Retractable Technologies, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed March 30, 2020. The company manufactures and markets safety syringes and other medical products, principally VanishPoint. Figures below are U.S. dollars.
Key financial results
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales | $41.8 million | $33.3 million |
| Gross profit / margin | $14.1 million / 33.8% | $10.2 million / 30.7% |
| Operating income (loss) | $3.0 million | $(1.3) million |
| Net income (loss) | $3.1 million | $(1.3) million |
| Income (loss) applicable to common shareholders | $2.4 million | $(2.0) million |
| Basic and diluted EPS | $0.07 | $(0.06) |
| Cash from operating activities | $2.2 million | $(1.2) million |
Sales increased 25.6% year over year, and unit sales rose 25%. Domestic revenue increased 11.3%; international revenue excluding licensing fees rose from $4.6 million to $9.7 million. VanishPoint syringes accounted for 85.6% of revenue and EasyPoint needles 7.2%.
Fourth-quarter 2019 sales were $12.6 million, with gross margin of 39.2% and net income of $1.9 million. The first quarter was loss-making; each of the following three quarters was profitable.
Balance sheet, liquidity and cash flow
- At year-end, current assets were $28.4 million and current liabilities $8.3 million (current ratio approximately 3.4). Cash and cash equivalents were $5.9 million; marketable investments were $7.8 million.
- Total assets were $39.2 million, total liabilities $10.6 million, and stockholders’ equity $28.5 million. Long-term debt, including current maturities, was $2.6 million; the principal loan is secured by company land and buildings and matures in 2028.
- Cash declined $3.7 million during 2019, primarily as the company moved funds into investments. Investing cash outflow was $5.3 million, including purchases of securities; proceeds from investment sales were $2.7 million. Management said operating cash flow was $2.2 million, with increased receivables offsetting some cash generation.
- Contractual obligations totaled $3.3 million, including $3.2 million of long-term debt and $84,155 of operating lease payments. No material capital-project commitments or off-balance-sheet arrangements were reported.
Changes, outlook and notable risks
- Higher sales volume drove the improved results and gross margin; operating expenses decreased 5.5%, following cost reductions implemented in late 2018. The company moved from operating and net losses in 2018 to profits in 2019.
- The company provided no quantified financial guidance. Management said sustained positive or break-even quarters require greater access to hospital markets, which has been difficult to obtain. It plans to pursue market access through sales, technology, new products and, when necessary, litigation.
- Manufacturers in China produced 82.6% of the company’s products in 2019. Management reported a temporary COVID-19-related supply disruption, but said by March 23, 2020 that Chinese suppliers had resumed production and shipments had arrived, and that inventory was believed sufficient to meet demand. The filing cautions that pandemic effects remain uncertain and could materially harm the business.
- Patents on the former VanishPoint design expired in 2020. The company says modifications are intended to extend protection, with patents on modifications and core technology expected to expire during 2028–2032; competitors could nevertheless copy aspects of the former design, and replacement products may not offset lost sales.
- Other material risks include competition from larger players, especially BD; dependence on market access and a concentrated customer base (three significant customers represented 45.6% of sales); foreign trade and supplier disruption; product liability; and investment-market risk. About 22% of liquid assets were invested in marketable securities.
- CEO Thomas J. Shaw had investment or voting power over 57.6% of common shares as of March 13, 2020. He also owns licensed technology; the company pays him a 5% royalty on applicable gross sales. Royalty expense was $3.45 million in 2019.
- The company sued its former legal advisers in November 2019 over representation in prior litigation against BD, alleging malpractice, negligence and breach of fiduciary duty. Defendants moved to dismiss; the filing reports no recovery amount and the outcome is uncertain.
- Preferred dividends in arrears totaled $12.3 million at year-end. No common dividends have been paid, and the company reported no current plan to pay them. The filing reports an agreement effective January 2020 to acquire preferred shares for $75,000 and 7,500 common shares, with $149,795 of associated unpaid dividends waived.
Investor verification points
- Verify the sustainability of 2019’s sales growth, margin improvement and positive operating cash flow, particularly given receivables growth and international-order variability.
- Assess the effect of 2020 patent expirations and whether modified VanishPoint products and newer products can maintain sales and market position.
- Monitor China-based manufacturing exposure, inventory coverage and the continuing operational and demand effects of COVID-19.
- Review the composition, liquidity and valuation sensitivity of the $7.8 million investment portfolio and its role in available operating liquidity.
- Track preferred dividend arrears, the related-party royalty arrangement, and developments in the lawsuit against former counsel.
Other filing note: The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor was not engaged to audit internal control.