Retractable Technologies, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. The company designs, manufactures, and markets safety syringes and other safety medical products. Safety syringes represented 97.3% of sales in the first nine months of 2014.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $10.89 million | $9.16 million | $23.80 million | $23.24 million |
| Gross profit / margin | $3.85 million / 35.4% | $3.32 million / 36.2% | $7.75 million / 32.6% | $7.83 million / 33.7% |
| Operating income (loss) | $0.42 million | ($0.83 million) | ($2.91 million) | ($4.58 million) |
| Net income (loss) | $0.37 million | ($0.94 million) | ($3.06 million) | ($4.79 million) |
| Net income (loss) applicable to common shareholders | $0.14 million | ($1.17 million) | ($3.74 million) | ($5.48 million) |
- Operating cash flow was negative $3.84 million for the first nine months, versus positive $2.86 million in 2013. Investing activities used $1.57 million; financing activities used $0.15 million.
- Cash and cash equivalents were $22.07 million at September 30, 2014, down from $27.63 million at year-end 2013. An additional $0.60 million was restricted cash. The company reported working capital of $18.1 million.
- Total debt was approximately $3.62 million, including $0.16 million current and $3.46 million long-term. The company paid off one equipment loan in April 2014 and expected to pay off another by November 2014.
- Total assets were $45.62 million and total liabilities $19.67 million. The $7.72 million BD patent-case payment remains recorded as a current liability because it is subject to possible restitution; management said it was not using those funds to finance operations.
Changes and management commentary
- Q3 sales rose 18.8% year over year, with overall unit sales up 17.4%. Domestic and international demand increased; international sales were particularly volatile and depended on a small number of existing customers. Q3 operating results turned positive, mainly on higher sales volume and lower expenses.
- For the nine-month period, sales increased 2.4%, while overall unit sales were flat. Gross margin fell to 32.6% from 33.7%; management cited higher manufacturing costs, including scrapped product, and product mix.
- Nine-month operating expenses declined 14.1% (about $1.7 million), reflecting lower legal, compensation, donated-product, and engineering costs. The company reduced its workforce by 13.7%, cut executive salaries by at least 10%, and incurred $206,000 in severance costs.
- Management said cash reserves, operations, and debt financing were expected to be its primary funding sources and did not intend to raise equity. If cost reductions prove inadequate, it may further reduce production, staffing, or salaries, or defer royalty payments. It identified no specific financial guidance or revenue forecast.
- The EasyPoint retractable needle received FDA substantial-equivalence notice in June 2014; manufacturing had not begun. The company was still purchasing about $1.5 million of equipment and molds for the product, funded from existing resources.
- The company expects the 2.3% medical-device excise tax to cost approximately $750,000 in 2014 and said it had not passed the tax on to customers.
Litigation, risks, and other notable items
- BD antitrust and false-advertising case: A September 2013 jury awarded $113.5 million in antitrust damages, subject to statutory trebling. On September 30, 2014, the court denied BD’s post-trial motions. In orders issued November 10, after quarter-end, the court found the $340 million antitrust damages amount sufficient as disgorgement, granted corrective-advertising and training-related injunctive relief to take effect January 15, 2015, and awarded attorneys’ fees subject to recalculation. The funds had not been received; a final judgment had not yet been entered, BD was expected to appeal, and the parties were ordered to mediation by January 15, 2015.
- Separate patent case: BD’s appeal of the order denying modification of the patent judgment was rejected; the mandate issued September 24, 2014. BD could seek Supreme Court review by approximately December 18, 2014. The $7.72 million received under stipulation remains subject to possible repayment with interest.
- Manufacturing and supplier concentration are significant: a Chinese manufacturer supplied about 70.8% of finished products in the first nine months and 78.3% in Q3. Loss of that supplier could require a replacement source and increased domestic production, potentially raising costs. Most product components are also sourced from single suppliers, though alternatives exist.
- Management cited market-access challenges, competition and litigation uncertainty, ability to maintain liquidity and manufacturing arrangements, production costs, and the potential impact of oil and transportation costs as risks. It said there were no material changes to the risk factors in its 2013 Form 10-K.
- Preferred-stock dividends were in arrears at September 30, 2014: approximately $13,000 for Series I, $45,000 for Series II, $3.73 million for Series III, $7.83 million for Series IV, and $0.95 million for Series V. These arrears may restrict certain common-stock dividends or repurchases under the preferred-stock terms.
- Disclosure controls and procedures were assessed as effective as of September 30, 2014; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether the BD antitrust case reaches a final judgment, survives appeal, and produces any collectible proceeds; these amounts are not included as available cash.
- The outcome of BD’s possible Supreme Court petition in the patent case and whether any portion of the $7.72 million stipulated payment must be repaid.
- Whether operating cash burn moderates and the company can maintain liquidity while funding operations and EasyPoint equipment purchases.
- Whether sales gains and cost reductions can be sustained without further weakening margins, and whether the company can improve access to hospital markets.
- The continuity and cost of Chinese manufacturing and key supplier relationships, and the implications of preferred-dividend arrears.