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
16
Table of Contents
factors include, among others: the impact of COVID-19 on all facets of logistics
and operations as well as costs; our ability to scale up production volumes in
response to an increase 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, specifically Becton, Dickinson and Company, 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 95.4% of our sales in the first three months of 2022.
EasyPoint® products accounted for 1.6% of sales in the first three months of
2022. We also manufacture and market an IV safety catheter and blood collection
products, including the blood collection tube holder and VanishPoint® Blood
Collection Set which were 2.9% of our total product sales for the first three
months of 2022.
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. We plan to highlight the advantages of our low
dead-space products, including the potential to reduce the costs associated with
wasted medication, as part of our overall marketing message.
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 for COVID-19 vaccination efforts, which
order was in the amount of $83.8 million plus $10 million in expedited freight
costs. The period of performance for this order ended in March 2022.
The Department of Health and Human Services awarded us another contract on
February 12, 2021 to supply low dead-space safety syringes for COVID-19
vaccination efforts. The base price for the contract and purchase order was
$54.2 million for the five-month base period of performance (February 15, 2021
to July 14, 2021). We received non-binding notice that the contract would be
extended for seven additional months beyond the base period of performance with
a total contract price during such period of approximately $92.8 million plus an
additional $6 million in air freight costs. However, to date, we have received a
commitment to exercise only the first four option periods which extended through
the end of December 2021. For each period, the freight reimbursement cost is
included in total overall contract value and is estimated at approximately 25%
of the overall price.
Our sales under both of the foregoing orders from the U.S. government were $15.7
million during the first three months of 2022, representing 35.2% of our total
sales for such period. Both of the above-mentioned orders as well as the TIA (as
defined below) from the U.S. government are material events particular to the
COVID-19 pandemic and may not be indicative of future operations. While we
continue to work with the Department of Health and Human Services, additional
orders are uncertain. In the absence of new U.S. government orders and/or an
increase in our domestic orders, we would expect our revenues to decline. The
addition of manufacturing equipment and facilities will greatly increase our
production capacity. However, in the absence of significant demand, such
capacity may be underutilized.
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) for $53.7 million in
government funding for expanding our domestic production of needles and syringes
to meet ongoing and future U.S. COVID-19 medical countermeasures demands.
Effective May 12, 2021, we entered into an amendment to the TIA providing an
additional $27.4 million in funding to add 12,500 square feet of controlled
environment and two additional assembly lines to increase our existing domestic
manufacturing
17
Table of Contents
capabilities. The amended completion date is August 29, 2022. As of May 6,
2022, we have negotiated contracts for the purchase of automated assembly
equipment, molds, and molding equipment, as well as portions of auxiliary
equipment, for approximately $64.2 million. We have also received a temporary
certificate of occupancy for the $6.7 million 27,800 square foot controlled
environment which was funded by the U.S. government under the original
agreement. In addition, we have substantially completed the additional
controlled environment space required under the May 12, 2021 amendment.
Finally, we have received the certificate of occupancy for the new $5.9 million
55,000 square foot warehouse which is our financial responsibility.
As a result of the COVID-19 pandemic, we have faced and continue to deal with
the logistical challenges of sourcing raw materials and finished goods,
particularly finished goods from China. We utilize multiple transportation
providers to ensure we can meet our delivery schedules, but we are subject to
the global supply chain and its complexities. To date, the freight challenges
have neither caused a loss of customers nor a cessation of production.
However, freight costs have materially increased. The increase in freight costs
has significantly impacted our cost of manufactured product, and we expect this
trend to continue as long as the global supply chain challenges persist. These
cost increases are not unique to our business, but the fact that a substantial
percent of our prior period sales were related to orders from the U.S.
government with reimbursed freight costs will affect comparability of 2022 costs
and margins to prior periods. In addition to increased costs associated with
the global supply chain, we have had challenges sourcing transportation. There
is also possible risk from the political environment in Europe and Asia. We
believe that with our current levels of products on-hand and our ability to
produce domestically, we are positioned to continue to operate and meet the
needs of our customers currently. Other factors that could affect our unit
costs include increases in tariffs, costs by third party manufacturers, and
changing production volumes. Increases in costs may not be recoverable through
price increases of our products.
Other factors which could have a material impact on our business include
COVID-19 booster shot recommendations, flu shot campaigns, and inefficient
domestic distribution networks. An increase in the frequency or necessity to
administer additional COVID-19 boosters or flu shots is still uncertain and may
not lead to an increase in our product sales.
We have entered into an agreement to expand our existing administrative offices
by 14,000 square feet. We currently expect that the cost of expansion will be
approximately $5.6 million. The expected substantial completion date for the new
office space is October 2022. To date, we have spent approximately $2.0 million.
As detailed in Note 4 to the financial statements, we held $18.7 million in debt
and equity securities as of March 31, 2022, which represented 17.5% of our
current assets. Such amount includes unrealized gains on investments, as well as
an additional $2.0 million cash investment during the first quarter of 2022. We
continually monitor our invested balances.
In response to, among other factors, the global COVID-19 pandemic, our delivery
orders from the U.S. government, and the TIA, employee headcount and related
salary and benefits costs have increased significantly. As of March 31, 2022,
the Company employed approximately 269 full-time, part-time, and temporary
employees. This represents approximately a 29.3% increase in our workforce since
March 2021 and compensation costs increased 25.6%.
As a result of our completion of the original U.S. government delivery orders
and the progression of the TIA, we continue to monitor our current level of
operating expenses, including the overall impact of our staffing structure.
Effective June 4, 2021, we entered into a repurchase plan (the "Plan") for the
purchase of up to $10 million of our Common Stock. Under the Plan, open market
purchases of our Common Stock commenced June 18, 2021 and 1,087,145 shares were
purchased through the Plan's termination on April 14, 2022 for an aggregate
purchase price of approximately $8.1 million. We terminated the plan because our
stock price appears not to be correlated with our economic performance at this
time.
Historically, unit sales have increased during the flu season. Seasonal trends
in 2020 and 2021 were less pronounced due to demand related to the COVID-19
vaccine. With the completion of our delivery orders from the U.S. government,
flu season orders may have a more pronounced effect on 2022 revenues.
18
Table of Contents
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 three months of 2022, our Chinese
manufacturers produced approximately 93.7% of our products. 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.
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 March 31, 2022 or 2021, as applicable. Dollar amounts have been
rounded for ease of reading.
Comparison of Three Months Ended March 31, 2022 and March 31, 2021
Domestic sales, including sales to the U.S. government, accounted for 58.0% and
97.3% of the revenues for the three months ended March 31, 2022 and 2021,
respectively. Domestic revenues decreased 46.8% principally due to lower sales
to the U.S. government. Domestic unit sales decreased 48.9%. Domestic unit
sales were 45.1% of total unit sales for the three months ended March 31, 2022.
Domestic unit sales excluding the U.S. government decreased approximately
16.4%. International revenues increased approximately 1,313.2% predominately
due to purchases from a non-governmental humanitarian organization for
international vaccination campaigns. Overall unit sales increased 8.5%. While
international unit sales and revenues increased dramatically, there is
uncertainty as to the timing of future international orders. In addition, the
revenues on a per-unit basis in the international market are significantly lower
than in the U.S. market. As a result, material increases in international
orders and unit sales have the potential to lower our overall revenues on a
per-unit basis, as well as our profit margins.
Cost of manufactured product increased 38.9% principally due to increases in
transportation costs, a higher-cost product mix, and an increase in units sold.
Royalty expense decreased 12.1% due to decreased gross sales.
Operating expenses increased 27.7% from the prior year. This is substantially
due to increased headcount and other employee-related expenses, as well as
consulting expenses. Each of these is attributable to the larger volume of
orders and the expansion activities required by the TIA. Included in the
increased employee expenses were $1.1 million of share-based compensation
expense and $686 thousand from general salary increases and larger headcount.
Sales and marketing expenses increased due to increased access to travel for our
sales staff.
Income from operations was $9.7 million compared to income from operations of
$23.4 million for the same period last year. The decrease was due to an overall
decrease in revenues and higher costs as well as fewer orders associated with
freight reimbursement.
Unrealized gain on equity securities increased by 201.7% due to the increased
market values of those securities. However, a realized loss on the sale of
investments led to a 61.6% decrease in interest and other income. Interest
expense for the first quarter of 2022 decreased by approximately 27.6% from the
same period in the prior year due to less imputed interest associated with the
stock exchanges discussed in Note 12 of the financial statements.
The provision for income taxes decreased to $5.8 million for the first quarter
of 2022 from $6.6 million in the first quarter of 2021. For a detailed
description of the determination and components of calculating the provision,
please refer to Note 5 of the financial statements.
19
Table of Contents
Discussion of Balance Sheet and Cash Flow Items
Cash comprises 20.8% of total assets. Cash flow from operations was $21.4
million for the three months ended March 31, 2022 principally due to a $15.3
million reduction of Accounts receivable. Additionally, we have recorded
deferred taxes of $5.1 million which is material to the adjustments to total
cash flow from operations. The deferred tax asset represents amounts available
to reduce income taxes payable on taxable income in future years.
Cash used by investing activities was $7.1 million for the three months ended
March 31, 2022 due primarily to the purchase of property, plant and equipment,
building improvements, and the purchase of equity securities. The $5.0 million
impact to cash from the purchase of fixed assets primarily reflects down
payments on orders for certain assets as discussed in Note 15 to the financial
statements. Of the $5.0 million, $1.0 million was spent on additional assembly
equipment and a new warehouse outside the TIA reimbursement provisions.
Cash used by financing activities was $356 thousand for the three months ended
March 31, 2022. This was primarily due to proceeds from the government under the
TIA for down payments on our orders for fixed assets, but was offset by our
repurchase of common stock in the amount of $2.5 million.
LIQUIDITY AND CAPITAL RESOURCES
Internal Sources of Liquidity
We have historically funded operations primarily from the proceeds from
revenues, private placements, litigation settlements, and loans. We expect to
fund operations going forward from revenues, cash reserves, and investments
available for sale if the need to access those funds arises. We do not, and
historically have not, utilized lines of credit to fund operations.
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. 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, capital expenditures, payment of income
taxes, quarterly preferred stock dividends, and other operational priorities.
Our long-term plans involving material cash requirements for capital
expenditures are detailed in this section below under "Capital Resources" and
our liabilities are our bank debt as set forth as out 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.
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
February 2021, we received another material contract from the Department of
Health and Human Services for additional
20
Table of Contents
safety syringes representing expected revenues and reimbursable freight costs of
$54.2 million for a five-month period ending July 14, 2021 and approximately
$92.8 million (plus an additional $6 million in air freight costs) for seven
monthly option periods. To date, we have received a commitment to exercise only
the first four option periods which extended through the end of December 2021.
We have not received additional orders beyond the first four option periods.
While we continue to work with the Department of Health and Human Services,
significant future orders are uncertain.
As discussed above, we entered into a TIA with the U.S. government for a total
value of approximately $81.0 million in government funding for expanding our
domestic production of needles and syringes. As of May 6, 2022, we have
received approximately $68.7 million for down payments on the purchase of
certain fixed assets. In 2021, we contributed approximately $5.9 million
towards the completion of the new 55,000 square foot warehouse as a portion of
the cost sharing agreement. The Company will continue to fund the expansion
efforts primarily through providing the necessary workforce to implement the
addition of new assets, as well as provide the ongoing necessary support.
External Sources of Liquidity
We received a PPP Loan in the principal amount of $1.4 million. On May 13,
2021, we were informed that the entire original principal amount of $1.4 million
would be forgiven.
We consider our investment portfolio a source of liquidity as well. As of March
31, 2022, $18.7 million was invested in third party securities.
Capital Resources
Since the execution of the TIA on July 1, 2020, we have significantly expanded
our facilities. As of May 6, 2022, we had received a temporary certificate of
occupancy for the approximately 27,800 square feet of additional controlled
environment within existing properties and a certificate of occupancy for the
55,000 square feet of new warehouse space. We have substantially completed an
additional 12,500 square feet of controlled environment space. As of May 6,
2022, we have negotiated contracts for the purchase of automated assembly
equipment, molds, and molding equipment, as well as portions of auxiliary
equipment, under the original TIA and the modification for approximately $64.2
million. To fund the purchase of the automated assembly equipment, auxiliary
equipment, and construction of the controlled environment, we are reimbursed by
the U.S. government according to the terms in the TIA. The TIA also allows us
to request an advance of funds for larger purchases when necessary. The
expenditures which are not reimbursable from the U.S. government under the TIA
are funded with cash from operations. The capital assets funded by us under the
TIA include the construction of the new warehouse as well as certain accessory
equipment.
We have entered into an agreement to expand our existing administrative offices
by 14,000 square feet. We currently expect that the cost of expansion will be
approximately $5.6 million which we will fund from cash from operations. The
expected substantial completion date for the new office space is October 2022.
To date, we have spent approximately $2.0 million.
As mentioned above in the section "Cash Requirements", we have cash reserves,
investments which could be liquidated in the event of our requirements therefor,
as well as the ability to generate cash flow from operations. 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.
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 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
21
Table of Contents
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.
© Edgar Online, source Glimpses
RETRACTABLE TECHNOLOGIES, INC. 
