Retractable Technologies, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. The company designs, manufactures, and markets safety syringes and other safety medical products. Statements are unaudited.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $9.16 million | $9.44 million | $23.24 million | $25.60 million |
| Gross profit | $3.32 million | $3.35 million | $7.83 million | $9.52 million |
| Gross margin | 36.2% | 35.5% | 33.7% | 37.2% |
| Operating loss | $0.83 million | $0.21 million | $4.58 million | $1.39 million |
| Net loss | $0.94 million | $0.27 million | $4.79 million | $1.59 million |
| Loss per share, basic and diluted | $0.04 | $0.02 | $0.20 | $0.09 |
Cash flow: Nine-month operating cash flow was $2.86 million, versus cash used of $1.20 million a year earlier. The 2013 figure included $7.72 million received from BD and recorded as a current liability pending litigation; it should not be viewed as ordinary operating cash generation. Investing activities used $0.20 million and financing activities used $1.35 million. Cash increased $1.31 million to $27.27 million.
Liquidity and debt: Working capital was $22.1 million. Current assets were $38.53 million and current liabilities $16.40 million, including the $7.72 million litigation liability. Total debt was approximately $3.91 million ($0.28 million current and $3.63 million long-term). Total liabilities rose to $20.03 million from $11.90 million at year-end 2012, principally reflecting the litigation proceeds liability; stockholders’ equity fell to $29.94 million from $35.73 million.
Material changes and management commentary
- For the quarter, sales declined 3.0% year over year and overall unit sales fell 3.2%. Domestic revenue rose 2.7%, while international revenue fell, primarily on lower 1mL syringe sales.
- For the nine-month period, sales declined 9.2%; domestic and international revenue both decreased, and overall unit sales fell 2.6%. Management attributed the lower gross margin mainly to lower average selling prices and unit sales.
- Operating expenses increased 16.2% in Q3 and 13.7% year to date. Drivers included medical-device excise tax, patent-related legal expense, compensation, and insurance. The company estimated the excise tax would exceed $1 million in 2013 and reported $769,000 paid through November 4.
- Safety syringes represented 98.6% of sales in the first nine months. Management said limited hospital-market access has constrained volumes and that minimal hospital access is needed to routinely achieve break-even quarters. It cited sales efforts, new products, manufacturing efficiencies, and litigation as strategies to improve market access.
- Management said it did not intend to raise equity capital and expected to rely on operations, cash reserves, and debt financing. It warned that if market access remains limited and operating cash becomes insufficient, it may cut production, reduce staff or salaries, or defer royalty payments. No quantified earnings or revenue guidance was provided.
Litigation, contingencies, and other notable items
- On September 30, the company received $7.72 million from BD under a stipulation related to a patent-infringement judgment. The funds were recorded as cash and an equal liability because BD may recover any excess if its appeal results in a lower amount owed. The related appeal was filed October 29.
- A separate jury verdict on September 19 found BD liable for anticompetitive conduct and false advertising and awarded the company $113.51 million on the antitrust claim, potentially subject to trebling. No final judgment had been entered; post-trial motions were set for December 12, and BD said it planned to appeal. The company had received no proceeds from this verdict.
- Double Dove, a Chinese manufacturer, supplied approximately 73.1% of units produced in the first nine months. Loss of this supplier could require replacement sourcing and increased domestic production, potentially raising costs. Two customers accounted for 32.9% of nine-month sales.
- The common-stock repurchase plan ended August 30, 2013; 655,818 shares were repurchased in the first nine months for $974,407. Preferred dividends were paid after the quarter. The filing reports cumulative dividend arrearages of $3.59 million for Series III, $7.29 million for Series IV, and $0.94 million for Series V at September 30.
Important facts for investors to verify
- Whether the $7.72 million patent-case payment is retained or must be repaid following BD’s appeal.
- The outcome and collectability of the $113.51 million antitrust verdict, including final judgment, post-trial motions, and appeals.
- Whether sales, margins, and cash generation can improve despite limited hospital access and higher operating expenses.
- Continuity of Double Dove supply, customer concentration, and the cost and capacity implications of shifting production.
- The company’s liquidity needs and preferred-dividend arrearages; reported positive operating cash flow included the litigation receipt recorded as a liability.