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RVP > SEC Filings for RVP > Form 10-Q on 14-Aug-2013All Recent SEC Filings

Show all filings for RETRACTABLE TECHNOLOGIES INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for RETRACTABLE TECHNOLOGIES INC


14-Aug-2013

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.


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MATERIAL CHANGES IN FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We have been manufacturing and marketing our products since 1997. Safety syringes comprised 98.6% of our sales in the first six months of 2013. We also manufacture and market the blood collection tube holder, IV safety catheter, and VanishPoint® Blood Collection Set. We currently provide other safety medical products in addition to safety products utilizing retractable technology. One such product is the Patient Safe® 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 and 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. The trial date is set for September 9, 2013.

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 for executive officers, but all other employees affected by the salary reduction had their salaries increased by the amount of the reduction, effective August 6, 2012. In addition, all regular full time employees, other than the four executive officers and employees who have not completed their probationary period, were given a 5% general wage increase effective May 6, 2013.

Section 4191 of the Internal Revenue Code, enacted by the Health Care and Education Reconciliation Act of 2010 in conjunction with the Patient Protection and Affordable Care Act provides for an excise tax of 2.3% on medical devices. At the present time the excise tax is applicable to domestic sales of our products, except those which are sold to exempt organizations. The majority of our sales are domestic and not in the retail market. The tax is imposed on sales, not profits. We estimate the impact of this tax to be in excess of one million dollars in 2013. There is no assurance this tax can be passed along to our customers. Through August 5, 2013, we have paid $460 thousand in Medical Device Excise Taxes.

We have brought additional molding operations to Little Elm as a cost saving measure. The addition of four molding machines in 2012 was part of that endeavor. We continue to focus on methods of upgrading our manufacturing capability and efficiency in order to reduce costs.

On July 10, 2012, we authorized a Common Stock repurchase plan structured to comply with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934. Under the plan, we purchased 255,812 and 338,909 shares in the three and six months ended June 30, 2013, respectively. Notwithstanding the terms of the plan, the exact number of shares which may be purchased in the future pursuant to the plan is difficult to predict given the current market in our Common Stock.


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Pursuant to the Certificates of Designation, Preferences, Rights And Limitations of the Series I Class B and Series II Class B Convertible Preferred Stock, we would be prohibited from purchasing our Common Stock while dividends are in arrears. Therefore, in order to continue the Common Stock repurchase plan, we plan to continue to pay quarterly dividends on the Series I Class B and Series II Class B Preferred Stock if such payments can be made in accordance with state law and other contractual obligations.

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 six months ended June 30, 2013, Double Dove manufactured approximately 71.7% of the units we produced. In the event that we become unable to purchase product from Double Dove, we would need to find an alternate supplier for the 0.5mL insulin syringe, the 0.5mL autodisable syringe, and the 5mL and 10mL syringes, and we would increase domestic production for the 1mL and 3mL syringes.

In 1995, we entered into a license agreement with Thomas J. Shaw for the exclusive right to manufacture, market, and distribute products utilizing automated retraction technology. This technology is the subject of various patents and patent applications owned by Mr. Shaw. The license agreement generally provides for quarterly payments of a 5% royalty fee on gross sales.

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 June 30, 2013 or 2012.

RESULTS OF OPERATIONS

Comparison of Three Months Ended June 30, 2013 and June 30, 2012

Domestic sales accounted for 69.0% and 77.9% of the revenues for the three months ended June 30, 2013 and 2012, respectively. Domestic revenues decreased 29.9% principally due to lower average selling prices and lower volumes. Domestic unit sales decreased 18.7% due to decreased sales of the 1mL syringe. Domestic unit sales were 55.6% of total unit sales for the three months ended June 30, 2013. International revenue and unit sales increased 10.8% and 15.6%, respectively, due to higher South American sales. Overall unit sales decreased 6.3%.

Gross profit decreased 47.8% primarily due to lower average domestic sales volume and lower domestic sales prices. The average cost of manufactured product sold per unit increased by 3.5% principally due to reducing capitalized cost of inventory. Gross profit as a percentage of net sales was 25.2% in the three months ended June 30, 2013 as compared to 38.2% in 2012 due to lower average sales prices. 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.

Operating expenses increased 6.8% or $263 thousand. The principal cause of the increase was the Medical Device Excise Tax of $234 thousand.

Our operating loss was $2.4 million compared to an operating loss for the same period last year of $532 thousand due primarily to lower gross profit and higher operating expenses.


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Our effective tax rate on the net loss before income taxes was (0.1)% and (2.4)% for the three months ended June 30, 2013 and June 30, 2012, respectively.

Comparison of Six Months Ended June 30, 2013 and June 30, 2012

Domestic sales accounted for 74.6% and 79.1% of the revenues for the six months ended June 30, 2013 and 2012, respectively. Domestic revenues decreased 17.8% principally due to decreased average sales prices and lower volumes. Domestic unit sales decreased 6.3% due to lower sales of the 1mL and 3mL syringes. Domestic unit sales were 63.0% of total unit sales for the six months ended June 30, 2013. International revenues and unit sales increased 6.0% and 5.9%, respectively due to higher South American sales. Overall unit sales decreased 2.1%.

Gross profit decreased 26.8% primarily due to lower average domestic sales prices and lower domestic sales volume. The average cost of manufactured product sold per unit decreased by 2.0% due to higher production volumes. Gross profit as a percentage of net sales was 32.1% in the six months ended June 30, 2013 as compared to 38.2% in 2012 due to lower average sales prices. 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.

Operating expenses increased 12.5% or $920 thousand. The increase in operating expense is due to the Medical Device Excise Tax ($451 thousand), increased staffing in Sales and Marketing, and legal fees for patents. The increase was mitigated by lower litigation costs.

Our operating loss was $3.8 million compared to an operating loss for the same period last year of $1.2 million due primarily to lower sales volumes and higher unit costs as well as increased operating expenses.

Our effective tax rate on the net loss before income taxes was (0.1)% and (1.7)% for the six months ended June 30, 2013 and June 30, 2012, respectively.

Discussion of Balance Sheet and Statement of Cash Flow Items

Our balance sheet remains strong with cash making up 46.9% of total assets. Working capital was $23.3 million at June 30, 2013, a decrease of $4.0 million from December 31, 2012.

Approximately $5.4 million in cash flow in the six months ended June 30, 2013 was used by operating activities. Our cash balance decreased primarily due to a combination of lower gross profit, decreased accounts payable of $1.3 million, and increased accounts receivable of $613 thousand, and an increase in inventories of $950 thousand. These working capital items tend to fluctuate from period to period depending upon our timing of payments, the timing of billing and cash receipts for those billings, and inventory management for the upcoming period. Additional uses of cash include our repurchase of Common Stock for $446 thousand and preferred stock dividends of $115 thousand.

We purchased 338,909 shares of our Common Stock pursuant to our Common Stock repurchase plan in the six months ended June 30, 2013. The average share price for our repurchases in the six months ended June 30, 2013 was $1.25.

LIQUIDITY

At the present time, Management does not intend to raise equity capital. Due to the funds received from prior litigation settlements, we have sufficient cash reserves and intend to rely on operations, cash reserves, and debt financing as the primary ongoing sources of cash.

Our note to Katie Petroleum was paid in full in September 2012. Our payments were approximately $37,000 per month.

Historical Sources of Liquidity

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


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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 27.1%) 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.

Cash Requirements

Due to funds received from prior litigation settlements, 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.


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CAPITAL RESOURCES

Repurchase of Common Stock

On July 10, 2012, we authorized a Common Stock repurchase plan structured to comply with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934. Under the plan, we purchased 255,812 and 308,909 shares in the three and six months ended June 30, 2013, respectively. Notwithstanding the terms of the plan, the exact number of shares which may be purchased in the future pursuant to the plan is difficult to predict given the current market in our Common Stock.

Pursuant to the Certificates of Designation, Preferences, Rights And Limitations of the Series I Class B and Series II Class B Convertible Preferred Stock, we would be prohibited from purchasing our Common Stock while dividends are in arrears. Therefore, in order to continue the Common Stock repurchase plan, we plan to continue to pay dividends on the Series I Class B and Series II Class B Preferred Stock if such payments can be made in accordance with state law and other contractual obligations.

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