Retractable Technologies, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Retractable Technologies designs, manufactures, and markets safety syringes and other medical products. Results are unaudited.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $7.47 million | $7.65 million | $15.15 million | $14.57 million |
| Gross profit | $2.07 million | $2.21 million | $4.93 million | $4.53 million |
| Gross margin | 27.7% | 28.9% | 32.5% | 31.1% |
| Operating expenses | $3.01 million | $3.51 million | $6.02 million | $6.99 million |
| Operating loss | $(0.94) million | $(1.31) million | $(1.10) million | $(2.46) million |
| Net loss | $(0.95) million | $(1.35) million | $(1.13) million | $(2.54) million |
| Loss per common share | $(0.03) | $(0.05) | $(0.05) | $(0.09) |
- For the six months, operating cash use was $1.53 million, compared with $2.05 million in 2017. Investing cash use was $0.14 million; financing cash use was $0.35 million. Cash declined $2.03 million to $12.85 million.
- At June 30, cash was $12.85 million; working capital was approximately $17.6 million. Total assets were $37.10 million and total liabilities $11.16 million.
- Debt was $3.25 million, including $0.36 million current and $2.89 million long-term. The bank note was renewed in April, extended to April 2028, and reset to prime plus 0.25%; its rate was 5.25% at quarter-end and it is secured by land and buildings.
- Inventory increased to $7.79 million from $6.21 million at year-end, principally finished goods. Management attributed first-half operating cash use primarily to the inventory increase.
Changes versus prior comparable periods
- Q2 sales declined 2.2%; domestic revenue rose 4.4% while international revenue fell 27.4%. Total unit sales declined 2.1%.
- First-half sales increased 4.0%; domestic revenue rose 7.6%, while international revenue declined 13.1%. Overall unit sales increased 6.2%.
- Q2 gross profit fell 6.4%, and margin contracted about 1.2 percentage points, primarily reflecting lower sales volume. First-half gross profit rose 8.7%, with margin improving about 1.4 points.
- Operating expenses fell 14.4% in Q2 and 13.8% in the first half, contributing to narrower operating and net losses. Management cited lower legal and compensation costs, no 2018 stock-option expense, and the absence of 2017 officer bonuses.
- First-half sales to significant customers were $6.3 million, or 41.8% of sales, versus $4.1 million, or 28.0%, in 2017. The filing does not identify those customers in this text.
Outlook, risks, contingencies, and notable items
- No specific revenue or earnings guidance is provided. Management says sustained break-even or profitable quarters require better access to hospital markets, and it continues sales, product-development, manufacturing-efficiency, and market-access efforts. Sales have historically increased during flu season.
- Chinese manufacturers supplied approximately 87.8% of products in the first half of 2018. Disruption could require alternate suppliers or expanded U.S. production, potentially increasing costs. Proposed tariffs on Chinese products could be adverse; management said syringes were not then included among proposed tariffed products.
- Two significant customers accounted for 41.8% of first-half sales. Management also cites risks from market access, pricing, manufacturing costs and supply relationships, foreign trade, and competing larger market participants.
- The company is appealing the take-nothing judgment in its false-advertising case against Becton, Dickinson and Company (BD); appellate briefing was completed, and oral argument was expected the week of October 1, 2018. The separate patent case brought by BD and MDC remains stayed pending the related litigation.
- Preferred stock dividend requirements were $352,498 for the first half. The filing reports dividend arrears for Series III, IV, and V and says no arrears for Series I and II; the amounts and description of the reported total arrearages should be checked against the filing’s preferred-stock terms.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. No material capital-expenditure commitments were reported for Q2. The medical device excise tax moratorium was extended through 2019, with the tax scheduled to resume January 1, 2020.
Important facts for investors to verify
- Whether domestic volume growth and improved first-half margins can offset weaker international sales and continued losses.
- Inventory levels, cash burn, and the company’s ability to maintain liquidity; management says additional borrowing is uncertain and does not intend to publicly raise equity.
- Exposure to Chinese manufacturers, potential tariffs, and the feasibility and cost of alternative or increased domestic production.
- Customer concentration and the identity, stability, and purchasing trends of significant customers.
- Developments in the BD appeal and patent litigation, and the meaning and implications of preferred dividend arrears.
- The effect of the bank loan’s adjustable rate and 2028 maturity on future interest expense and debt service.