Business Context and Reporting Period
Company: Retractable Technologies, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: The Company designs, develops, manufactures, and markets safety syringes and other safety medical products. Primary products include the VanishPoint insulin syringe and the Patient Safe syringe. Manufacturing occurs in Little Elm, Texas, and via a contract manufacturer in China (Double Dove).
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Net Sales | $10,752,445 | $21,763,523 |
| Gross Profit | $2,935,726 | $6,504,668 |
| Gross Margin | 27.3% | 29.9% |
| Operating Loss | $(3,548,520) | $(10,371,054) |
| Net Loss | $(3,434,317) | $(10,111,322) |
| Loss Per Share (Basic/Diluted) | $(0.16) | $(0.47) |
| Cash and Cash Equivalents | $17,502,934 | $17,502,934 (Balance Sheet) |
| Working Capital | $21,637,711 | $21,637,711 (Balance Sheet) |
| Total Debt (Current + Long-term) | $7,569,473 | $7,569,473 (Balance Sheet) |
Note: Working Capital calculated as Total Current Assets ($32,216,160) minus Total Current Liabilities ($10,578,449).
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 19.5% in the three months ended September 30, 2009, compared to the same period in 2008. Domestic sales rose 17.6% and international sales rose 31.7%, driven by flu season demand and a contract with the Department of Health and Human Services (DHHS) for H1N1 vaccinations.
- Operating Expenses: Operating expenses increased 50.6% quarter-over-quarter. This was primarily due to increased litigation costs and stock option compensation expense ($983,231 in the quarter), partially offset by lower compensation costs due to workforce reductions.
- Liquidity: Cash and cash equivalents decreased from $33.28 million at December 31, 2008, to $17.50 million at September 30, 2009. Net cash used by operating activities was $13.28 million for the nine-month period.
- Inventory: Inventories increased to $8.44 million (from $6.64 million at year-end 2008) due to raw material buildup for DHHS orders and finished goods for the flu season.
Guidance, Outlook, and Risks
Outlook and Guidance: Management expects revenues and the percentage of revenue from the H1N1 Program to increase significantly in the fourth quarter of 2009 and the first quarter of 2010, contingent on the program continuing as scheduled. The Company is implementing cost-cutting measures, including a 16% workforce reduction (partially reversed for DHHS production), salary cuts, and moving molding operations in-house to reduce unit costs.
Legal Proceedings and Contingencies:
- Becton Dickinson (BD): A jury returned a verdict on November 9, 2009, finding BD infringed three patents and owes the Company $5,000,000. Judgment has not been entered, and the case is subject to appeal.
- Abbott Laboratories: Ongoing litigation regarding breach of contract and fraud. Trial is scheduled for May 2010. Abbott has counterclaimed for over $6,000,000.
- Other Litigation: Active patent infringement suits against Occupational and Medical Innovations Limited (OMI) and Safety Medical International (SMI).
Risks:
- Market Access: The Company faces limited access to hospital markets due to monopolistic practices by competitors, specifically BD.
- Supplier Concentration: Approximately 67.4% of finished products in the first nine months of 2009 were sourced from a single Chinese manufacturer, Double Dove.
- Liquidity: While cash reserves are currently sufficient, the Company relies on litigation settlements and operations. Preferred stock dividends are in arrears, totaling over $15 million across all series.
Investor Verification Checklist
- BD Litigation Status: Verify the entry of judgment and potential for appeal regarding the $5 million verdict against Becton Dickinson.
- H1N1 Contract Execution: Confirm the volume and revenue realization from the DHHS contract in Q4 2009 and Q1 2010.
- Preferred Stock Arrears: Review the total accumulated dividends in arrears ($15.2+ million) and the status of the rescheduled shareholder meeting to amend certificates of designation.
- Supplier Dependency: Assess the risk mitigation plan if the primary Chinese supplier (Double Dove) cannot meet demand or if supply is disrupted.
- Cash Burn Rate: Monitor the $13.3 million cash outflow from operations to ensure liquidity remains sufficient to fund operations and litigation through 2010.