Retractable Technologies, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015; comparisons are to the corresponding 2014 periods. The company designs, manufactures, and markets safety syringes and other medical products. Safety syringes represented 98.1% of nine-month sales.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $9.48 million | $10.89 million | $22.38 million | $23.80 million |
| Gross profit / margin | $3.22 million / 34.0% | $3.85 million / 35.4% | $8.22 million / 36.7% | $7.75 million / 32.6% |
| Operating income (loss) | ($0.20 million) | $0.42 million | ($2.33 million) | ($2.91 million) |
| Net income (loss) | ($0.25 million) | $0.37 million | $5.24 million | ($3.06 million) |
| Cash from operations | Not stated separately | Not stated separately | ($1.97 million) | ($3.84 million) |
- Q3 sales declined 12.9% year over year; overall unit sales fell 5.2%. Domestic revenue fell 25.6%, while international revenue increased 27.0%.
- Nine-month sales declined 6.0%; overall unit sales fell 5.9%. Lower manufacturing costs helped lift gross profit despite lower sales. Operating expenses declined about 1%.
- Nine-month net income included $7.72 million of litigation proceeds recognized in Q2. Excluding that one-time item, the company would have reported a pretax loss of approximately $2.48 million.
- At September 30, cash was $19.70 million, working capital was $23.81 million, and current assets were $31.62 million versus current liabilities of $7.81 million. Cash declined $2.43 million from year-end 2014.
- Total debt was approximately $3.73 million, including $246,000 current maturities. Capital expenditures included approximately $1.0 million for EasyPoint assembly equipment and $276,000 for molding machines.
Material developments, outlook, and risks
- Litigation: The company recognized a previously received $7.72 million payment from BD in Q2 2015 after resolution of the related case and appeals. Separately, a district court judgment in the company’s antitrust and false-advertising case against BD totals roughly $352 million plus interest and costs, with injunctive relief. The company had received none of that judgment; BD appealed, with oral argument expected in Q1 2016. The financial statements do not include the judgment.
- Market and operations: Management says access to hospital markets remains difficult. It is installing, testing, and validating EasyPoint equipment. Sales have historically risen later in the year during flu season, but the filing gives no specific financial guidance.
- Manufacturing and customer concentration: The primary Chinese manufacturer supplied about 78.2% of VanishPoint finished products in the first nine months. Two significant customers accounted for 46.0% of nine-month sales. Loss of the manufacturer or key customers could affect supply, costs, or revenue.
- Costs and liquidity: Management expects the medical-device excise tax to cost about $600,000 in 2015, net of expected rebate-related refunds; it received a $287,000 refund in Q3 and filed for another $400,000. Management intends to fund operations with cash, operating receipts, and debt when available; additional borrowing is uncertain. It may further reduce costs, staffing, production, or defer royalties if savings prove insufficient.
- Controls and reporting: Management identified a material weakness in disclosure controls after discovering that inventory was understated at June 30, 2015. The Q2 Form 10-Q was restated on November 13, 2015. Management planned additional senior-level review of accounting procedures and calculations.
- Preferred dividends: Dividend arrears at September 30 totaled $12,313 for Series I, $44,050 for Series II, $3.85 million for Series III, $8.37 million for Series IV, and $964,586 for Series V. The Q3 Series I and II dividends were paid in October.
Important facts for investors to verify
- Progress and outcome of BD’s appeal, any cash recovery, and the status or impact of the ordered injunctive relief.
- Whether the inventory restatement and disclosed material weakness lead to further adjustments or control deficiencies.
- Quarter-to-quarter sales trends, customer concentration, Chinese manufacturing dependence, and EasyPoint commercialization.
- Cash burn, availability and terms of additional debt, debt maturities, and the company’s ability to sustain preferred dividends.