Retractable Technologies, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. The company designs, manufactures, and markets safety syringes and other medical products. Financial statements are unaudited.
Financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $6.88 million | $6.91 million | $12.92 million | $14.08 million |
| Gross profit | $2.18 million | $1.74 million | $3.90 million | $4.52 million |
| Gross margin | 31.7% | 25.2% | 30.2% | 32.1% |
| Operating loss | $1.34 million | $2.39 million | $3.33 million | $3.75 million |
| Net loss | $1.39 million | $2.44 million | $3.43 million | $3.85 million |
| Loss per common share, diluted | $0.06 | $0.10 | $0.14 | $0.16 |
- For the first six months, operating cash use was $3.73 million, compared with $5.40 million a year earlier. Capital expenditures were $962,000, versus $160,000. Cash and cash equivalents ended at $22.25 million, down $5.38 million from year-end 2013.
- At June 30, current assets were $32.87 million and current liabilities $15.39 million, for working capital of approximately $17.48 million. The balance sheet also included $600,000 of restricted cash and $7.72 million of litigation proceeds recorded as a liability pending resolution of a stipulation.
- Total debt was approximately $3.68 million, including $176,000 current and $3.50 million long-term. A Deutsche Leasing note was paid off in April; another note was expected to be paid off in November 2014.
- Preferred dividends of $458,000 were reflected in the six-month loss applicable to common shareholders. The filing reported dividend arrears across preferred-stock series, including substantial cumulative arrears for Series III, IV, and V.
Material changes and management commentary
- Q2 sales were nearly flat year over year, while first-half sales declined 8.3%. Q2 domestic revenue rose 8.1%, but international revenue fell 19.6%; overall unit sales declined 4.8%. For the first half, domestic revenue fell 3.8%, international revenue fell 21.4%, and total unit sales declined 12.1%.
- Q2 gross margin improved to 31.7%, principally because manufacturing cost per unit fell 6.4%. First-half gross margin declined to 30.2%, as manufacturing cost per unit rose 6.7% amid lower sales volume and production-schedule variation.
- Operating expenses declined 14.7% in Q2 and 12.5% in the first half, primarily due to lower non-litigation legal, compensation, consulting, and other costs. Management cited approximately $673,000 lower non-litigation legal costs in the first half. The company reduced its workforce by 13.7% effective May 9 and paid $191,000 in Q2 severance; executive salaries were reduced by at least 10% in May and July.
- Management said it considered cash reserves sufficient for current needs and did not intend to raise equity capital at present, expecting to rely on operations, reserves, and debt financing. It warned additional cost reductions—including production, staffing, compensation, or royalty-payment changes—could be considered if current measures prove insufficient. No specific earnings or revenue guidance was provided.
- The company was still purchasing approximately $1.5 million of manufacturing equipment and molds, funded from existing cash. Management estimated the medical-device excise tax would cost approximately $750,000 in 2014 and noted it may not be able to pass the tax on to customers.
Litigation, risks, and other notable items
- In a separate patent case, BD paid $7.72 million in September 2013 under a stipulation. The funds remain recorded as a current liability and management said they were not being used to fund operations. On July 7, 2014, the Federal Circuit affirmed denial of BD’s motion to reduce the damages award; BD filed a rehearing petition on August 6, with the company’s response due August 21. The stipulation may require repayment, with interest, if the judgment is reduced.
- In the company’s antitrust and false-advertising case against BD, a September 2013 jury awarded $113.51 million on the antitrust claim, potentially subject to trebling. Post-trial orders and final judgment had not issued as of the filing, BD planned to appeal, and the company had received no proceeds from this verdict. The award was not treated as realized income.
- Safety syringes represented 96% of first-half sales. A single Chinese manufacturer supplied approximately 63% of products produced in the first half. Loss of that source could require finding another supplier and expanding domestic production, potentially increasing costs. Management also cited limited hospital-market access, competition, supplier and raw-material costs, and the ability to maintain liquidity as risks.
- One significant customer accounted for 29.7% of first-half sales. The company also relies on contractual distributor rebates and estimates allowances for unreported sales tracking.
- The FDA notified the company of substantial equivalence for its EasyPoint retractable needle on June 17, 2014. Management noted historically higher unit sales during flu season. The company reported effective disclosure controls and no material change in internal control over financial reporting; it reported no material changes to its 2013 risk factors.
Key facts for investors to verify
- Current status and potential repayment exposure of the $7.72 million patent-case payment, and subsequent developments in BD’s rehearing petition.
- Status, timing, and appeal prospects for the $113.51 million antitrust verdict; no related proceeds were recognized or received as of the filing.
- Cash burn, working-capital trend, and whether operating cash use and planned equipment spending remain supportable without external financing.
- Progress in restoring first-half sales and margins, gaining hospital-market access, and managing reliance on the Chinese manufacturer and major customers.
- Effectiveness of cost reductions and the actual 2014 medical-device excise-tax burden; formal financial guidance was not provided.