Retractable Technologies, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. The company designs, manufactures, and markets safety syringes and other safety medical products. Safety syringes represented 93.0% of Q1 sales.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Net sales | $6.04 million | $7.17 million; down 15.8% |
| Gross profit / margin | $1.72 million / 28.5% | $2.78 million / 38.7% |
| Operating loss | $1.99 million | $1.37 million |
| Net loss | $2.04 million | $1.41 million |
| Loss per common share | $0.08 | $0.06 |
| Cash used by operations | $2.66 million | $2.13 million |
| Capital expenditures | $0.74 million | $0.06 million |
| Cash and cash equivalents | $24.20 million at March 31 | $27.63 million at December 31, 2013 |
| Working capital | $18.8 million at March 31 | Down $2.4 million from year-end |
| Total debt | $3.74 million, including current portion | $3.82 million at December 31, 2013 |
Revenue fell as overall unit sales declined 20.6%. Domestic revenue decreased 13.7%; international revenue decreased 24.1%. Gross margin contracted mainly because lower production volumes raised the average manufactured-product cost per unit by 25.4%. Operating expenses declined 10.4% to $3.71 million, including lower non-litigation legal costs and charitable product donations, but did not offset the gross-profit decline.
Cash includes $7.72 million received from BD in a patent case but recorded as a current liability subject to possible restitution; management said it would not use those proceeds for operations until a final judgment on appeal. Thus, reported cash is not all available for operating needs. Q1 cash decreased $3.43 million. Current liabilities also include $7.72 million of litigation proceeds subject to stipulation.
Material changes, outlook, and risks
- Cost actions: Non-litigation legal costs fell by about $360,000 in Q1. Effective May 9, 2014, the company reduced its workforce by 13.7%; it expected annual compensation savings exceeding $1 million and about $300,000 of severance costs in Q2.
- Outlook: No formal revenue or earnings guidance was provided. Management said it intended to rely on operations, cash reserves, and debt financing, and did not then intend to raise equity. It warned that further production, workforce, salary, or royalty-payment reductions could be considered if cost actions were insufficient.
- Costs and investment: Management estimated the medical-device excise tax would cost about $750,000 in 2014. The company was purchasing $1.5 million of manufacturing equipment and molds; a $535,224 letter of credit was issued in April, secured by company funds. It planned to use existing cash if debt financing was unavailable.
- Market access and production: Management cited difficulty gaining hospital-market access and said volumes remained below expectations. The primary Chinese manufacturer produced about 53.3% of units in Q1; disruption could require finding alternatives and increasing domestic production, potentially raising costs. Three customers accounted for 49.1% of Q1 net sales, versus one customer and 19.2% a year earlier.
- Litigation: A jury awarded the company $113.5 million in a separate antitrust and false-advertising case against BD; the antitrust damages may be trebled. Post-trial orders had not issued, BD planned to appeal, and the company had received none of this award. Separately, BD appealed an order concerning the patent-infringement judgment; oral argument occurred May 9, 2014. The $7.72 million payment in that patent case remains subject to possible repayment.
- Preferred dividends: Dividends in arrears at March 31 included total arrearages of $3.66 million for Series III, $7.56 million for Series IV, and $0.95 million for Series V, in addition to Series I and II arrearages. Dividend arrears may restrict payments on junior stock.
- Management attributed weaker domestic sales in part to flu-season timing and less national flu-vaccination press coverage. It noted that results for the quarter are not necessarily indicative of full-year results.
Important facts for investors to verify
- Availability and potential repayment exposure of the $7.72 million patent-case proceeds, and the outcome of BD’s appeal.
- Post-trial rulings, any appeal, and collectability or timing of the separate $113.5 million jury award; no proceeds had been received as of the filing.
- Whether workforce reductions and other cost controls improve cash burn and margins amid falling sales and higher unit costs.
- Ability to maintain production through Chinese manufacturers, manage customer concentration, and secure hospital-market access.
- Funding and cash requirements for the $1.5 million equipment purchase, including the restricted funds supporting the letter of credit.