Retractable Technologies, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. The unaudited filing covers a Texas-based manufacturer and marketer of safety syringes and other medical products. Safety syringes represented 98.6% of sales in the first half. Common shares outstanding were 26,762,040 as of August 1, 2013.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $6.91 million | $8.73 million | $14.08 million | $16.16 million |
| Gross profit | $1.74 million | $3.33 million | $4.52 million | $6.17 million |
| Gross margin | 25.2% | 38.2% | 32.1% | 38.2% |
| Operating loss | $(2.39) million | $(0.53) million | $(3.75) million | $(1.18) million |
| Net loss | $(2.44) million | $(0.60) million | $(3.85) million | $(1.32) million |
| Loss per common share, basic and diluted | $(0.10) | $(0.03) | $(0.16) | $(0.07) |
- Cash flow: Operating activities used $5.40 million in the first half, compared with $2.25 million used in the prior-year period. Capital expenditures were $160,000; financing activities used $718,000, including $446,000 for common-stock repurchases and $115,000 in preferred dividends. Cash declined $6.28 million to $19.69 million.
- Balance sheet and liquidity: At June 30, cash was $19.69 million, current assets $30.25 million, and working capital $23.3 million. Total debt was approximately $3.98 million, including $304,000 current and $3.68 million long-term. Total liabilities were $10.60 million.
- Management said cash reserves, operations, and debt financing were expected to remain the primary funding sources and that it did not intend to raise equity. It cautioned that additional borrowing may be uncertain.
Changes and management commentary
- Q2 sales fell 20.9% year over year; first-half sales declined 12.9%. Domestic sales weakened, while international sales increased, principally from stronger South American sales. Overall unit sales declined 6.3% in Q2 and 2.1% for the first half.
- Management attributed lower gross profit and margins mainly to lower domestic selling prices and volume. First-half operating expenses rose 12.5%, including the medical-device excise tax, higher sales and marketing staffing, and patent legal fees; lower litigation costs partly offset the increase.
- The company estimated the 2.3% medical-device excise tax would cost more than $1 million in 2013 and reported $460,000 paid through August 5. The tax applies to sales, and management said passing it on to customers was uncertain.
- Management stated that limited access to hospital markets constrained sales and said it would continue sales initiatives, product development, manufacturing-efficiency efforts, and litigation. Historically, unit sales tend to increase later in the year partly due to flu-season demand; no quantified earnings or revenue guidance was provided.
Risks, contingencies, and notable items
- Litigation: A patent dispute with Becton, Dickinson and Company (BD) remained active. The Supreme Court denied the company’s petition for review in January 2013; on August 7, 2013, a district court denied BD’s motion to conform the judgment to the appellate mandate, and BD said it would appeal. A separate company antitrust and related suit against BD was set for jury selection on September 3, 2013, with trial scheduled to begin September 9. Another BD/MDC patent case against the company remained stayed. Outcomes and financial effects are not quantified clearly in the filing.
- Supplier concentration: Double Dove, a Chinese manufacturer, supplied about 71.7% of finished products in the first half. Loss of that source could require alternate sourcing and increased domestic production, potentially raising costs or disrupting supply.
- Customer concentration: Two significant customers accounted for 33.8% of first-half sales and 44.5% of Q2 sales. The company also disclosed estimates and reserves relating to distributor pricing allowances and disputed non-contractual rebates.
- Preferred-stock obligations: Dividends in arrears at June 30 totaled approximately $11.71 million across Series I–V, including $7.15 million for Series IV and $3.56 million for Series III. The company said preferred-dividend status can restrict common-stock repurchases. It declared $57,613 of dividends payable, paid July 22.
- The company repurchased 338,909 shares in the first half, according to the cash-flow statement and Note 8, for $446,155. One MD&A passage instead states 308,909 shares; this appears inconsistent and should be checked. The Q2 repurchase total was 255,812 shares.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no material changes to the 2012 Form 10-K risk factors.
Important facts for investors to verify
- Reconcile the first-half share-repurchase count: 338,909 in the cash-flow statement and Note 8 versus 308,909 in one MD&A passage.
- Track cash burn, working-capital movements, and the company’s ability to sustain operations without new equity or additional borrowing.
- Monitor domestic pricing and hospital-market access, the medical-device excise-tax burden, and whether lower margins improve.
- Follow the BD litigation and any resulting impact on market access, injunctions, or potential recoveries; the filing provides no clear estimate of outcomes.
- Assess reliance on Double Dove and significant customers, and the implications of preferred-dividend arrears for liquidity and repurchases.