Retractable Technologies, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. The company designs, manufactures, and markets safety syringes and other medical products. Safety syringes accounted for 93.4% of nine-month sales. Financial statements are unaudited.
Financial results
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net sales | $8.84 million | $9.48 million | $22.34 million | $22.38 million |
| Gross profit (margin) | $3.26 million (36.9%) | $3.22 million (34.0%) | $8.07 million (36.1%) | $8.22 million (36.7%) |
| Operating loss | $81,000 | $199,000 | $1.58 million | $2.33 million |
| Net income (loss) | $(125,000) | $(255,000) | $(1.72) million | $5.24 million |
| Loss applicable to common shareholders | $(302,000) | $(482,000) | $(2.25) million | $4.56 million |
| Basic and diluted EPS | $(0.01) | $(0.02) | $(0.08) | $0.16 basic; $0.15 diluted |
- Revenue trends: Q3 sales fell 6.8%; nine-month sales were essentially flat. Domestic sales rose 18.7% in Q3 and 13.4% for nine months, while international sales declined 55.4% and 47.8%, respectively. Total unit sales fell 21.6% in Q3 and 7.5% year to date.
- Profitability: Q3 gross profit increased 1.1%, helped by higher average prices; operating loss narrowed as expenses declined. Nine-month gross profit decreased 1.9%, while operating loss improved mainly because operating expenses fell 8.6%.
- Prior-period comparison: Nine-month 2015 results included $7.72 million of litigation proceeds, a non-recurring item that contributed to reported 2015 net income. The 2016 nine-month period reported a loss.
- Cash flow: Operating cash used was $1.64 million for the first nine months, versus $1.97 million in 2015. Capital expenditures were $1.67 million; financing provided $486,000. Cash declined $2.83 million to $15.22 million.
- Balance sheet and liquidity: At September 30, cash was $15.22 million, working capital was $20.6 million, and total assets were $40.54 million. Total debt was approximately $3.48 million, including $259,000 current. Management said it had sufficient cash reserves and intended to rely on operations, cash, and debt financing when available; additional borrowing was uncertain. No current intention to raise equity was stated.
Management commentary, outlook, and risks
- No specific earnings or revenue guidance was provided. Management noted sales have historically increased during flu season and said access to hospital markets remains difficult. The company began selling its EasyPoint retractable needle in Q2 2016.
- Management attributed domestic growth to higher volumes and, in Q3, higher average prices. International orders can fluctuate substantially. Manufacturing costs may rise with lower production volumes, supplier costs, petroleum prices, or transportation costs; price increases may not recover those costs.
- Manufacturing concentration is a risk: the primary Chinese manufacturer supplied approximately 85.1% of VanishPoint syringes in the first nine months of 2016. Disruption could require replacement sourcing and increased domestic production, potentially raising costs.
- Two significant customers represented 39.3% of Q3 sales; one represented 31.6% of nine-month sales. Accounts payable included $4.00 million of estimated distributor contractual pricing allowances.
- Litigation: A district court judgment against Becton, Dickinson and Company (BD) awarded $352 million plus interest and costs, with injunctive relief. BD appealed; the Fifth Circuit had heard oral argument, but had not issued a decision as of the filing. The company had received none of the judgment amounts, and the financial statements do not reflect the judgment. A separate patent case brought by BD and MDC remained stayed pending resolution of the appeal.
- Contingencies and unusual items: The medical device excise tax was suspended through 2017; management cited the suspension as a factor reducing expenses. In Q2 2016, the company ordered about $1.4 million of molding equipment and molds; it reported financing of approximately $530,000 for certain molding machines.
- Controls: Management concluded disclosure controls were not effective due to an unresolved material weakness in raw-material inventory accounting. An improved Oracle process was being tested in parallel, with implementation planned for the first half of 2017.
- Equity and dividends: A November 1, 2016 CEO option grant for 3 million shares, valued at $5.9 million, requires shareholder approval to become effective. Preferred dividends were in arrears for Series III, IV, and V; total arrearages at September 30 were $3.984 million, $5.713 million, and $980,000, respectively.
Important facts for investors to verify
- Outcome and timing of BD’s appeal, collectability of any judgment, and whether the financial statements or liquidity outlook change.
- Progress implementing the inventory-accounting controls remediation and whether the material weakness is resolved.
- Sales recovery, international demand, customer concentration, and continued access to hospital markets.
- Reliability and cost implications of the primary Chinese manufacturer relationship, and the results of EasyPoint commercialization.
- Cash consumption, equipment financing, debt repayment capacity, preferred-dividend arrearages, and shareholder approval status of the CEO option grant.