Business Context and Reporting Period
Company: Retractable Technologies, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: The Company designs, develops, manufactures, and markets safety syringes and other safety medical products. Primary products include the VanishPoint insulin syringe, tuberculin syringes, and the Patient Safe Syringe. Manufacturing occurs in Little Elm, Texas, and via a contract manufacturer in China (Double Dove), which supplied approximately 71.1% of finished products in the first nine months of 2008.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 |
Nine Months Ended Sep 30, 2008 |
Nine Months Ended Sep 30, 2007 |
|---|---|---|---|
| Sales, Net | $8,997,038 | $20,786,420 | $19,088,932 |
| Gross Profit | $2,125,922 | $6,387,597 | $5,589,090 |
| Gross Margin | 23.6% | 30.7% | 29.3% |
| Loss from Operations | $(2,180,509) | $(6,309,009) | $(7,128,081) |
| Net Loss | $(2,035,738) | $(5,732,388) | $(4,468,027) |
| Loss Applicable to Common Stockholders | $(2,378,455) | $(6,762,690) | $(5,520,425) |
| Loss Per Share (Basic & Diluted) | $(0.10) | $(0.28) | $(0.23) |
Liquidity and Balance Sheet Highlights (as of Sep 30, 2008)
- Cash and Cash Equivalents: $35,963,071 (Decreased from $40,507,431 at Dec 31, 2007).
- Total Assets: $59,297,134.
- Total Liabilities: $13,252,831.
- Long-Term Debt: $4,638,949 (excluding current portion of $500,310).
- Working Capital: $37,435,175 (Current Assets $46,025,549 less Current Liabilities $8,590,374).
- Current Ratio: 5.4.
Cash Flow (Nine Months Ended Sep 30, 2008)
- Net Cash Used by Operating Activities: $(3,753,397).
- Net Cash Used by Investing Activities: $(1,753,251) (Primarily $2.16M for property, plant, and equipment).
- Net Cash Provided by Financing Activities: $962,288 (Primarily $1.33M proceeds from long-term debt).
- Net Decrease in Cash: $(4,544,360).
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 11.1% for the nine months ended Sep 30, 2008, compared to the prior year, driven by a 7.0% increase in domestic unit sales and higher average selling prices.
- Cost of Sales: Costs of manufactured product increased due to higher volumes and a 1.7% increase in the average cost per unit. The Company noted that Double Dove increased prices by $0.005 per unit in the fourth quarter.
- Operating Expenses: Total operating expenses decreased slightly (0.2%) year-over-year for the nine-month period, primarily due to reductions in sales and marketing expenses and lower litigation costs, partially offset by higher bad debt accruals and compensation costs.
- Net Loss: The net loss for the nine months ended Sep 30, 2008, was $1.3 million higher than the prior year period. This increase is principally attributed to a $1.4 million income tax benefit recorded in 2007 (due to a state tax audit settlement) which was not present in 2008.
- Bad Debt Provision: The Company increased its provision for doubtful accounts by approximately $144,000 during the period due to current economic conditions.
Guidance, Outlook, Risks, and Contingencies
Management Commentary and Outlook
Management does not intend to raise equity capital at this time, relying instead on cash reserves, operations, and debt financing. The Company is expanding its warehouse and adding a Clean Room, funded by a $4.2 million construction line of credit, with completion expected in Q1 2009. Management anticipates that unit sales will increase in the latter part of the year due to flu season demand. However, the Company faces challenges in gaining hospital market access due to monopolistic practices by competitors (specifically Becton Dickinson).
Legal Proceedings and Contingencies
- Suit vs. Abbott Laboratories: Filed in 2005 alleging fraud and breach of contract. Abbott filed a counterclaim in July 2008 seeking over $6 million. Trial is scheduled for January 2010.
- Suit vs. Becton Dickinson (BD): Multiple suits filed alleging patent infringement and antitrust violations. Patent claims are set for trial in March 2009. BD has also sued the Company for patent infringement.
- Suit vs. Occupational and Medical Innovations (OMI): Ongoing litigation in Australia and the U.S. regarding patent infringement and false advertising. A U.S. trial is set for December 2009.
- Other Litigation: Suits involving MedSafe Technologies and Safety Medical International (SMI) are pending.
Risk Factors
- Market Access: The Company operates in a market dominated by BD, limiting volume growth despite federal legislation requiring safety devices.
- Liquidity: Cash position decreased by $4.5 million in the period due to operating losses and increasing legal fees. If cash becomes insufficient, the Company may reduce production, workforce, or defer royalty payments.
- Supplier Concentration: Approximately 71.1% of production is sourced from Double Dove in China. Disruption could force a costly shift to domestic production.
- Patent Expiration: Initial patents protecting the core technology begin expiring in May 2015.
- Preferred Stock Dividends: Significant dividends are in arrears across multiple series of Class B Convertible Preferred Stock (e.g., Series IV total arrearage is $6,892,000).
Investor Verification Checklist
- Cash Burn Rate: Verify the sustainability of the $35.9M cash balance given the $3.75M operating cash outflow and ongoing litigation costs.
- Legal Exposure: Assess the potential financial impact of the Abbott counterclaim ($6M+) and the outcome of the BD patent trials scheduled for 2009.
- Supplier Dependency: Confirm the stability of the relationship with Double Dove and the feasibility of ramping up domestic production if the Chinese supply chain is disrupted.
- Preferred Stock Arrears: Review the total accumulated dividends in arrears ($10M+ across all series) and the implications for common stock dividends and equity dilution upon conversion.
- Market Access Strategy: Evaluate the effectiveness of current strategies to penetrate hospital markets dominated by competitors.