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RVP > SEC Filings for RVP > Form 10-Q on 18-Nov-2011All Recent SEC Filings

Show all filings for RETRACTABLE TECHNOLOGIES INC

Form 10-Q for RETRACTABLE TECHNOLOGIES INC


18-Nov-2011

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.

FORWARD-LOOKING STATEMENT WARNING

Certain statements included by reference in this filing containing the words "could," "may," "believes," "anticipates," "intends," "expects," and similar such words constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Any forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among others, our ability to maintain liquidity, our maintenance of patent protection, the impact of current litigation, our ability to maintain favorable supplier arrangements and relationships, our ability to quickly increase capacity in response to an increase in demand, our ability to access the market, our ability to maintain or lower production costs, our ability to continue to finance research and development as well as operations and expansion of production, the increased interest of larger market players, specifically Becton, Dickinson and Company ("BD"), in providing devices to the safety market, and other factors referenced in Item 1A. Risk Factors in Part II. Given these uncertainties, undue reliance should not be placed on forward-looking statements.

MATERIAL CHANGES IN FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We have been manufacturing and marketing our products into the marketplace since 1997. Safety syringes comprised 96.7% of our sales in the first nine months of 2011. We also manufacture and market the blood collection tube holder and the IV safety catheter. We currently provide other safety medical products in addition to safety products utilizing retractable technology. One such product is the Patient SafeŽ syringe, which is uniquely designed to reduce the risk of bloodstream infections resulting from catheter hub contamination.

Historically, unit sales have increased in the latter part of the year due, in part, to the demand for syringes during the flu season.

Our products have been and continue to be distributed nationally and internationally through numerous distributors. Although we have made limited progress in some areas, such as the alternate care market, our volumes are not as high as they should be given the nature and quality of our products and the federal and state legislation requiring the use of safe needle devices. The alternate care market is composed of alternate care facilities that provide long-term nursing care out-patient surgery, emergency care, and physician services. The fact that our progress is limited is principally due to exclusive marketing practices engaged in by BD, the dominant maker and seller of disposable syringes and other needle products, which practices have blocked us from access to the market. A suit against BD is currently pending alleging violations of state and federal antitrust acts and false advertising. BD has ceased marketing the infringing 1mL Integra syringe.

We continue to pursue various strategies to have better access to the hospital market, as well as other markets, including attempting to gain access to the market through our sales efforts, our innovative technology, introduction of new products, and, when necessary, litigation.

In the event we continue to have only limited market access, and the cash provided by the litigation settlements and generated from operations becomes insufficient, we would take additional cost cutting measures to reduce cash requirements. Such measures could result in the reduction of units being produced, the reduction of workforce, the reduction of salaries of officers and other nonhourly employees, and the deferral of royalty payments.


We took such actions at the end of the second quarter of 2009. Salary reductions put in place in the second quarter of 2009 remain in place.

We are bringing additional molding operations to Little Elm as a cost saving measure. The addition of four molding machines in 2011 is part of that endeavor. We continue to focus on methods of upgrading our manufacturing capability and efficiency in order to reduce costs.

Effective July 12, 2010, we entered into a settlement agreement with Abbott and Hospira. In connection with this settlement agreement, we granted Hospira an exclusive one-year option to negotiate a licensing agreement for certain uses of our Patient SafeŽ syringe. This option expired unexercised in July 2011. We have received the total $8 million option payment, including the final payment in the third quarter of 2011. As part of the settlement, in the third quarter of 2010, Hospira paid us $6.0 million and forgave a marketing fee of $1.4 million. The settlement was reduced by an outstanding invoice due to us for $144 thousand.

In the second quarter of 2010, we reached an agreement with our counsel, Locke Lord LLP, regarding future litigation expenditures that caps certain of our litigation costs in exchange for a contingent fee interest. We believe this agreement serves both our short-term and long-term interests and will reduce the legal fee component of our General and administrative costs and will continue to impact our cash flow in a positive manner.

On September 12, 2011, we commenced an offer to purchase outstanding Class B Convertible Preferred Stock (the "Preferred Stock") for cash and Common Stock (the "Exchange Offer"). As of November 4, 2011, the expiration date of the Exchange Offer, Preferred Stockholders had tendered the following number of shares of Preferred Stock: 1) 27,500 shares of Series I Preferred Stock; 2) 41,000 shares of Series II Preferred Stock; 3) 0 shares of Series III Preferred Stock; 4) 5,000 shares of Series IV Preferred Stock; and 5) 1,173,464 shares of Series V Preferred Stock. A total of $1,308,275 and 1,246,964 shares of Common Stock were issued as consideration to participating Preferred Stockholders pursuant to the Exchange Offer. In accordance with the terms of the Exchange Offer, participating Preferred Stockholders agreed to waive all unpaid dividends in arrears associated with their tendered Preferred Stock, which resulted in a waiver of a total of $3,539,714 in unpaid dividends in arrears.

Product purchases from Double Dove, a Chinese manufacturer, have enabled us to increase manufacturing capacity with little capital outlay and have provided a competitive manufacturing cost. In the nine months ended September 30, 2011, Double Dove manufactured approximately 68.6% of the units we produced. We believe we could make up any long-term disruption in these purchases by utilizing more of the capacity at the Little Elm facility, except for the 0.5mL insulin syringe, the 5mL and 10mL syringes, and the autodisable syringe which altogether comprised about 10.3% of our revenues for the nine months ended September 30, 2011.

With increased volumes, our manufacturing unit costs have generally tended to decline. Factors that could affect our unit costs include increases in costs by third party manufacturers, changing production volumes, costs of petroleum products, and transportation costs. Increases in such costs may not be recoverable through price increases of our products.

The following discussion may contain trend information and other forward-looking statements that involve a number of risks and uncertainties. Our actual future results could differ materially from our historical results of operations and those discussed in any forward-looking statements. Dollar amounts have been rounded for ease of reading. All period references are to the periods ended September 30, 2011 or 2010.

RESULTS OF OPERATIONS

Comparison of Three Months Ended September 30, 2011 and September 30, 2010

Domestic sales accounted for 96.2% and 80.1% of the revenues for the three months ended September 30, 2011 and 2010, respectively. Domestic revenues decreased 18.8% principally due to lower sales volumes and lower average sales prices. Domestic unit sales decreased 7.8%. Domestic unit sales were 94.7% of total unit sales for the three months ended September 30, 2011. International unit sales and revenues decreased 89.5% and 87.1%, respectively. Overall, unit sales decreased 34.7%.


Gross profit decreased 34.8% primarily due to lower revenues. The average cost of manufactured product sold per unit increased by 6.1%. Profit margins can fluctuate depending upon, among other things, the cost of manufactured product and the capitalized cost of product recorded in inventory, as well as product sales mix. Royalty expense decreased 29.5% due to lower gross sales.

Operating expenses decreased 18.4% or $769 thousand. The decrease in General and administrative expense was the most significant. The decrease of $420 thousand in General and administrative expense was due mainly to bonuses paid in 2010. Sales and marketing expense decreased 17.7% due principally to bonuses paid in 2010 and lower fee expenses. Research and development costs decreased 46.4% due to lower validation and sampling costs.

Our operating loss was $26 thousand compared to an operating income for the same period last year of $1.0 million due primarily to lower revenues, mitigated by a reduction in operating expenses.

Litigation settlements, net reflects cash proceeds of $2.0 million from Hospira less royalty expense of $100,000 for the three months ended September 30, 2011. Litigation settlements, net for the three months ended September 30, 2010 reflects our settlement with Abbott and Hospira, including a payment of $6.0 million, a waiver of an invoice due to us of $144,000, and a $1.4 million marketing fee payable to Abbott.

Our effective tax rate on income before income taxes was (0.1)% and zero percent for the three months ended September 30, 2011 and September 30, 2010, respectively.

Comparison of Nine Months Ended September 30, 2011 and September 30, 2010

Domestic sales accounted for 81.3% and 87.0% of the revenues for the nine months ended September 30, 2011 and 2010, respectively. Domestic revenues decreased 13.8% principally due to lower volumes and lower average sales prices. Domestic unit sales decreased 5.1%. Domestic unit sales were 71.0% of total unit sales for the nine months ended September 30, 2011. International unit sales and revenues increased 37.1% and 33.9%, respectively, due primarily to South American sales. Overall, unit sales increased 4.2%.

Gross profit decreased 14.5% primarily due to lower revenues mitigated by lower unit cost. The average cost of manufactured product sold per unit decreased by 6.6%. Profit margins can fluctuate depending upon, among other things, the cost of manufactured product and the capitalized cost of product recorded in inventory, as well as product sales mix. Royalty expense decreased 5.0% due to lower gross sales.

Operating expenses decreased 30.3% or $4.7 million. The decrease in General and administrative expense was the most significant. The decrease of $3.8 million in General and administrative expense was due mainly to legal expenses, stock option expense, and bonuses paid last year. Sales and marketing expense decreased 15.6% due principally to lower fees and lower compensation costs. Research and development costs decreased 37.7% due to lower validation and sample costs.

Our operating loss was $1.1 million compared to an operating loss for the same period last year of $4.2 million due primarily to the reduction in operating expenses.

Litigation settlements, net reflects cash proceeds of $6.0 million from Hospira less royalty expense of $300,000 for the nine months ended September 30, 2011. Litigation settlements, net for the nine months ended September 30, 2010 reflects our settlement with Abbott and Hospira, including a payment of $6.0 million, a waiver of an invoice due to us of $144,000, and a $1.4 million marketing fee payable to Abbott.

Our effective tax rate on income before income taxes was 1.1% and 11.7% (benefit) for the nine months ended September 30, 2011 and September 30, 2010, respectively. The benefit for the nine months ended September 30, 2010 is due to a carryback of our net operating loss for 2009 pursuant to a revision in the tax law.


Discussion of Balance Sheet and Statement of Cash Flow Items

Our balance sheet remains strong with cash making up 50.3% of total assets. Working capital was $34.1 million at September 30, 2011, an increase of $3.8 million from December 31, 2010.

We expect to continue moving the manufacturing of piece parts to Little Elm as a cost saving measure. Finished goods inventory decreased 12.6% since December 31, 2010.

Approximately $5.0 million in cash flow in the nine months ended September 30, 2011 was provided by operating activities. Uses of cash were primarily for the purchase of property, plant, and equipment, repayment of long-term debt, and payment of dividends.

Accrued liabilities, other declined $2.7 million due principally to application of prepayments to orders received during the period.

LIQUIDITY

Historical Sources of Liquidity

We have historically funded operations primarily from the proceeds from revenues, private placements, loans, and litigation settlements.

Internal Sources of Liquidity

Margins and Market Access

To routinely achieve break even quarters, we need minimal access to hospital markets which has been difficult to obtain due to the monopolistic marketplace which was the subject of our initial lawsuit and now also included in our second antitrust lawsuit against BD. We will continue to attempt to gain access to the market through our sales efforts, innovative technology, the introduction of new products, and, when necessary, litigation.

We continue to focus on methods of upgrading our manufacturing capability and efficiency in order to reduce costs.

Fluctuations in the cost and availability of raw materials and inventory and our ability to maintain favorable supplier arrangements and relationships could result in the need to manufacture all (as opposed to 30.7%) of our products in the U.S. This could temporarily increase unit costs as we ramp up domestic production.

The mix of domestic and international sales affects the average sales price of our products. Generally, the higher the ratio of domestic sales to international sales, the higher the average sales price will be. Typically international sales are shipped directly from China to the customer. Purchases of product manufactured in China, if available, usually decrease the average cost of manufacture for all units. Domestic costs, such as indirect labor and overhead, remain relatively constant. The number of units produced by us versus manufactured in China can have a significant effect on the carrying costs of inventory as well as Cost of sales. We will continue to evaluate the appropriate mix of products manufactured domestically and those manufactured in China to achieve economic benefits as well as to maintain our domestic manufacturing capability.

Fluctuations in the cost of oil (since our products are petroleum based) and transportation and the volume of units purchased from Double Dove may have an impact on the unit costs of our product. Increases in such costs may not be recoverable through price increases of our products. Reductions in oil prices may not quickly affect petroleum product prices.

Seasonality

Historically, unit sales have increased in the latter part of the year due, in part, to the demand for syringes during the flu season.


Licensing Agreement

Pursuant to a settlement agreement among us, Abbott, and Hospira effective July 12, 2010 (the "Effective Date"), Hospira was granted an exclusive one-year option to negotiate a licensing agreement to produce and market our Patient SafeŽ syringe for certain uses. This option expired unexercised in July 2011. In exchange for the option, Hospira paid us $2 million per quarter for four quarters, beginning three months from the Effective Date and every three months thereafter, for a total of $8 million. We have received the total $8 million, including the final payment in the third quarter of 2011. As part of the settlement, in the third quarter of 2010, Hospira paid us $6.0 million and forgave a marketing fee of $1.4 million. The settlement was reduced by an outstanding invoice due to us in the amount of $144 thousand.

Cash Requirements

Due to funds received from prior litigation settlements and income, we have sufficient cash reserves and intend to rely on operations, cash reserves, and debt financing as the primary ongoing sources of cash. In the event we continue to have only limited market access and cash generated from operations becomes insufficient to support operations, we would take additional cost cutting measures to reduce cash requirements. Such measures could result in the reduction of units being produced, the reduction of workforce, the reduction of salaries of officers and other nonhourly employees, and the deferral of royalty payments.

External Sources of Liquidity

We have obtained several loans from our inception, which have, together with the proceeds from the sales of equities and litigation efforts, enabled us to pursue development and production of our products. Given the current economic conditions, our ability to obtain additional funds through loans is uncertain. Furthermore, the shareholders previously authorized an additional 5,000,000 shares of a Class C Preferred Stock that could, if necessary, be designated and used to raise funds through the sale of equity. Due to the current market price of our Common Stock, it is unlikely we would choose to raise funds by the sale of equity.

Pursuant to a settlement agreement among us, Abbott, and Hospira, Hospira was granted an exclusive one-year option to negotiate a licensing agreement to produce and market our Patient SafeŽ syringe for certain uses. This option expired unexercised in July 2011. In exchange for the option, Hospira paid us $2 million per quarter for four quarters, for a total of $8 million. We have received the total $8 million, including the final payment in the third quarter of 2011. As part of the settlement, in the third quarter of 2010, Hospira paid us $6.0 million and forgave a marketing fee of $1.4 million. The settlement was reduced by an outstanding invoice due to us in the amount of $144 thousand.

CAPITAL RESOURCES

In 2011, we purchased molding machines to expand our in-house molding capability and further reduce costs. Financing was completed in the second quarter of 2011 for three molding machines in the amount of $327,725. The purchase and financing for a fourth molding machine for $207,260 is expected to be completed in the fourth quarter of 2011.

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