Business context and reporting period
Retractable Technologies, Inc. designs, manufactures and sells safety syringes and other medical products. This unaudited Form 10-Q covers the three months ended March 31, 2018, compared with the same quarter of 2017. VanishPoint safety syringes represented 95.5% of first-quarter 2018 sales. Results for the quarter are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Net sales | $7.673 million | $6.924 million; up 10.8% |
| Gross profit / margin | $2.860 million / 37.3% | $2.325 million / 33.6% |
| Operating expenses | $3.017 million | $3.477 million; down 13.2% |
| Operating loss | $157,000 | $1.152 million |
| Net loss | $179,000 | $1.190 million |
| Loss applicable to common shareholders | $356,000; $0.01 per share | $1.366 million; $0.04 per share |
| Cash from operations | $459,000 | Cash used of $977,000 |
| Cash and cash equivalents | $15.094 million at March 31 | $14.878 million at December 31, 2017 |
| Total debt | $3.381 million | $3.492 million at December 31, 2017 |
Working capital was $18.5 million, down $173,000 from year-end; cash represented 40.6% of total assets. Current assets were $25.813 million and current liabilities $7.278 million. First-quarter capital spending was $76,000, debt repayments $111,000, and preferred dividends paid $55,000. The effective income tax rate was 0.0%.
Material changes versus the prior period
- Domestic revenue rose 10.9%, with domestic unit sales up 9.0%; international revenue increased 10.2% and international unit sales rose 56.8%, partly offset by lower average selling prices. Total unit sales increased 17.3%.
- Gross profit grew 23.0%, primarily on higher volume. Average manufactured-product cost per unit fell 11.2% as production increased; royalty expense to shareholder rose 7.5% with higher gross sales.
- Operating expenses declined $461,000, mainly due to lower litigation costs, no 2018 stock-option expense, and the absence of 2017 officer bonuses. Operating loss narrowed substantially.
- Operating cash flow improved mainly because the company collected year-end receivables, partly offset by increased inventory and payment of accounts payable. Accounts receivable fell to $3.466 million from $5.106 million, while inventory increased to $6.810 million from $6.206 million.
Outlook, risks, contingencies and unusual items
- Outlook: The filing provides no quantified financial guidance. Management says access to hospital markets remains difficult and that it is pursuing sales efforts, new products, technology and, when necessary, litigation to improve market access. It expects to rely on operations, cash reserves and debt financing when available; access to additional loans is uncertain. Sales have historically increased during flu season.
- Manufacturing and trade risk: Chinese manufacturers produced approximately 82.7% of products in Q1 2018, versus 78.4% a year earlier. Loss of those suppliers could require replacement manufacturers or expanded U.S. production. Potential tariffs, supplier costs, transportation and raw-material costs could pressure margins; cost increases may not be recoverable through pricing.
- Customer concentration: Four significant customers accounted for 63.3% of Q1 2018 net sales, compared with three customers and 53.2% in Q1 2017.
- Litigation: In the company’s case against Becton, Dickinson and Company (BD), the Fifth Circuit overturned the antitrust damages while affirming false-advertising liability and remanding for damages determination. The district court later entered a take-nothing judgment and dismissed the case. The company appealed; briefing was completed May 2, 2018, with oral argument expected later in 2018. A separate BD/MDC patent case remains stayed pending resolution of the related proceedings. The filing does not provide a clear estimate of any potential recovery or exposure.
- Debt renewal: Subsequent to quarter-end, the company renewed its bank loan, extending the approximately $4.21 million original-principal promissory note by ten years and changing its rate to adjustable prime plus 0.25%. The remaining principal at renewal was approximately $3.03 million.
- Storm repairs: Q1 2018 hail-damage repairs were $149,792 and were offset by insurance proceeds, with no statement-of-operations impact. Remaining insurance proceeds were $316,501; management expected remaining repairs to be completed in Q2 2018.
- Preferred dividends: As of March 31, 2018, dividend arrearages totaled $4.178 million for Series III, $6.227 million for Series IV and $999,236 for Series V. Series I and II had no arrears. The filing reports $176,249 in quarterly preferred dividend requirements deducted in calculating loss applicable to common shareholders.
- Controls and accounting: Management concluded disclosure controls and procedures were not effective as of March 31, 2018. The filing notes implementation of controls for adoption of the new revenue standard but does not clearly state the specific deficiency behind the ineffectiveness conclusion. Revenue recognition standard adoption had no opening retained-earnings impact. The medical device excise tax moratorium was extended, delaying the tax until January 1, 2020.
Important facts for investors to verify
- Whether sales growth and improved gross margin persist, given product mix, seasonality and pricing pressures.
- Reliance on Chinese manufacturing and concentrated sales to significant customers, including exposure to tariffs and supply interruptions.
- Progress and potential outcomes of the BD appeals and stayed patent litigation; no recovery should be assumed from the disclosed proceedings.
- Loan renewal terms, future interest expense and management’s statement that additional borrowing is uncertain.
- The nature and remediation of ineffective disclosure controls, and the status of preferred dividend arrearages.
- Completion and insurance coverage of remaining storm repairs.