Retractable Technologies, Inc. — Q1 2013 10-Q
Reporting period: Three months ended March 31, 2013; financial statements are unaudited. The company designs, manufactures, and markets safety syringes and other safety medical products. Safety syringes represented 98.8% of sales.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $7.17 million | $7.43 million | Down 3.5% |
| Gross profit / margin | $2.78 million / 38.7% | $2.84 million / 38.2% | Profit down 2.3%; margin up 0.5 percentage points |
| Operating expenses | $4.14 million | $3.49 million | Up 18.9% |
| Operating loss | $1.37 million | $645,000 | Loss increased |
| Net loss | $1.41 million | $714,000 | Loss increased |
| Loss applicable to common shareholders / diluted loss per share | $1.64 million / $0.06 | $944,000 / $0.04 | Loss increased |
| Operating cash flow | $(2.13) million | $146,000 | Turned negative |
Domestic revenue declined 4.2%, principally from lower average selling prices, while domestic unit sales rose 8.7%. Overall unit sales increased 3.3%; international unit sales fell 8.3% and international revenue declined 0.4%. Average manufactured-product cost per unit decreased 8.3%, supporting the higher gross margin. General and administrative expense increased $498,000, primarily due to patent costs and the medical-device excise tax; sales and marketing expense also rose with added staff and bonuses.
Financial position and liquidity
- At March 31, cash and cash equivalents were $23.53 million, down $2.43 million from year-end; total assets were $44.13 million.
- Working capital was approximately $26.0 million, down $1.4 million from December 31, 2012. Current liabilities were $6.23 million.
- Total debt was approximately $4.06 million, including $320,000 current and $3.74 million long-term.
- Operating cash use was driven in part by the net loss and a $1.84 million decrease in accounts payable. Capital expenditures were $64,000; debt repayments were $78,000.
- Management said it had sufficient cash reserves, including funds from prior litigation settlements, and did not intend to raise equity capital. It expected to rely on operations, cash reserves, and debt financing; the company noted that obtaining additional loans was uncertain.
Material changes, outlook, and risks
- No formal earnings guidance was provided. Management said sales have historically tended to rise later in the year, partly due to flu-season demand.
- The company estimated the 2.3% medical-device excise tax would cost more than $1 million in 2013; it had paid $217,000 through March 31 and $281,000 through May 10. The company noted it may not be able to pass the tax on to customers.
- Double Dove, a Chinese manufacturer, supplied approximately 70.8% of finished products in Q1 2013. Loss of this supplier could require finding alternatives and expanding domestic production, potentially raising costs during the transition.
- Management cited limited access to hospital markets and ongoing competition from BD as constraints on volumes. If market access remains limited and operating cash generation is insufficient, possible measures include lower production, workforce or salary reductions, and deferring royalties.
- The BD patent litigation had mixed appellate results: the Federal Circuit affirmed infringement findings relating to the 1mL product but reversed findings relating to the 3mL product; the Supreme Court denied review in January 2013. The district court was considering post-trial motions. A separate company antitrust and related claims case against BD was scheduled for trial beginning September 9, 2013. Outcomes and any potential recovery are uncertain.
- The company reported preferred-stock dividend arrears totaling approximately $11.54 million across its outstanding series at quarter-end. It also reported $57,613 of dividends payable at March 31, paid April 22. Common-stock repurchases totaled 83,097 shares in Q1 at an average $1.08 per share.
Important facts for investors to verify
- Whether revenue, unit sales, and margins improve despite lower average selling prices and increased operating expenses.
- Cash burn, working-capital movements, and the assumptions supporting management’s assessment of sufficient liquidity and access to debt financing.
- The actual 2013 medical-device excise-tax burden and whether it can be reflected in pricing.
- Reliance on Double Dove and the cost and feasibility of alternate sourcing or increased domestic production.
- Developments and potential financial effects of the BD patent and antitrust litigation; the filing does not provide a clear value for any expected litigation recovery.
- Preferred-dividend arrears and the conditions affecting future dividend payments and common-stock repurchases.