Retractable Technologies, Inc. — FY 2016 Form 10-K
Business and period: The company designs, manufactures and markets safety syringes and other medical devices, including VanishPoint, Patient Safe and the EasyPoint retractable needle launched in Q2 2016. This annual report covers the year ended December 31, 2016; comparisons are principally with FY 2015. Financial statements were audited and presented in accordance with U.S. GAAP.
Key financial results
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net sales | $29.83 million | $29.55 million |
| Gross profit / margin | $10.34 million / 34.7% | $10.57 million / 35.8% |
| Operating expenses | $13.85 million | $13.77 million |
| Operating loss | $3.51 million | $3.21 million |
| Net income (loss) | $(3.69) million | $4.31 million |
| Loss (income) applicable to common shareholders | $(4.40) million | $5.91 million |
| Operating cash flow | $(0.79) million | $(3.25) million |
| Capital expenditures | $1.95 million | $1.47 million |
At year-end, cash and cash equivalents were $16.20 million, down from $18.05 million. Current assets were $26.68 million and current liabilities $7.17 million. Total debt was $3.93 million, including $0.43 million due within one year; total liabilities were $10.67 million. Stockholders’ equity was $28.11 million. Common-stock dividends were not paid. Preferred dividends in arrears totaled approximately $10.8 million.
Changes and operating performance
- Sales increased about 0.9% year over year, but total unit sales declined 7.0%. Domestic revenue rose 14.2%, supported principally by 1 mL syringes and EasyPoint; international revenue fell from approximately $6.5 million to $3.5 million, mainly because of order timing.
- Gross margin declined 1.1 percentage points. Management cited higher manufacturing costs and EasyPoint production start-up costs. Operating expenses rose slightly, including a $456,000 impairment of Patient Safe assembly equipment taken out of service as production was outsourced.
- EasyPoint generated 4.5% of 2016 revenue. Syringe sales overall represented 93.0% of revenue, leaving the business highly reliant on its established products.
- FY 2015 profitability included $7.72 million of litigation proceeds recognized from BD and a $2.31 million deemed capital contribution related to a preferred-stock transaction. The 2015 result is therefore not a straightforward measure of recurring performance.
Outlook, risks and unusual matters
- No quantified earnings or revenue guidance is provided. Management said litigation expenses were expected to be significantly lower in 2017 and cited efforts to improve manufacturing efficiency, grow market access, introduce products and expand international sales. It also said routine break-even or profitable quarters require better hospital-market access.
- BD litigation remains material: the Fifth Circuit overturned the prior antitrust damages award in December 2016 but affirmed false-advertising liability and remanded damages for redetermination. The Supreme Court denied the company’s petition for certiorari on March 20, 2017; the damages outcome remained uncertain. A separate patent-infringement action by BD and MDC was stayed.
- Patent protection for VanishPoint syringes is expected to continue until 2020. Management warns that expiration could cause a substantial and rapid sales decline; newer products may not replace those sales.
- Manufacturing and supply are concentrated in China: the primary Chinese manufacturer produced approximately 86.3% of VanishPoint syringes in 2016, while China produced 78.4% of the company’s products overall. A disruption could raise costs and interrupt supply. One customer generated 31.4% of 2016 revenue.
- Management reported disclosure controls and internal control over financial reporting were not effective as of year-end because remediation of a material weakness involving inventory accounting was still in progress. The company expected its Oracle inventory system to be fully operational by June 30, 2017. The auditor did not express an opinion on internal-control effectiveness.
- Other risks include dominant competitors with greater resources and market influence, dependence on licensed technology and a 5% royalty on gross sales, product-liability exposure, regulatory and foreign-trade changes, and the CEO’s control of approximately 51.6% of common stock.
- The 2.3% medical-device excise tax was suspended through December 31, 2017. The company invested approximately $1.9 million in manufacturing equipment in 2016, mostly for EasyPoint. It also disclosed a correction of prior-period patent-cost capitalization errors; the comparative 2015 balance sheet was revised, and the company said the errors were immaterial to previously filed statements.
Important facts for investors to verify
- Progress and final outcome of the BD false-advertising damages proceeding, and any resulting cash recovery or litigation costs.
- Whether Oracle inventory-system implementation resolved the reported material weakness and whether controls were subsequently assessed as effective.
- Customer retention and order trends, particularly for the customer representing 31.4% of revenue, and the sustainability of domestic growth amid lower international sales.
- Actual sales traction and margins for EasyPoint and other new products relative to the risk of VanishPoint patent expiry in 2020.
- Cash burn, capital spending, debt maturities, preferred dividend arrears and the company’s ability to fund operations if operating losses continue.
- Supply continuity and alternative manufacturing capacity given reliance on Chinese production, as well as any changes in market access, trade policy or the device-tax suspension.