Retractable Technologies, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; filed March 30, 2012. The company designs, manufactures, and sells safety syringes and other medical devices, principally under the VanishPoint brand. Syringes represented 97.2% of 2011 sales. This is an annual filing, with unaudited quarterly data also disclosed.
Key financial results
| Metric | 2011 | 2010 |
|---|---|---|
| Net sales | $32.10 million | $36.22 million |
| Gross profit / margin | $10.90 million / 34.0% | $12.52 million / 34.6% |
| Operating loss | $4.09 million | $6.66 million |
| Net income | $1.42 million | $2.40 million |
| Earnings per common share, diluted | $0.02 | $0.04 |
| Cash from operations | $5.51 million | $8.73 million |
| Cash and cash equivalents at year-end | $25.67 million | $23.27 million |
| Total debt at year-end, including current portion | $4.76 million | $4.82 million |
| Current assets / current liabilities | $35.75 million / $5.97 million | $40.22 million / $9.99 million |
Net income included $5.70 million of litigation settlements, net; the company nevertheless reported an operating loss. Year-end current assets were about six times current liabilities. Stockholders’ equity was $38.65 million, and total liabilities were $10.11 million. Preferred dividends in arrears totaled approximately $10.7 million at year-end; common dividends have not been paid.
Changes and notable quarterly results
- Sales fell 11.4% year over year. Unit sales declined 6.3%; management also cited lower average selling prices. Domestic unit sales fell 1.9% and international unit sales fell 15.8%.
- Gross margin decreased 0.6 percentage point to 34.0%. Lower sales volume and lower unit costs reduced cost of sales, but did not prevent the margin decline.
- Operating expenses declined 21.9%, mainly because of lower litigation costs, lower stock-option expense, and the absence of 2010 bonuses and impairment charges. The operating loss narrowed accordingly.
- Cash from operations was lower than in 2010. Management attributed 2011 operating cash generation principally to litigation receipts and reductions in receivables and inventory.
- Fourth-quarter 2011 sales were $6.11 million, gross margin was 17.8%, and net loss was $2.98 million. The quarter had no litigation settlement proceeds, unlike the first three quarters, each of which recorded $1.9 million. The filing’s quarterly table reports fourth-quarter operating expenses of $4.06 million.
- For comparison, 2009 sales included a material DHHS swine-flu syringe contract; DHHS sales were 24.4% of 2009 revenue. Litigation settlement and option-related receipts also materially affected 2010 and 2011 results.
Outlook, risks, and unusual items
- Outlook: The filing provides no quantified revenue or earnings guidance. Management says it intends to rely on operations, cash reserves, and debt financing, and believes existing cash reserves are sufficient. It says additional cost reductions could be needed if market access remains limited and operating cash becomes insufficient.
- Market access and competition: Management attributes limited market penetration to barriers in a market dominated by BD and other larger competitors, including group purchasing organization and distribution arrangements. The company’s ability to increase sales and reach routine break-even quarters depends in part on gaining hospital-market access.
- Litigation: The Federal Circuit affirmed infringement findings for BD’s 1mL Integra syringe but reversed the finding concerning the 3mL product. The company sought Supreme Court review; the petition was pending, with a decision expected by October 2012. A separate antitrust and related claims trial was anticipated in fall 2012 after continuance. BD and MDC also had a separate patent-infringement action pending against the company, with no trial date set. Outcomes and financial effects are uncertain.
- Supply and manufacturing: Double Dove, a Chinese supplier, produced approximately 67.1% of finished products in 2011. A disruption could require alternative sourcing or expanded domestic production; management identified certain syringe models as not readily replaceable by current Little Elm capacity. Four molding machines purchased in 2011 are intended to expand in-house production and reduce unit costs.
- Customer concentration and receivables: Four customers generated 50.6% of 2011 revenue. The allowance for doubtful accounts increased by approximately $1.3 million during the year, to $2.08 million.
- Patents and related-party royalties: Initial core spring-action syringe patents begin expiring in May 2015, with a significant patent expiring in August 2016. The company pays a 5% royalty on gross sales under a technology license with its CEO; 2011 royalty expense was $2.64 million. The CEO and former spouse are royalty recipients.
- Preferred-stock exchange: The company exchanged 1,277,464 preferred shares for 1,277,464 common shares and $1.36 million cash. Participating holders waived approximately $3.59 million of accumulated unpaid dividends; the exchange reduced annual preferred-dividend requirements by about $451,000. Common shares outstanding increased to 25.32 million at year-end.
- The company reported effective disclosure controls and internal control over financial reporting, with no material weaknesses identified. Its independent auditor issued an unqualified opinion on the financial statements; the auditor did not provide an opinion on internal-control effectiveness.
Important facts for investors to verify
- Whether the company can improve market access and sales volumes enough to reduce operating losses without relying on litigation proceeds.
- The outcome and timing of the BD/MDC patent and antitrust litigation, including any potential cash, royalty, injunction, or market-access consequences.
- Whether the company can replace or mitigate its reliance on Double Dove, particularly for products that its U.S. facility cannot readily supply.
- The collectability of receivables, given the higher doubtful-account allowance and significant customer concentration.
- The sustainability of liquidity and cash generation after litigation receipts, and the company’s remaining preferred-dividend arrears and debt obligations.
- The effect of upcoming patent expirations on competitive position, and the costs and benefits of the new in-house molding capacity.