Business Context and Reporting Period
Company: Retractable Technologies, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: The Company designs, develops, manufactures, and markets safety syringes and other safety medical products. Manufacturing occurs in Little Elm, Texas, and via a contract manufacturer in China (Double Dove). Safety syringes comprised 98.2% of sales for the six months ended June 30, 2009.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|
| Sales, Net | $11,011,078 | $11,789,382 |
| Gross Profit | $3,568,942 | $4,261,675 |
| Gross Margin | 32.4% | 36.1% |
| Loss from Operations | $(6,822,534) | $(4,128,500) |
| Net Loss | $(6,677,005) | $(3,696,650) |
| Loss Applicable to Common Shareholders | $(7,362,439) | $(4,384,235) |
| Cash and Cash Equivalents (End of Period) | $20,975,485 | $35,296,288 |
| Working Capital | $23,390,383 | $33,376,806 (Dec 31, 2008) |
| Total Debt (Current + Long-term) | $7,682,628 | Not explicitly stated for 2008 total |
Liquidity Ratios: Current ratio decreased from 4.3 (Dec 31, 2008) to 3.1 (June 30, 2009). Quick ratio decreased from 3.6 to 2.2.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 6.6% year-over-year for the six-month period. Domestic revenues fell 7.6% and international revenues fell 1.5%, driven primarily by a 10.2% decrease in overall unit sales.
- Margin Compression: Gross profit decreased 16.3%. The average cost of manufactured product sold per unit increased 10.5% due to higher capitalized unit costs in inventory from the prior year.
- Operating Expenses: Total operating expenses increased 23.9% to $10.39 million. Increases were driven by litigation costs, accounting fees, and stock option expense amortization. A $200,000 severance charge was recorded in the second quarter.
- Cash Flow: Net cash used by operating activities was $10.16 million, compared to $4.38 million in the prior year period. This was largely due to a $3.65 million increase in inventory levels.
- Inventory Build-up: Inventories increased 55% to $10.29 million, attributed to transitioning molding activities to the Little Elm facility and stocking for the flu season.
Guidance, Outlook, and Risks
Management Commentary & Cost Cutting: Management announced significant cost-cutting measures effective July 1, 2009, to conserve cash. These include a 16% workforce reduction (saving ~$2.1M annually), a 10% salary cut for senior personnel, discontinuation of 401(k) matching, and the CEO waiving future royalty payments (saving ~$1.0M over three quarters). Management expects to save an additional $1.6M by moving molding operations in-house and reducing professional fees.
Outlook: Sales are historically seasonal, increasing in the latter part of the year due to flu season. Management anticipates potential demand increases if H1N1 (swine flu) vaccinations require additional syringes. The Company expects to begin receiving royalties from its Chinese licensee (BTMD) once government requirements are met, though no date is predicted.
Risks and Contingencies:
- Litigation: The Company is involved in multiple significant lawsuits, including a breach of contract suit against Abbott Laboratories (trial set for May 2010) and patent infringement suits against Becton Dickinson (BD) and others. Litigation costs remain a significant expense.
- Market Access: Management states it is blocked from hospital markets by monopolistic practices of BD, limiting volume growth.
- Supplier Concentration: Approximately 73% of finished products in the first six months of 2009 were sourced from Double Dove in China. Disruption here would require ramping up domestic production.
- Preferred Stock Dividends: Significant dividends are in arrears on all five series of Class B Preferred Stock. The Board is seeking shareholder approval to amend certificates to allow repurchases of junior stock despite these arrears.
Investor Verification Checklist
- Cash Burn Rate: Verify the sustainability of the $20.9M cash balance given the $10.2M operating cash outflow in six months and the $4.2M construction loan maturing in Q3 2009.
- Inventory Valuation: Assess the risk of obsolescence given the 55% increase in inventory and the company's stated plan to reduce inventory levels over the next 12 months.
- Litigation Exposure: Monitor the status of the Abbott counterclaim (seeking >$6M) and the BD patent trials scheduled for late 2009, as outcomes could materially impact financial position.
- Preferred Stock Amendments: Confirm the outcome of the shareholder vote regarding the amendment of Certificates of Designation, which affects the ability to repurchase common stock while dividends are in arrears.
- BTMD Royalties: Track the timeline for the Chinese licensee (BTMD) to meet government requirements and begin generating royalty revenue.