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MarketScreener Homepage  >  Equities  >  Nyse MKT  >  Retractable Technologies, Inc.    RVP

RETRACTABLE TECHNOLOGIES, INC.

(RVP)
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RETRACTABLE TECHNOLOGIES : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

11/16/2020 | 04:01pm EST

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, the impact of COVID-19 on all facets of logistics and operations, as well as costs, our ability to complete capital improvements and ramp up domestic production in response to government agreements, potential tariffs, our ability to maintain liquidity, our maintenance of patent protection, our ability to maintain favorable third party manufacturing and supplier arrangements and relationships, foreign trade risk, our ability to access the market, production costs, the impact 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 since 1997. VanishPoint® syringes comprised 82.3% of our sales in the first nine months of 2020. We also manufacture and market the EasyPoint® needle, 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 associated with catheter hub contamination.

In the second quarter of 2016, we began selling the EasyPoint® needle. EasyPoint® needles made up 12.0% of revenues for the nine months ended September 30, 2020. The EasyPoint® is a retractable needle that can be used with Luer lock syringes, Luer slip syringes, and prefilled syringes to give injections. The EasyPoint® needle can also be used to aspirate fluids and collect blood.

Our products have been and continue to be distributed nationally and internationally through numerous distributors.

Historically, unit sales have increased in the latter part of the year due, in part, to the demand for syringes during the flu season. Experts and industry professionals predicted that flu shots would be critical for the public in the 2020 flu season because of the continuing COVID-19 pandemic. Although our domestic sales outside of the HHS Order increased approximately 40% during the three months ended September 30, 2020, we cannot determine what percent of the increased sales were attributable to flu shots versus preparation for a COVID-19 vaccine.

On May 1, 2020, we were awarded a delivery order under an existing contract by the Department of Health and Human Services of the United States to supply automated retraction safety syringes (the "HHS Order"). The total fixed price under the delivery order is $83,788,440. The existing contract was executed in September 2018, but the order placed on May 1, 2020 is unusually significant. In the third quarter of 2020, our sales under this order were approximately $12.9 million and we expect such sales to increase each quarter through May 2021. We



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understand that the purpose of the HHS Order is to provide syringes for the COVID-19 vaccine, when available. Additionally, in October 2020, the contract value was increased by $10 million when the U.S. government agreed to expedite freight into our facilities by paying for airfreight costs from China.

Effective July 1, 2020, we entered into a Technology Investment Agreement ("TIA") with the United States Government Department of Defense, U.S. Army Contracting Command-Aberdeen Proving Ground, Natick Contracting Division & Edgewood Contracting Division (ACC-APG, NCD & ECD) on behalf of the Biomedical Advanced Research and Development Authority (BARDA) ("Government") for $53,664,286 in government funding for expanding our domestic production of needles and syringes. Pursuant to the terms of the TIA, we are expecting to make significant additions to our facilities which should allow us to increase domestic production. Additionally, the TIA provides for reimbursement for equipment and supplies. As of early November 2020, we have negotiated contracts for the purchase of automated assembly equipment, molds, and molding equipment, as well as portions of auxiliary equipment, for approximately $38 million. We have engaged architects and general construction contractors for the completion of new controlled environment facilities and additional warehousing facilities. The expanded facilities consist of approximately 27,800 square feet of additional controlled environment within existing properties and new construction of approximately 55,000 square feet of new warehouse space in conjunction with the overall production capacity expansion. The estimated cost of the controlled environment within existing properties is $6 million, and construction of the new warehouse is estimated to be $5.8 million. The cost of the controlled environment will be funded by the Government under the TIA, while the cost of the new warehouse will be our financial obligation. Building permits were obtained for both buildings in October 2020. The scheduled completion dates for the construction are within the second quarter of 2021.

On April 17, 2020, we entered into a promissory note in the principal amount of $1,363,000 (the "PPP Loan") in favor of Independent Bank (the "Lender") pursuant to the Paycheck Protection Program (the "PPP") of the Coronavirus Aid, Relief, and Economic Security Act, administered by the U.S. Small Business Administration ("SBA"). The PPP Loan matures on April 17, 2022 and bears interest at a rate of 1.0% per annum. Commencing November 17, 2020, we may be required to pay the Lender equal monthly payments of principal and interest as necessary to fully amortize the principal amount outstanding by the maturity date. PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loan granted under the PPP. We have not yet applied for forgiveness and we cannot be certain of the amount, if any, which may be forgiven.

As detailed in Note 4 to the financial statements, we held $6.7 million in debt and equity securities as of September 30, 2020, which represents 14.3% of our current assets. During the third quarter of 2020, we liquidated a portion of our investment portfolio (approximately $4.0 million) for operational needs. We continually monitor our invested balances.

During the third quarter of 2020, we hired 15 new full-time employees, predominantly as production line workers, and terminated several back office employees. We also moderately increased non-executive pay. The net effect of these actions caused a net increase of approximately $150 thousand in our operating expenses for the quarter ended September 30, 2020.

Product purchases from our Chinese manufacturers have enabled us to increase manufacturing capacity with little capital outlay and have provided a competitive manufacturing cost. In the first nine months of 2020, our Chinese manufacturers produced approximately 82.2% of our products. Despite the global disruption of the coronavirus pandemic, we have not experienced a significant disruption to our supply chain. In the event that we become unable to purchase products from our Chinese manufacturers, we would need to find an alternate manufacturer for the blood collection set, IV catheter, Patient Safe® syringe, 0.5mL insulin syringe, 0.5mL autodisable syringe, and 2mL, 5mL, and 10mL syringes and we would increase domestic production for the 1mL and 3mL syringes and EasyPoint® needles. Regardless of vendor availability, we expect to increase our domestic syringe production capacity at our facilities pursuant to the plans outlined in the TIA.

In 1995, we entered into a license agreement with Thomas J. Shaw for the exclusive right to manufacture, market, and distribute products utilizing his patented automated retraction technology and other patented technology. This technology is the subject of various patents and patent applications owned by Mr. Shaw. The



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license agreement generally provides for quarterly payments of a 5% royalty fee on gross sales of products subject to the license and he receives fifty percent (50%) of the royalties paid to us by certain sublicensees of the technology subject to the license.

With increased volumes, our manufacturing unit costs have generally tended to decline. Factors that could affect our unit costs include possible tariffs, 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. Decreases in costs of petroleum products during the first nine months of 2020 have reduced certain raw material costs.



                             RESULTS OF OPERATIONS


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, 2020 or 2019.



   Comparison of Three Months Ended September 30, 2020 and September 30, 2019

Domestic sales, including sales to the U.S. government, accounted for 94.2% and 77.7% of the revenues for the three months ended September 30, 2020 and 2019, respectively. Domestic revenues increased 182.3% principally due to the increase in units sold. Domestic unit sales increased 151.7%. Domestic unit sales were 90.6% of total unit sales for the three months ended September 30, 2020. Domestic sales excluding the HHS Order rose approximately 40%. International revenue and unit sales decreased 39.7% and 41.3%, representing a return to normal levels after the unusually high volumes in 2019. Our international orders may be subject to significant fluctuation over time and there is limited predictability with respect to the timing of international orders. Overall unit sales increased 92.2%. Other than the Department of Health and Human Services, our increased sales are predominantly attributable to existing customers as well as several new smaller customers who do not operate as distributors. Our sales under the HHS Order in the quarter ended September 30, 2020 were approximately $12.9 million and we expect such sales to increase each quarter through May 2021.

The Cost of manufactured product increased by 67.0% principally due to the increase in the volume of units sold. 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 increased 79.6% due to increased gross sales.

Gross profit increased 267.0% primarily due to the increase in net revenues.

Operating expenses increased 24.8%. The increase was due to employee expenses such as added payroll and related costs and consulting fees.

Our income from operations was $10.3 million compared to an operating income of $978 thousand for the same period last year due primarily to the increase in net revenues and resulting gross profit.

Interest and other income decreased $179 thousand for the quarter ended September 30, 2020 compared to the same period last year principally due to unrealized losses in investments.

Our effective tax rate on income before income taxes was 15.63% and 0.4% for the three months ended September 30, 2020 and September 30, 2019, respectively.



   Comparison of Nine Months Ended September 30, 2020 and September 30, 2019

Domestic sales, including sales to the U.S. government, accounted for 86.8% and 79.4% of the revenues, excluding product licensing fees, for the nine months ended September 30, 2020 and 2019, respectively. Domestic revenues increased 87.9% principally due to the increase in units sold. Domestic unit sales increased 76.4%. Domestic unit sales were 81.6% of total unit sales for the nine months ended September 30, 2020. International



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revenue and unit sales increased 10.1% and 3.7%, respectively, due to increased orders and the timing of the same. Our international orders may be subject to significant fluctuation over time and there is limited predictability with respect to the timing of international orders. Overall unit sales increased 56.3%. As discussed above, our sales under the HHS Order contributed $14.3 million to our results for the nine months ended September 30, 2020.

The Cost of manufactured product increased by 45.2% principally due to the increase in the volume of units sold. 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 increased 38.5% due to increased gross sales.

Gross profit increased 128.9% primarily due to the increase in net revenues.

Operating expenses increased 14.7%. The increase was due to an increase in employee headcount and related costs as well as consulting fees and an increase in the allowance for doubtful accounts.

Our operating income was $11.8 million compared to an operating income for the same period last year of $1.1 million due primarily to increased net revenues and resulting gross profit.

Interest and other income for the first nine months of 2020 increased $589 thousand compared to the same period last year principally due to realized and unrealized gains on investments.

Our effective tax rate on income before income taxes was (1.2)% and 0.6% for the nine months ended September 30, 2020 and September 30, 2019, respectively. As of June 30, 2020, we released our valuation allowance for deferred tax assets based on evidence supporting the position that the potential benefit would be "more-likely-than-not" realized. As a result of the release of the valuation allowance, we recognized approximately $1.8 million in deferred tax assets and recognized the corresponding amount as a beneficial income tax provision. The recognition of the benefit and deferred tax asset is reflected in the second quarter of 2020.



          Discussion of Balance Sheet and Statement of Cash Flow Items


Cash comprises 23% of total assets. Working capital was $32.0 million at September 30, 2020, an increase of $11.8 million from December 31, 2019.

Cash provided by operations was $8.8 million for the nine months ended September 30, 2020 due primarily to net income for the period, offset by a significant increase in accounts receivable.

Cash used by investing activities was $7.7 million for the nine months ended September 30, 2020 due primarily to the net sales of equity securities and the purchase of fixed assets. The $9.5 million impact to cash from the purchase of such fixed assets reflects down payments on orders for certain assets detailed in this report in connection with the TIA. In the third quarter of 2020, we liquidated approximately $4.0 million of our investment portfolio for operational needs.

Cash provided by financing activities was $8.6 million for the nine months ended September 30, 2020. This was primarily due to the proceeds from the PPP loan, proceeds from the exercise of stock options, and proceeds from the government under the TIA for down payments on our orders for fixed assets.



                                   LIQUIDITY


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


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. Some international sales of our products are shipped directly from China to the customer. 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. Additionally, the effect of an overall increase in units sold also has a positive effect on margins. 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.



Seasonality


Historically, unit sales have increased during the flu season. We cannot determine what percent of our recent increase in domestic sales (excluding the HHS Order) were attributable to flu shots versus preparation for a COVID-19 vaccine.




Cash Requirements



We have sufficient cash reserves, received a PPP loan, and have begun to realize income from operations. We also have access to our investments which may be liquidated in the event that we need to access the funds for operations.

Contracts with the U.S. Government

As discussed above, we were awarded a material delivery order by the Department of Health and Human Services of the United States in the total amount of approximately $83.8 million, plus certain expedited freight expenses. In the third quarter of 2020, our sales under this HHS Order were approximately $12.9 million and we expect such sales to increase each quarter through May 2021.

As discussed above, we entered into a TIA with United States government for approximately $53.7 million in Government funding for expanding our domestic production of needles and syringes. To date, we have received approximately $6.9 million for down payments on the purchase of certain fixed assets. Pursuant to the terms of the TIA, we are expecting to make significant additions to our facilities which should allow us to increase domestic production. We have engaged architects and construction contractors for the completion of new controlled environment facilities and warehousing facilities which are expected to be completed in the second quarter of 2021.



Option Exercises


Stock options were exercised by our employees and directors at various dates during the quarter ended September 30, 2020, and, consequently, we received approximately $224 thousand to exercise such options.

External Sources of Liquidity

We recently received a PPP Loan, as described above, in the principal amount of $1,363,000. PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loan granted under the PPP. We have not yet applied for forgiveness and we cannot be certain of the amount, if any, which may be forgiven.

We may obtain a construction loan for the construction of new facilities in connection with our expansion plans in connection with the TIA. While a portion of the planned construction will be funded by the Government, we expect to fund the construction of the new warehouse and expect the cost to be approximately $5.8 million.

It is unlikely we would choose to raise funds by the public sale of equity despite recent increases in the value of our stock. Our stock price increased materially during the first nine months of 2020. The closing price per share on January 1, 2020 was $1.53. On September 30, 2020, our stock price closed at $6.66 per share and it was $8.25 on November 10, 2020.



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We consider our investment portfolio a source of liquidity as well. For example, in the third quarter of 2020, we liquidated approximately $4.0 million from our investment portfolio for operational needs. As of September 30, 2020, $6.7 million was invested in third party securities.



                               CAPITAL RESOURCES


Since the execution of the TIA on July 1, 2020, we have been planning significant expansion to our facilities. We have engaged architects and general construction contractors for the completion of controlled environment facilities and additional warehousing facilities. The expanded facilities consist of approximately 27,800 square feet of additional controlled environment within existing properties and new construction of approximately 55,000 square feet of new warehouse space in conjunction with the overall production capacity expansion. We expect this construction to be completed in the second quarter of 2021. We have also contracted for additional automated assembly equipment, along with necessary auxiliary equipment, costing approximately $38 million in the aggregate.

© Edgar Online, source Glimpses

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Financials (USD)
Sales 2019 41,8 M - -
Net income 2019 3,15 M - -
Net cash 2019 11,0 M - -
P/E ratio 2019 21,4x
Yield 2019 -
Capitalization 535 M 535 M -
EV / Sales 2018 0,30x
EV / Sales 2019 0,91x
Nbr of Employees 138
Free-Float 43,5%
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Managers and Directors
NameTitle
Thomas J. Shaw Chairman, President & Chief Executive Officer
Lawrence G. Salerno Operations Director
John W. Fort CFO, Treasurer, Director, CAO & Vice President
Judy Ni Zhu Manager-Research & Development
Kathryn M. Duesman Vice President-Clinical Affairs
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