Retractable Technologies, Inc. — Q1 2016 Form 10-Q
Business and period: The company designs, manufactures, and sells safety syringes and other medical products. This unaudited report covers the three months ended March 31, 2016, compared with Q1 2015. Safety syringes accounted for 97.9% of Q1 2016 sales.
Financial results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $5.92 million | $6.18 million |
| Gross profit / gross margin | $2.19 million / 37.0% | $2.40 million / 38.8% |
| Operating loss | $894,169 | $895,097 |
| Net loss | $939,091 | $944,345 |
| Loss applicable to common shareholders | $1.12 million | $1.17 million |
| Basic and diluted loss per share | $0.04 | $0.04 |
| Operating cash flow | $218,079 | $556,229 |
| Capital expenditures | $75,650 | $363,177 |
Sales declined 4.2%; gross profit fell 8.7%. Domestic revenue decreased 5.7%, reflecting lower average selling prices and slightly lower unit sales; international revenue increased 21.8%, though international orders can fluctuate. Total unit sales were up 0.1%. Operating expenses decreased 6.4%, largely from lower medical-device excise tax, non-litigation legal costs, and bad-debt accruals, partly offset by higher sales and marketing costs. The medical-device excise tax was suspended for 2016–2017.
Cash and cash equivalents were $18.10 million at March 31, 2016, versus $18.05 million at year-end. Working capital was $21.8 million, down $906,000. Total assets were $40.28 million; total liabilities were $10.21 million; long-term debt including current maturities was approximately $3.60 million. The current ratio was approximately 4.2. Cash was 44.9% of total assets.
Changes, outlook, and material matters
- Management reported sufficient cash reserves and expects to rely on operations, cash, and debt financing when available. It does not currently intend to raise equity; access to additional loans is uncertain. No specific financial guidance was provided.
- The EasyPoint retractable needle began selling in Q2 2016. The company ordered additional molding machines and molds, with expected spending of $1.4 million.
- On April 5, 2016, the CEO exercised an option for 1 million shares at $0.81 per share, generating $810,000 for the company.
- A federal court judgment against BD awarded the company $352 million plus post-judgment interest and costs, along with injunctive relief. The award was not received and is not reflected in the financial statements; BD appealed, and the Fifth Circuit had not ruled after oral argument on February 29, 2016. A related patent case remained stayed pending resolution of appeals.
- Three customers represented 52.6% of Q1 sales, versus 57.4% in Q1 2015. The primary Chinese manufacturer supplied approximately 58.4% of VanishPoint syringes; losing that source could require alternative sourcing and increased domestic production, potentially raising costs.
- Management disclosed ineffective disclosure controls due to a material weakness in raw-material accounting. It expected to implement an Oracle inventory accounting system by Q3 2016.
- Series III, IV, and V preferred dividends were in arrears at quarter-end, with reported total arrearages of $3.919 million, $5.542 million, and $974,000, respectively. Series I and II had no arrears.
Key facts for investors to verify
- Progress and outcome of BD’s appeal, collectability of the judgment, and any accounting treatment if the judgment becomes realizable.
- Implementation and remediation of the Oracle inventory system and the disclosed material weakness in financial-reporting controls.
- Sales growth, pricing, customer concentration, and market access, particularly in hospitals.
- Reliability and economics of Chinese manufacturing and the timing, cost, and market uptake of EasyPoint.
- Cash requirements, debt-financing availability, planned $1.4 million equipment expenditure, and preferred-dividend arrearages.