Retractable Technologies, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; the filing also provides unaudited fourth-quarter results. The company designs, manufactures, and sells safety syringes and other medical devices, primarily under the VanishPoint and PatientSafe brands.
Financial results and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $30.79 million | $33.64 million |
| Gross profit / margin | $10.31 million / 33.5% | $11.18 million / 33.2% |
| Operating expenses | $16.24 million | $15.12 million |
| Operating loss | $5.93 million | $3.94 million |
| Net loss | $6.21 million | $4.13 million |
| Loss per common share | $0.26 | $0.19 |
| Cash flow from operations | $2.93 million | $0.16 million |
| Cash and cash equivalents at year-end | $27.63 million | $25.96 million |
| Total current assets / current liabilities | $37.91 million / $16.62 million | $35.44 million / $8.08 million |
| Long-term debt, including current portion | $3.82 million | $4.14 million |
Fourth-quarter 2013 sales were $7.55 million, versus $8.04 million in fourth-quarter 2012. Fourth-quarter net loss was $1.43 million, compared with $2.54 million; gross margin was 32.8%, versus 20.5%.
Reported 2013 operating cash flow includes the $7.72 million BD patent-case payment, which was also recorded as a current liability and is subject to possible repayment. The company says it will not use those proceeds for operations until the appeal is resolved. Thus, reported cash and operating cash flow should not be treated as wholly available or recurring. The main bank loan is secured by company land and buildings.
Changes versus comparable periods
- FY2013 sales fell 8.5% year over year. Domestic revenue declined 2.1%, while international revenue fell from $8.3 million to $5.9 million, primarily on lower volumes; total unit sales decreased 11.5%.
- Gross margin edged up to 33.5% from 33.2%, but gross profit declined with lower sales. Operating expenses rose 7.4%, contributing to a larger operating loss.
- Management attributed higher expenses in part to the 2.3% Medical Device Excise Tax, restoration of prior wage reductions, and added sales personnel. The tax cost was $758,000 in 2013.
- The 2013 net loss compares with 2011 net income of $1.42 million, which included $5.70 million in net litigation settlements. The company cautions that prior-year results are affected by litigation proceeds and other unusual items.
Outlook, commentary, risks, and unusual items
- Market access: Management says limited access to hospital and other markets has constrained sales and profitability. It intends to pursue sales, product development, manufacturing efficiencies, international growth, and litigation. No numerical revenue or earnings guidance is provided. Management says it has sufficient reserves but could cut production, staffing, salaries, or defer royalties if operating cash becomes inadequate; it does not currently intend to raise equity.
- BD litigation: A jury awarded the company $113.51 million in antitrust damages in September 2013, potentially subject to trebling. No final judgment had been entered as of the filing; post-trial motions remained pending and BD stated it planned to appeal. The company had received none of this award and had not recognized it as income.
- Patent-case payment: The separate $7.72 million payment received from BD is subject to a stipulation: if the appeal establishes a lower amount, the company may have to return the excess with interest. The related appeal was scheduled for May 9, 2014.
- Operating concentration: Double Dove, a Chinese manufacturer, produced approximately 72.9% of units in 2013. Two customers accounted for 30.2% of revenue. Syringes represented 98.6% of revenue, and 1mL and 3mL syringes represented 94.0% of revenue.
- Other key risks: Risks include dependence on market access and patent protection, larger competitors’ resources and contracts, supplier disruption and possible higher domestic production costs, medical-device regulation, product-liability exposure, and no recall insurance. Some relevant syringe patents expire in 2015 and 2016; other related patents and applications have later expiration dates.
- Other financial items: Preferred dividends in arrears totaled approximately $12.1 million at year-end; common dividends have never been paid. A 5% gross-sales royalty is payable under a technology license with CEO Thomas J. Shaw, who owns the licensed technology. The auditor issued an unqualified opinion on the financial statements; management reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Final court rulings, appeal outcomes, collectability, and any potential trebling of the $113.51 million antitrust award; separately, the final amount and repayment exposure for the $7.72 million patent-case payment.
- How much reported cash is available for operations after accounting for litigation proceeds subject to stipulation, and whether operating cash flow is sustainable without that item.
- Whether the company can improve market access and reverse declining sales, especially in domestic hospitals and international markets.
- Continuity of Double Dove supply, customer concentration, and the cost and capacity implications of shifting production to the United States.
- The effects of the medical-device excise tax, preferred dividend arrears, and related-party royalty obligations on future cash needs.