Retractable Technologies, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. The unaudited filing covers a manufacturer and marketer of safety syringes and other medical products. Results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 |
|---|---|---|---|---|
| Net sales | $11.57m | $9.60m | $22.78m | $17.53m |
| Gross profit | $3.67m | $2.93m | $7.20m | $5.42m |
| Gross margin | 31.7% | 30.5% | 31.6% | 30.9% |
| Operating income | $0.96m | $0.33m | $1.44m | $0.15m |
| Net income | $3.77m | $0.39m | $4.09m | $0.26m |
| Income applicable to common shareholders | $3.59m | $0.22m | $3.74m | $(0.09)m |
| Basic and diluted EPS | $0.11 | $0.01 | $0.11 | $(0.00) |
- Q2 sales increased 20.6% year over year; H1 sales rose 29.9%. Management attributed growth principally to higher unit volumes. Overall unit sales increased 25.3% in Q2 and 31.3% in H1.
- Operating expenses rose 4.3% in Q2 and 9.4% in H1. Higher gross profit drove improved operating income.
- Net income benefited from investment gains and a $1.8m deferred-tax benefit after release of the valuation allowance. H1 unrealized investment gains were $870,760; management attributed about $900,000 of Q2 interest and other income to an investment in energy stocks. These items make reported profit less representative of operating performance.
Cash, liquidity and debt
- At June 30, 2020, cash was $5.31m, investments in debt and equity securities were $10.76m, and working capital was approximately $24.5m. Working capital increased $4.3m from year-end 2019.
- H1 operating cash flow was $0.21m, compared with cash used of $0.82m in H1 2019. Receivables and inventory increases used cash; higher accounts payable partly offset those uses. Investing activities used $2.49m, primarily for securities purchases; financing activities provided $1.65m.
- Total balance-sheet debt was approximately $3.87m, including the $1.36m PPP loan. The PPP loan bears 1% interest, matures in April 2022, and may be forgiven in whole or in part; the company had not applied for forgiveness and could not determine the amount, if any, that would be forgiven.
Material developments, outlook and risks
- A May 2020 HHS delivery order has a fixed total price of approximately $83.8m for automated-retraction safety syringes. Q2 sales under the order were about $1.4m; management expected sales to increase quarterly through May 2021. The order is not equivalent to revenue already recognized.
- Effective July 1, 2020, the company entered a $53.664m Department of Defense/BARDA Technology Investment Agreement to reimburse expenditures for expanding domestic needle and syringe production. This is expenditure-based funding, with a ten-year company commitment to provide facilities, expertise, labor and equipment maintenance. By August 14, the company had negotiated approximately $20m of equipment contracts and was planning facility and warehouse expansion.
- Management reported no significant pandemic-related supply-chain disruption to date and increased product demand during 2020, while cautioning that it could not predict its ability to maintain operations. The Texas facility continued operating as an essential business.
- Reliance on Chinese manufacturers is substantial: they supplied about 83.5% of products in H1 2020. A disruption could require replacement suppliers or expanded domestic production. International order timing is also described as difficult to predict.
- COVID-19 risks include possible facility closures, workforce impacts, supply and logistics interruptions, restricted access to healthcare customers, and weaker demand from healthcare providers or a broader recession. Management said it could not predict the pandemic’s full effects.
- The company invested approximately $2m in energy-sector stocks in late April; the portfolio is market-sensitive. Investments are intended to be available for possible operating needs.
- The company is suing former legal counsel over its representation in prior litigation against Becton, Dickinson and Company, seeking damages and other relief. Defendants moved to dismiss; a hearing was scheduled for September 10, 2020. The filing does not provide a clear estimate of potential recovery.
- Management said liquidity included cash, investments, operating profits and PPP proceeds; a construction loan might be sought for expansion. No material capital-expenditure commitments were reported for Q2, before the post-quarter expansion plans.
Key facts for investors to verify
- Progress, timing, costs and reimbursement terms for the $53.664m capacity-expansion agreement, including the company’s ten-year obligations.
- Actual shipment, revenue recognition and collection under the $83.8m HHS order, and whether expected quarterly growth through May 2021 materializes.
- PPP loan forgiveness eligibility, amount and repayment schedule, including any subsequent SBA review.
- Whether operating cash generation improves as receivables and inventory grow, and how much liquidity remains available after planned expansion spending.
- Exposure to Chinese sourcing, energy-stock price movements, preferred-stock dividend arrears and the outcome of the legal proceedings.