% of net sales, compared with 49.1% a year earlier.
- Management said it had sufficient cash reserves and did not intend to raise equity, but access to additional loans was uncertain. If cost reductions prove insufficient, it may reduce production or staffing, cut compensation, or defer royalties. The filing also identifies market access, manufacturing costs, supplier arrangements, liquidity and litigation outcomes as risks.
- Preferred dividends of $170,817 were declared in March and paid April 30. Preferred-stock dividend arrearages totaled approximately $13.0 million at March 31; arrears may restrict dividends on junior stock.
Important facts for investors to verify
- Current status and appeal outcome of the BD antitrust/false-advertising judgment, including whether any award is ultimately collected.
- Cash available for operations, given continuing losses, preferred-dividend arrearages and the $7.725 million litigation liability.
- Whether domestic sales and gross-margin improvement can persist amid sharply lower international sales and customer concentration.
- Continuity of the primary Chinese manufacturing relationship and the cost and capacity implications of any shift to alternate or domestic production.
- Actual 2015 medical-device excise-tax expense and the timing and amount of any expected refunds.