Retractable Technologies, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2017; comparisons are with the corresponding 2016 periods. The company designs, manufactures, and markets safety syringes and other medical products. Safety syringes represented 90.6% of sales for the first nine months of 2017.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $10.41 million | $8.84 million | $24.98 million | $22.34 million |
| Gross profit | $3.26 million | $3.26 million | $7.79 million | $8.07 million |
| Gross margin | 31.3% | 36.9% | 31.2% | 36.1% |
| Operating loss | $(33,000) | $(81,000) | $(2.49) million | $(1.58) million |
| Net loss | $(67,000) | $(125,000) | $(2.61) million | $(1.72) million |
| Loss applicable to common shareholders | $(243,000) | $(302,000) | $(3.13) million | $(2.25) million |
Q3 sales rose 17.8%; nine-month sales rose 11.8%. Management attributed higher sales mainly to increased unit volume. Q3 overall unit sales increased 25.5%; nine-month unit sales increased 18.3%. The nine-month increase included substantial growth in international sales, which management said reflected order timing and may fluctuate.
For the first nine months, gross profit declined 3.4% as lower average prices and higher manufacturing costs offset volume growth. Cost of manufactured product rose 21.9% and royalty expense rose 10.8%. Operating expenses increased 6.6%, primarily from stock-option expense, added sales and marketing personnel and travel, higher R&D payroll, and officer bonuses; lower legal and bad-debt costs partly offset the increase. Q3 operating expenses declined 1.4%, principally due to lower legal and bad-debt costs, partly offset by sales and marketing staffing.
Cash, liquidity, and capital
- Cash and cash equivalents were $15.87 million at September 30, 2017, versus $16.20 million at December 31, 2016. Working capital was $19.8 million, up approximately $337,000.
- Operating cash use was $2.02 million for the first nine months, compared with $1.64 million in 2016. The company used $172,000 in investing activities, mainly for property and equipment, and received $1.86 million net from financing activities.
- Financing included $2.35 million from the CEO’s 2017 stock purchases, offset in part by $326,000 of debt repayments and $165,000 of preferred dividends paid. The CEO bought three million shares for aggregate consideration of approximately $2.35 million.
- Total debt was approximately $3.60 million, including $430,000 current and $3.17 million long-term. Management said it intended to fund operations with operating cash, reserves, and debt financing when available; access to additional loans is uncertain, and management did not intend to raise equity publicly at that time.
- Preferred dividends accrued at $176,249 per quarter. At September 30, cumulative dividend arrearages were reported for Series III, IV, and V preferred stock; total arrearages were $4.11 million, $6.06 million, and $993,000, respectively. No Series I or II dividends were in arrears.
Material developments, outlook, and risks
- Litigation: In the company’s antitrust and false-advertising case against Becton, Dickinson and Company (BD), the Fifth Circuit overturned the antitrust damages award in December 2016 while affirming false-advertising liability and remanding damages. In August 2017, the district court entered judgment for BD and dismissed the case. The company sought reconsideration and appealed; the district court denied reconsideration in October, and an amended appeal notice was filed in November. The filing reports no litigation recovery. A separate BD/MDC patent case remained stayed pending the related proceedings.
- Storm damage: Hail damaged company buildings in March 2017. The insurer assessed and paid $1,009,960, less a $5,000 deductible. The company recorded $128,710 of repairs in Q3, offset by insurance proceeds, with no net statement-of-operations impact; $876,250 of proceeds remained. Repairs were expected to finish by year-end without significant operational disruption.
- Manufacturing and market access: The primary Chinese manufacturer supplied approximately 90.4% of VanishPoint syringes in the first nine months. Loss of Chinese manufacturing access could require alternate suppliers or increased domestic production and raise costs. The company also identified supplier, raw-material, petroleum, transportation, production-capacity, pricing, and hospital-market-access risks.
- Outlook: No specific revenue or earnings guidance was provided. Management said increased hospital-market access is needed to reach routine positive or break-even quarters, and it continued to pursue sales, product, manufacturing-efficiency, and market-access initiatives. Historically, unit sales rise during flu season. The medical device excise tax was suspended through December 31, 2017.
- Other items: EasyPoint needle sales were 9.8% of Q3 revenue and 4.9% of nine-month revenue. Management reported effective disclosure controls at quarter-end and said it had remedied a previously reported raw-material accounting weakness through parallel systems and added review procedures; full Oracle system implementation was intended by year-end.
Important facts for investors to verify
- Progress and outcome of the company’s appeal in the BD case, and any effect on results or market access.
- Whether sales growth, particularly international growth, is sustained and whether higher volume translates into improved margins.
- Reliance on the primary Chinese manufacturer and the costs and capacity implications of any supply disruption.
- Cash use, access to additional borrowing, and the ability to fund operations while continuing to report losses.
- Preferred dividend arrearages and the terms or restrictions associated with the preferred stock.
- Completion and final cost of storm repairs, and implementation of the Oracle accounting system.