RVP

Business Context and Reporting Period

Company: Retractable Technologies, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: The Company designs, develops, manufactures, and markets safety syringes and other safety medical products. Manufacturing is conducted in Little Elm, Texas, and via a contract manufacturer in China (Double Dove). Safety syringes comprised 98.2% of sales in the first six months of 2008.

Key Financial Metrics

Liquidity: The Company reported a current ratio of 6.8 and a quick ratio of 5.7 as of June 30, 2008. Cash and cash equivalents represented 60.5% of total assets.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 22.7% for the three months ended June 30, 2008, compared to the same period in 2007. For the six months, sales increased 6.7%.
  • Q2 2008: Domestic revenues increased 12.7% and international revenues increased 95.8% due to new distributors.
  • YTD 2008: Domestic revenues increased 13.0%, while international revenues decreased 16.3% due to lower volumes from the PATH program, partially offset by new distributors.
• Profitability: Gross profit increased due to higher unit sales and lower cost per unit. The average cost of manufactured product sold per unit decreased 14.4% in Q2 and 2.5% YTD.
  • Operating Expenses: Decreased 1.8% in Q2 (driven by lower trade show/travel costs) but increased 3.6% YTD (driven by legal and compensation costs).
  • Net Loss: Net loss narrowed significantly in Q2 compared to the prior year ($833k vs $1.6M) and YTD ($3.7M vs $3.9M).
• Cash Flow: Net cash used by operating activities was $4.38 million for the six months ended June 30, 2008, compared to $5.31 million in the prior year period. Cash decreased by $5.21 million during the period.

Guidance, Outlook, Risks, and Contingencies

Management Commentary & Outlook:

• Market Access: Management states it is blocked from full market access by monopolistic practices of Becton Dickinson (BD). Without litigation expenses, the Q2 net loss would have been less than $225,000.
• Cost Structure: The Company relies on Double Dove (China) for ~70% of production to maintain competitive costs. Double Dove increased prices by $0.005 per unit due to labor/material costs and currency fluctuations.
• Expansion: The Company is expanding its warehouse and adding a Clean Room, funded by a pending $4.2 million loan secured by a second lien on existing property.
• Licensing: A licensing agreement with BTMD expired in May 2008. The Company recognized $100,000 of prepaid royalty income but expects future royalties once BTMD meets Chinese government requirements.

Risks and Contingencies:

• Litigation:
  • Abbott Laboratories: Ongoing lawsuit alleging fraud and breach of contract. Abbott filed a counterclaim seeking over $6 million. Trial set for January 2010.
  • Becton Dickinson (BD): Multiple active suits involving patent infringement and antitrust claims. Trials scheduled for March 2009 and October 2009.
  • OMI (Occupational and Medical Innovations): Litigation in Australia and the U.S. regarding patent infringement and false advertising.
• Supplier Concentration: Roughly 69.7% of finished products in the first half of 2008 were sourced from Double Dove. Disruption could impact supply of key products.
• Preferred Stock Dividends: Significant dividends are in arrears across multiple series of Class B Convertible Preferred Stock (e.g., Series IV total arrearage is $6.75 million). No dividends can be paid on common stock while preferred dividends are in arrears.

Investor Verification Checklist

• Litigation Exposure: Verify the status and potential financial impact of the counterclaims filed by Abbott ($6M+) and the multiple patent disputes with BD and OMI.
• Supplier Dependency: Assess the risk of supply chain disruption given that ~70% of products are manufactured by a single Chinese vendor (Double Dove).
• Preferred Stock Arrears: Confirm the total accumulated dividend arrearages on preferred stock, which restrict common stock dividends and may impact capital structure.
• Debt Financing: Monitor the closing of the $4.2 million warehouse expansion loan and its impact on future interest expenses.
• Market Access: Evaluate the Company's ability to overcome market access barriers imposed by competitors, as this is cited as a primary driver of current losses.