Business context and reporting period
Retractable Technologies, Inc. designs, manufactures and markets safety syringes and other medical products. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods. Safety syringes represented 93.3% of sales in the first half.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $7.65 million | $7.58 million | $14.57 million | $13.50 million |
| Gross profit / margin | $2.21 million / 28.9% | $2.62 million / 34.6% | $4.53 million / 31.1% | $4.81 million / 35.6% |
| Operating loss | $1.31 million | $0.61 million | $2.46 million | $1.50 million |
| Net loss | $1.35 million | $0.66 million | $2.54 million | $1.60 million |
| Loss per common share | $0.05 | $0.03 | $0.09 | $0.07 |
- Six-month operating cash flow was negative $2.05 million, versus negative $0.51 million in 2016. Capital expenditures were $0.13 million; financing provided $1.45 million, including $1.78 million from a CEO share purchase. Cash declined $0.73 million to $15.47 million.
- At June 30, cash was $15.47 million and working capital was approximately $19.15 million. Total debt was approximately $3.71 million, including $0.44 million current and $3.27 million long-term. Total liabilities were $11.56 million.
- Inventory increased to $8.05 million from $7.02 million at year-end. Accounts payable included $3.48 million of estimated contractual pricing allowances.
Material changes versus prior periods
- Q2 sales rose 0.9%, but gross profit fell 15.6%; first-half sales rose 8.0%, while gross profit fell 5.7%. Higher manufacturing costs and weaker domestic sales weighed on profitability.
- For Q2, domestic revenue fell 12.8% and domestic unit sales fell 14.1%; international revenue rose 152.3%, largely due to timing of several large orders. First-half domestic revenue fell 3.6%, while international revenue rose 144.6%. Management cautions that international orders fluctuate.
- Operating expenses rose 9.0% in Q2 and 10.8% in the first half, reflecting stock-based compensation and expanded sales and marketing staffing; first-half expenses also included officer bonuses. Legal expenses declined.
- Share-based compensation was $470,309 for the first half, compared with none in the 2016 period. Weighted-average shares increased to 31.50 million from 29.05 million for the first half.
Outlook, risks, contingencies and unusual items
- No numerical revenue or earnings guidance was provided. Management said sales have historically increased during flu season and is pursuing hospital and other market access through sales efforts, new products and, when necessary, litigation.
- Management said cash reserves were sufficient for current needs and expected to rely on operations, cash and debt financing when available; access to additional loans is uncertain. Management does not intend to raise public equity at present.
- The Fifth Circuit overturned the prior $340.5 million antitrust damages judgment against Becton, Dickinson and Company (BD), while affirming false-advertising liability and remanding damages for redetermination. A May 11, 2017 proceeding had taken place, but no decision had issued by the filing. The related patent case remained stayed. The litigation outcome could materially affect the Company’s financial condition; no recovery amount can be predicted.
- A March hailstorm damaged roofs, HVAC units and a wall at the Company’s facilities. The insurer paid $1,004,960; management expected repairs to begin in Q3 and finish by year-end, without significant operational disruption, and did not expect repair costs to exceed coverage.
- Manufacturing depends substantially on China: the primary Chinese manufacturer produced approximately 89.1% of VanishPoint syringes in the first half. Disruption could require finding alternate manufacturers or increasing domestic production, potentially raising costs. The Company also relies on single suppliers for some components.
- Preferred dividends payable totaled $55,113 and were paid July 20, 2017. Dividends were in arrears on Series III, IV and V preferred stock; total arrearages were $4.08 million, $5.97 million and $0.99 million, respectively, at June 30.
- The filing reported disclosure controls as effective. A previously identified raw-material accounting material weakness was being addressed through parallel systems and enhanced review, with full Oracle costing-system implementation targeted by year-end 2017.
Important facts for investors to verify
- Subsequent court rulings and any revised damages determination in the BD litigation, and the status of the related stayed patent case.
- Whether domestic sales and gross margins recover, and whether international order timing sustains the recent growth.
- Cash burn, inventory levels, debt repayments and the Company’s ability to obtain financing if needed.
- Repair costs and completion of the hail-damage work, including whether insurance proceeds cover the actual costs.
- Progress implementing the Oracle costing system and any further disclosure about the prior raw-material accounting weakness.
- Reliance on Chinese manufacturing and concentrated customers: one significant customer represented 28.0% of first-half sales, and two represented 40.2% of Q2 sales.