Retractable Technologies, Inc. — Q1 2017 Form 10-Q
Business and period: The company designs, manufactures and markets safety syringes and other medical products. This unaudited report covers the three months ended March 31, 2017, compared with Q1 2016. Safety syringes represented 94.2% of Q1 2017 sales.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $6.924 million | $5.922 million |
| Gross profit / gross margin | $2.325 million / 33.6% | $2.190 million / 37.0% |
| Operating expenses | $3.477 million | $3.084 million |
| Operating loss | $1.152 million | $894,169 |
| Net loss | $1.190 million | $939,091 |
| Loss applicable to common shareholders | $1.366 million | $1.115 million |
| Basic and diluted loss per share | $0.04 | $0.04 |
| Cash flow from operations | $(976,910) | $218,079 |
- Sales increased 16.9%; total unit sales rose 17.2%. Domestic revenue increased 8.1%, while international revenue increased 132.9%, although international orders may fluctuate materially.
- Gross profit grew 6.2%, slower than sales, and gross margin declined about 3.4 percentage points. Management cited a 6.1% increase in average manufactured product cost per unit and higher shareholder royalties.
- Operating expenses rose 12.7%, primarily due to officer bonuses and stock-based compensation, partly offset by lower litigation costs. The resulting operating and net losses widened.
- Cash increased to $16.816 million from $16.199 million at year-end. Q1 cash flow was supported by $1.780 million from a direct common-stock purchase by the CEO; operations used cash, and debt repayments were $113,696.
Financial position and liquidity
- At March 31, 2017, total assets were $39.647 million, current assets $27.735 million, and working capital approximately $20.345 million. Current liabilities were $7.390 million.
- Total long-term debt, including current maturities, was approximately $3.815 million, down from $3.929 million at December 31, 2016. Stockholders’ equity was $28.878 million.
- Management said cash reserves were sufficient and expected to rely on operations, reserves and debt financing when available. It did not intend to raise equity publicly; availability of additional loans was uncertain.
Outlook, risks and significant matters
- No numerical earnings or sales guidance was provided. Management said access to hospital markets remains difficult and is needed to routinely achieve break-even or profitable quarters. It cited sales efforts, new products and manufacturing efficiency as continuing priorities; sales have historically increased during flu season.
- The company reported no EasyPoint needle sales in Q1, but said it had purchase orders for delivery later in 2017. Management expected stock-option expense from 2016 grants of about $235,000 per quarter for the next two quarters and expected litigation expenses to be significantly lower in 2017.
- BD litigation: The Fifth Circuit overturned the prior antitrust damages award but affirmed false-advertising liability and remanded damages for redetermination. The company’s Supreme Court petition was denied March 20, 2017. The filing reports a May 11, 2017 trial date and says no judgment had been issued; it cautions that the outcome could materially affect financial condition and that recovery cannot be predicted.
- Manufacturing concentration: The primary Chinese manufacturer supplied about 90.5% of VanishPoint syringes in Q1 2017, versus 58.4% in Q1 2016. Disruption could require finding alternative suppliers or expanding domestic production, potentially increasing costs. Three customers accounted for 53.2% of sales.
- Controls: Management concluded disclosure controls were not effective because a previously reported material weakness in raw-material accounting remained unresolved. An improved Oracle inventory system was expected to be fully operational by June 30, 2017.
- The Little Elm facility sustained hail damage requiring roof replacements. Management expected insurance to cover most costs but noted possible unexpected expense and business interruption.
- Preferred dividends in arrears at March 31 totaled $10.919 million for Series III, IV and V combined. The $55,113 dividend payable for Series I and II was paid in April 2017.
Important facts for investors to verify
- Subsequent developments and the final damages outcome in the BD litigation, including any effect on liquidity or reported results.
- Whether the Oracle inventory system was implemented on schedule and whether the material weakness was remediated.
- Progress in improving market access and sales, especially given customer concentration and the absence of Q1 EasyPoint sales.
- Chinese supplier continuity, product costs and gross-margin trends, alongside the company’s cash use and ability to obtain debt financing.
- Insurance proceeds and any disruption or unreimbursed costs from the hail-related roof work; also monitor preferred-dividend arrears and future obligations.