Retractable Technologies, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also provides unaudited fourth-quarter results. The company designs, manufactures and sells safety syringes and related medical products, principally VanishPoint and Patient Safe products.
Financial performance and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Net sales | $29.55 million | $34.52 million |
| Gross profit / margin | $10.57 million / 35.8% | $12.02 million / 34.8% |
| Operating loss | $3.21 million | $2.16 million |
| Net income (loss) | $4.31 million | ($2.35 million) |
| Cash from operating activities | ($3.25 million) | ($3.87 million) |
| Cash and cash equivalents, year-end | $18.05 million | $22.13 million |
| Total debt, including current maturities | $3.67 million | $3.57 million |
| Current assets / current liabilities, year-end | $30.81 million / $8.10 million | $34.23 million / $15.10 million |
2015 net income included $7.72 million of litigation proceeds recognized after resolution of a separate patent case; the company still incurred an operating loss. The $2.31 million deemed capital contribution from a preferred-stock transaction also increased income applicable to common shareholders. Basic and diluted earnings per share were $0.21 and $0.20, respectively. The filing reports no dividends on common stock.
Fourth-quarter 2015 sales were $7.18 million, gross margin was 32.6%, and operating loss was $873,000. The comparable 2014 quarter reported sales of $10.72 million, a 39.8% gross margin, and operating income of $751,000.
Changes versus prior year
- Sales declined 14.4%; total unit sales fell 11.9%. Domestic revenue decreased 16.7%, principally attributed to reduced flu-season demand. International revenue declined from $6.9 million to $6.5 million, primarily due to more restrictive customer qualification requirements.
- Gross margin improved to 35.8% from 34.8%, while operating expenses fell 2.9%. Nevertheless, the operating loss widened as lower gross profit outweighed expense reductions.
- Cash from operations remained negative, though the outflow improved from 2014. Inventory rose to $6.30 million from $4.66 million; year-end cash declined by $4.08 million.
- Current liabilities fell substantially, mainly because the $7.72 million litigation-proceeds liability was removed when the proceeds were recognized as income.
Outlook, risks, contingencies and unusual items
- Management gave no quantified revenue or earnings guidance. It said access to hospital markets and increased market share are needed to achieve routine break-even or profitable quarters. Management expects to rely on operations, cash reserves and debt financing when available; obtaining additional loans is uncertain.
- The district court entered a judgment against BD totaling approximately $352 million, including damages, attorneys’ fees and costs, with injunctive relief. BD appealed; oral argument occurred February 29, 2016, and no appellate decision had issued by the filing. The company had received none of this award, and it was not recorded in the financial statements. The filing describes the award and its components; verify the precise amount and appeal status against the court record.
- The company received $7.72 million from BD in 2013 in a separate patent matter and recognized it in 2015 after that case concluded. This is a non-recurring item, not recurring operating revenue.
- Two customers represented 45.7% of 2015 revenue. A primary Chinese manufacturer supplied approximately 77.7% of VanishPoint finished products; interruption could disrupt supply or raise costs. Syringes accounted for 98.2% of revenue, and 1mL and 3mL syringes represented 91.5% of revenue.
- Patent protection is material; some VanishPoint patent coverage had expired or was due to expire in 2016, while another patent was expected to provide coverage through 2020. Other risks include dominant competitors, market-access barriers, supplier dependence, product liability, and foreign-market risks.
- The 2.3% medical-device excise tax was suspended for sales from January 1, 2016 through December 31, 2017. The company reported a $360,000 tax impact in 2015.
- Management identified a material weakness in internal control over financial reporting related to errors in raw-material inventory pricing maintained in a spreadsheet. No revision to previously filed financial statements resulted. The company planned to implement an Oracle inventory system by the third quarter of 2016 and increase accounting oversight. The auditor issued an unqualified opinion on the financial statements but was not engaged to audit internal control effectiveness.
Important facts for investors to verify
- Current appellate status and collectability of the unrecorded BD judgment, and whether any injunctive relief remains effective.
- Cash burn, cash balance and available borrowing capacity, particularly if operating losses persist.
- Customer concentration and contingency plans for disruption at the Chinese manufacturer.
- Remediation and independent validation of the inventory-control material weakness.
- Preferred-stock dividend arrears: $10.3 million at year-end 2015, despite the 2015 exchange that waived $3.09 million of arrears and avoided $200,000 of annual future dividend requirements.