Retractable Technologies, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The company designs, manufactures, and markets safety syringes and other medical products. Financial statements are unaudited.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $9.60 million | $7.47 million | $17.53 million | $15.15 million |
| Gross profit | $2.93 million | $2.07 million | $5.42 million | $4.93 million |
| Gross margin | 30.5% | 27.7% | 30.9% | 32.5% |
| Operating income (loss) | $329,000 | $(939,000) | $154,000 | $(1.10) million |
| Net income (loss) | $392,000 | $(948,000) | $263,000 | $(1.13) million |
| Income (loss) applicable to common shareholders | $216,000 | $(1.12) million | $(89,000) | $(1.48) million |
Sales grew 28.4% in Q2 and 15.7% in the first half year over year. Q2 operating margin improved to 3.4% from negative 12.6%; first-half operating margin was 0.9% versus negative 7.2%. Preferred dividends of $176,000 for Q2 and $352,000 for the half year contributed to the difference between net income and results attributable to common shareholders. Basic and diluted EPS were $0.01 for Q2 and $(0.00) for the first half.
Cash flow and liquidity: Cash and cash equivalents were $3.77 million at June 30, down from $9.65 million at year-end. First-half operating cash outflow was $820,000; investing outflow was $4.74 million, including purchases of securities net of sales and $346,000 of capital expenditures; financing outflow was $317,000. Working capital was approximately $17.3 million, consistent with management’s rounded $17.4 million figure. Cash plus investments in debt and equity securities totaled approximately $11.26 million.
Debt and balance sheet: Long-term debt, including current maturities, was approximately $2.84 million, compared with $3.05 million at December 31, 2018. Total assets were $36.26 million and stockholders’ equity was $25.77 million. Current assets were $25.27 million and current liabilities $7.94 million.
Material changes versus the prior comparable period
- Revenue and unit sales increased: overall unit sales rose 31.3% in Q2 and 21.2% for the first half. Management attributed growth to higher domestic and international demand.
- Operating expenses fell 13.4% in Q2 and 12.5% for the half, mainly from lower payroll costs following 2018 workforce reductions and reduced legal expenses.
- First-half gross margin declined from 32.5% to 30.9%, despite higher gross profit; management noted margins vary with manufacturing costs, inventory costs, and product mix.
- Cash declined substantially, largely reflecting the shift of funds into investments. Investment securities rose to $7.49 million from $2.99 million at year-end; management said the securities are available for sale but their market value could result in principal losses if sold.
- The company corrected the classification of investments previously reported as held-to-maturity. It revised the December 31, 2018 balance sheet presentation, increasing current assets by $1.99 million; it said the error was immaterial to previously filed statements and had no 2018 statement-of-operations impact.
- Effective May 3, 2019, the company settled and released past claims with BD and MDC, and the related antitrust, false-advertising, and patent-infringement proceedings were dismissed. Settlement terms and amounts are not stated in the filing text.
Outlook, management commentary, and risks
- No specific financial guidance was provided. Management noted sales have historically increased during flu season and said industry trends could support increased demand for EasyPoint needles.
- Management said it believes cash reserves are sufficient and expects to rely on operations, reserves, and debt financing when available. It does not currently intend to raise public equity, while noting additional borrowing is uncertain.
- Hospital market access remains difficult; management said it needs improved access to hospital markets to routinely achieve positive or break-even quarters. It is pursuing sales efforts, new products, technology, and, when necessary, litigation.
- Approximately 80.5% of products in the first half were obtained from Chinese manufacturers. Disruption could require replacement suppliers or increased domestic production, potentially raising unit costs. Tariffs, supplier costs, production volumes, and transportation costs may also affect margins.
- Three significant customers accounted for 45.4% of first-half sales. International orders can fluctuate and are difficult to predict. VanishPoint syringes represented 85.1% of first-half sales.
- The company pays a 5% royalty on gross sales under its technology license; licensing fees recognized in the first half were $163,000 and were subject to a 50% royalty. The filing also cites the medical-device excise tax moratorium through 2019, with the tax expected to resume January 1, 2020.
- Preferred stock dividend arrears for Series III, IV, and V totaled approximately $12.0 million at June 30, 2019. The company reported no arrears for Series I and II. Management said further cost reductions, including production, workforce, salary, or royalty-payment changes, may be considered if current measures prove insufficient.
- Management reported disclosure controls were effective as of June 30, 2019, and no material changes in internal control over financial reporting. The filing reported no material changes to the risk factors in the most recent annual report.
Important facts for investors to verify
- Whether sales growth and improved quarterly operating results continue, particularly given lower first-half gross margin and seasonal demand patterns.
- Cash generation, liquidity needs, and the market value and saleability of the investment portfolio, including the effects of any future investment sales.
- Exposure to Chinese manufacturing, tariffs, concentrated customers, and the potential cost and timing of alternative production capacity.
- The status and terms of the BD/MDC settlement, and the implications of the company’s ongoing challenges gaining hospital-market access.
- The amount, priority, and potential effect of preferred dividend arrears, and whether financing or additional cost reductions become necessary.