Retractable Technologies Inc: Form 10-Q for the period ended Sep 30, 2023

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: material changes in demand; 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 in providing devices to the safety market; and any 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 80.5% of our sales in the first nine months of 2023. EasyPoint® products accounted for 14.1% of sales in the first nine months of 2023.

Our products have been and continue to be distributed nationally and internationally through numerous distributors. Some of our popular syringe products provide low dead-space. Low dead-space syringes reduce residual medication remaining in the syringe after the dose has been administered. In some instances, the low dead-space allows for additional doses of medication to be obtained from the vials.

In 2020 and 2021, we were awarded significant orders and contracts by the U.S. government for safety syringes for COVID-19 vaccination efforts. From 2020 through the first quarter of 2022, the U.S. government was a significant customer. We cannot predict whether any future U.S. government orders may occur.

In 2020, we entered into a Technology Investment Agreement (“TIA”) with the U.S. government which provided significant government funding for expanding our domestic production of needles and syringes to meet ongoing and future U.S. COVID-19 medical countermeasures demands. Recent additions of manufacturing equipment and facilities have increased our production capacity and our overhead costs. Additionally, in 2022, we expanded our existing administrative offices at a total cost of $5.8 million. There are currently no plans to further expand our production or administrative facilities, nor do we have material commitments for additional manufacturing equipment purchases.

The U.S. government orders as well as the TIA are material events particular to the COVID-19 pandemic and are not indicative of future operations.

Although we have recently experienced certain cost increases in raw materials, those costs primarily affected our domestic manufacturing because the finished goods we purchased from China (being 90% of our products) are subject to a long-term fixed price contract. Other factors that could affect our unit costs include increases in tariffs, supplier cost increases, and changing production volumes. Increases in costs may not be recoverable through price increases of our products.

In the first nine months of 2023, 24.5% of our revenues were international sales, predominantly from international sales in the first quarter of the year. The timing and volumes of international sales are more difficult to predict than domestic sales, and international vaccination campaigns tend to lag behind those in the domestic market.

We believe domestic customers have retained products provided for vaccination purposes in inventory, leading to a decrease in our 2023 domestic sales. Customers have reported that demand was diminished due to their remaining syringe inventory. While it is difficult to estimate how much of the remaining inventory might still remain in the market, domestic unit sales have increased each quarter of this year subsequent to the surge in government sales for COVID-19 vaccinations. This trend is consistent with historical sales patterns, coinciding with flu season sales.

As detailed in Note 4 to the financial statements, we held $33.7 million in debt and equity securities as of September 30, 2023, which represented 18.5% of our total assets. During the first quarter of 2023, we increased our investment in U.S. government-backed mutual funds by approximately $9.0 million and restructured our investments in equity securities by approximately $6.0 million. During the second quarter of 2023, we sold our position in certain equity investments and reinvested the funds, investing approximately $27.8 million in U.S. government-backed mutual funds. During the third quarter of 2023, we sold $24 million in U.S. government-backed mutual funds and reinvested the proceeds in equity securities. The purchases of new investments have materially decreased our cash position since December 2022.

On July 13, 2023, we received a refund of previously paid estimated state tax payments of approximately $8 million. The $8 million was recorded as Income Taxes Receivable on the Condensed Balance Sheets at December 31, 2022 through June 30, 2023.

In June 2022, we reduced our workforce by approximately 16% and we further reduced our workforce by an additional 22% in March 2023. These reductions in force were a result of the substantial completion of our facility expansion and the fulfillment of U.S. government orders to provide products for COVID-19 vaccinations. The result of such cost saving measures represents overall savings in employee related costs of approximately $1.9 million in the first nine months of 2023 versus 2022. The savings are comprised of overall reductions in gross wages, payroll taxes, and insurance as well as other related employee costs.

Historically, unit sales have increased during the flu season. With the dramatic increase in sales attributable to COVID-19 vaccinations, however, the effect of flu season sales was less impactful in past years. Unit sales in 2023 have increased each quarter domestically for those products associated with administering vaccinations (including the flu shot) which indicates that the seasonal trends are following pre-pandemic patterns.

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 third quarter of 2023, our Chinese manufacturers produced approximately 91% of our products. In the event that we become unable to purchase products from our Chinese manufacturers, we may 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.

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 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.

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. All period references are to periods ended September 30, 2023 or 2022, as applicable. Dollar amounts have been rounded for ease of reading.

Comparison of Three Months Ended September 30, 2023 and September 30, 2022

Domestic sales accounted for 90.9% and 39.9% of the revenues for the three months ended September 30, 2023 and 2022, respectively. Domestic revenues increased 2.1%. Domestic unit sales increased 1.8%. Domestic unit sales were 87% of total unit sales for the three months ended September 30, 2023. International revenues decreased approximately 93.2% predominately due to fewer international vaccination-related sales. Overall unit sales decreased 66.1%. There is uncertainty as to the timing of future international orders.

Cost of manufactured product decreased 69.0% principally due to lower unit sales. Royalty expense decreased 46.6% due to the associated decrease in gross sales.

Operating expenses decreased 3.1% from the prior year. This is substantially due to decreases in stock option expenses and headcount as well as employee-related expenses as a result of a reduction of labor force in March of 2023.

The loss from operations was $936 thousand compared to a loss of $691 thousand for the same period last year. The greater loss was due to an overall decrease in revenues.

The unrealized loss on debt and equity securities was $6.5 million due to the decreased market values of those securities.

The benefit for income taxes was $1.2 million for the third quarter of 2023 as compared to a benefit of $5.8 million in the third quarter of 2022.

Comparison of Nine Months Ended September 30, 2023 and September 30, 2022

Domestic sales accounted for 75.5% and 54.4% of the revenues for the nine months ended September 30, 2023 and 2022, respectively. Domestic revenues decreased 50.5% principally due to lack of sales to the U.S. government. Domestic unit sales decreased 46%. Domestic unit sales were 66.4% of total unit sales for the nine months ended

September 30, 2023. International revenues decreased approximately 80.8% predominately due to fewer international vaccination-related sales. Overall unit sales decreased 66.9%. There is uncertainty as to the timing of future international orders.

Cost of manufactured product decreased 63.3% principally due to lower unit sales. Royalty expense decreased 55.3% due to the associated decrease in gross sales.

Operating expenses decreased 3.1% from the prior year. This is substantially due to decreases in stock option expense, consulting, and reduced headcount. In the first nine months of 2023, we incurred approximately 30.9% more in sales and marketing expenses, primarily in travel and trade show expenses as well as increased headcount for sales representatives, in an effort to improve future revenues.

The loss from operations was $8.7 million compared to an income from operations of $7.0 million for the same period last year. The loss was due to an overall decline in revenues and an increase in cost of manufactured product on a per-unit basis.

The unrealized loss on debt and equity securities was $11.3 million due to the decreased market values of those securities but we recognized a gain on sales of equity securities in the amount of $5.6 million.

The benefit for income taxes was $1.9 million for the first nine months of 2023 as compared to $1.5 million in the first nine months of 2022.

Discussion of Balance Sheet and Cash Flow Items

Cash flow provided by operations was $873 thousand for the nine months ended September 30, 2023 due to a number of factors. We recognized approximately $4.5 million in other income from the TIA during the first nine months of 2023. Changes in working capital also impacted cash flows from operating activities. Accounts receivable increased by $3.8 million, inventories increased by $2.0 million, and accounts payable decreased by $3.0 million. This was offset by a decrease of $9.5 million in income taxes receivable and an increase of $1.2 million in accrued liabilities.

Cash used by investing activities was $10.4 million for the nine months ended September 30, 2023 due primarily to the purchase of $68.3 million of debt and equity securities, which was offset by $58.6 million of proceeds from the sale of debt and equity securities.

Cash provided by financing activities was $1.1 million for the nine months ended September 30, 2023. This was primarily due to proceeds from the government under the TIA for payments on our orders for fixed assets but was offset by our payment of $1.1 million in connection with the private stock exchange discussed in Note 11.

LIQUIDITY AND CAPITAL RESOURCES

We have historically funded operations primarily from the proceeds from revenues, private placements, litigation settlements, and loans. We may fund operations going forward from revenues, cash reserves, and investments if the need to access those funds arises.

On July 13, 2023, we received a refund of previously paid estimated state tax payments of approximately $8 million. This amount was reported as cash on the balance sheet at September 30, 2023 and increased cash balances in the third quarter of 2023. The $8 million was recorded as Income Taxes Receivable on the Condensed Balance Sheets at December 31, 2022 through June 30, 2023.

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. Generally, an overall increase in units sold can positively affect our margins. The cost of raw materials used in manufacturing and transportation costs can also significantly affect our 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.

Cash Requirements

We believe we will have adequate means to meet our short-term needs to fund operations for at least 12 months from the date of issuance of the financial statements. Besides cash reserves and expected 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. Expected short-term uses of cash include payroll and benefits, royalty expense, inventory purchases, contractual obligations, payment of income taxes, quarterly preferred stock dividends, and other operational priorities. Our liabilities are our bank debt as set forth as Long-term debt on our Condensed Balance Sheets and other liabilities detailed herein in Note 7 to the financial statements. We believe we will have adequate means to meet our currently foreseeable long-term liquidity needs. In the event that our long-term cash requirements exceed our current reserves and our ability to generate cash from operations, management would necessarily undertake to reduce our operational cash requirements.

Capital Resources

Since the execution of the TIA on July 1, 2020, we have significantly expanded our facilities. There are no remaining capital projects.

CRITICAL ACCOUNTING ESTIMATES

We are responsible for developing estimates for amounts reported as assets and liabilities, and revenues and expenses in conformity with U.S. generally accepted accounting principles (“GAAP”). Those estimates require that we develop assumptions of future events based on past experience and expectations of economic factors. Among the more critical estimates management makes is the estimate for customer rebates. The amount reported as a contractual allowance for rebates involves examination of past historical trends related to our sales to customers and the related credits issued once the contractual obligations of the customers have been met. The establishment of a liability for future claims of rebates against sales in the current period requires that we have an understanding of the relevant sales with respect to product categories, sales distribution channels, and the likelihood of contractual obligations being satisfied. We examine the results of estimates against actual results historically and use the determination to further develop our basis for assumptions in future periods, as well as the accuracy of past estimates. While we believe that we have sufficient historical data, and a firm basis for establishing reserves for contractual obligations, there is an inherent risk that our estimates and the underlying assumptions may not reflect actual future results. In the event that these estimates and/or assumptions are incorrect, adjustments to our reserves may have a material impact on future results.

Disclosure Controls and Procedures

Pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, Management, with the participation of our President, Chairman, and Chief Executive Officer, Thomas J. Shaw (the “CEO”), and our Vice President and Chief Financial Officer, John W. Fort III (the “CFO”), acting in their capacities as our principal executive and principal financial officers, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. The term disclosure controls and procedures means controls and other procedures that are designed to ensure that information required to be disclosed by us in our periodic reports is: i) recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms;

and ii) accumulated and communicated to our Management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based upon this evaluation, the CEO and CFO concluded that, as of September 30, 2023, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There have been no changes during the third quarter of 2023 or subsequent to September 30, 2023 in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

There were no material changes in our Risk Factors as set forth in our most recent annual and quarterly reports which are available on EDGAR.