Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. Patient Safety Technologies, Inc (812301) 10-Q published on Nov 13, 2013 at 5:04 am
Reporting Period: Sep 29, 2013
Based on the reported balances from Cardinal Health, we estimate that the Forward Order inventory balance is approximately $10 million. Should Cardinal Health have any excess inventory in January of 2014, Cardinal Health has the right to begin to use that excess inventory to fulfill demand from end users for our products. Should this occur our reported revenues and cash flows will be negatively affected. Based on the reported balances from Cardinal Health, we estimate that the Forward Order inventory balance will continue to be approximately $10 million in January 2014. Without assuming any additional customer growth, the maximum amount of excess inventory that could be utilized by Cardinal Health during 2014 is approximately $2.5 million a quarter, as determined by dividing the remaining Forward Order inventory balance by 4 quarters. Once any excess inventory is utilized over that 12 month period our revenues and cash flows should no longer be affected by this issue. The actual impact under the Second Amendment could vary based on a variety of factors that are identified in our quarterly and annual reports including but not limited to the amount of excess inventory, the rate of growth in our customer base, the amount, if any, of the Forward Order we repurchase and other factors. Management currently has no immediate plans to repurchase amounts of this excess inventory. However we will consider this option should an appropriate opportunity arise. While we have not provided any estimates of what we expect future sales growth to be, in order to prevent a significant negative impact to our future revenue by Cardinal Health’s release of Forward Order inventory, (i) we would need to experience substantial growth in the number of hospitals using our products, (ii) we would need to buyback any excess inventory from Cardinal Health, or (iii) Cardinal Health would need to decide not to use its excess inventory to partially meet customer demand. See further discussion of the Forward Order inventory and its potential impact on the Company including the expected impact on revenue, cash flow and liquidity arising from Cardinal Health’s release of Forward Order inventory during 2014 in the Financial Condition, Liquidity and Capital Resources section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Total revenue for the three months ended September 30, 2013 was $5.2 million, which compared to total revenue for the three months ended September 30, 2012 of $5.0 million, representing year over year growth in reported revenue of 5%. The primary reason for the increased revenue growth was the larger number of facilities utilizing our products during the three months ended September 30, 2013 as compared to the three months ended September 30, 2012. We had 303 customer facilities implemented as of September 30, 2013 compared to 265 facilities on September 30, 2012, representing year over year growth of 14% in our installed customer base. Reported revenues during the quarter ended September 30, 2013 were negatively impacted by a number of factors, including the effect of a large number of our existing customers switching the distributors they use to fulfill their surgical products, including our products, and the temporary negative impact this switching has had on the supply chain as the incumbent distributor fulfills end customer demand by working down its existing inventory of our products prior to the newly selected distributor begins ordering corresponding amounts of inventory of our products.
Cost of revenue for the nine months ended September 30, 2013 was $8.7 million, an increase of $1.6 million or 23%, as compared to cost of revenue of $7.1 million for the same nine month period in 2012. The increase in cost of revenue was primarily the result of a higher number of customer facilities using our products during the nine month period ended September 30, 2013 as compared to the nine month period ended September 30, 2012. Our cost of revenue for the nine months ended September 30, 2013 also included a significantly higher amount of non-cash depreciation expense from providing scanner hardware at no cost to the larger number of new customer facilities (see “ Hardware Effect on Revenue and Cost of Revenue ” in the Factors Affecting Past and Future Results section). Depreciation expense from scanners was $1.6 million for the nine months ended September 30, 2013, an increase of $452 thousand or 40% compared to $1.1 million for the nine month period ended on September 30, 2012. Cost of revenue as a percentage of revenue was 59% during the nine month period ended September 30, 2013 and 57% for the nine month period ended September 30, 2012. Excluding the non-cash depreciation expense from cost of revenue for the nine month period ended September 30, 2013 results in an adjusted cost of revenue of $7.1 million ($8.7 million reported cost of revenue minus $1.6 million non-cash depreciation expense), which reflects an increase of $1.2 million or 19% as compared to a similarly adjusted cost of revenue of $6.0 million for the nine month period ended September 30, 2012 after excluding comparable non-cash depreciation expense ($7.1 million reported cost of revenue minus $1.1 million non-cash depreciation expense). This was partially offset by a decrease in product costs related to our disposable sponge products. During the first quarter of 2013 we realized a cumulative cost reduction of our disposable sponge products. We expect to realize an increased portion of the benefit of this cost reduction during the fourth quarter of 2013.
General and administrative (“G&A”) expenses totaled $4.0 million for nine months ended September 30, 2013, representing an increase of $813 thousand, or 25%, compared to G&A expenses of $3.2 million during the same nine month period in 2012. The increase in G&A expenses during the nine months ended September 30, 2013 as compared to the same period in 2012 was due primarily to the addition of additional employees and third party services to support our growing customer base and expanded operations, as well as several non-recurring consulting projects focused on improving both our operations and compliance environment. During 2013, we hired consultants and later added both key management and staff positions to upgrade and enhance our quality and regulatory systems and processes. We also invested in bringing in-house both senior management and experienced staff with technical skills for supporting new product development, including in the areas of software and hardware development, and other skills and capabilities that will bring new emphasis to product development and more extensive capabilities to deliver future products.
We reported other income of $11 thousand for the nine months ended September 30, 2013, an increase of $43 thousand as compared to other expense of $32 thousand for the nine months ended September 30, 2012. During the nine month periods ended September 30, 2013 and September 30, 2012, we recorded interest expense of $144 thousand and $36 thousand respectively, relating to an agreement with A Plus made in early 2012 which gave us extended payment terms, in order to assist in funding the significant growth we experienced throughout 2012. In addition, during the three months ended September 30, 2013 we also recorded other income related to a gain of $150 thousand on the redemption of preferred stock in Alacra Corporation, an investment previously held by us since 2000.