Patient Safety Technologies announces results for second quarter 2013

Patient Safety Technologies, Inc. (the "Company", OTCBB: PSTX, OTCQB: PSTX) today announced results for its second quarter ended June 30, 2013.

Expanded Customer Base and Financial Highlights
During the second quarter of 2013 the Company grew its installed customer base of facilities using its SurgiCount Safety-Sponge^® System to 294. This compares to 215 facilities as of the end of the second quarter of 2012 and represents year over year growth in the Company's installed customer base of 37%. Additionally, as of the date of this release the Company has implemented or signed contracts and scheduled implementations for additional facilities, collectively growing the number of facilities currently installed and those with signed agreements and scheduled implementations to 320.  Although not necessarily proportional to reported revenues, the number of facilities using the Company's products is a good indicator of our underlying business.

Total revenue for the second quarter of 2013 was $5.0 million. This compares to total revenue of $4.4 million for the second quarter of 2012. The higher revenue for the second quarter of 2013 as compared to the same period in 2012 was primarily related to the larger customer installed base during the second quarter of 2013, partially offset by a number of factors including the impact of a number of our larger existing customers switching the distributors they choose to fulfill our products.  We believe the effects of such distributor switchings are temporary, as the existing distributor typically discontinues ordering our products in advance of when the newly selected distributor begins initiating orders to build up its inventory to fulfill our products for the end user facilities, however our end user facility customers will continue their consume our products at their normal consumption levels.   

Reported GAAP gross margins were 43% for the second quarter of 2013 as compared to 42% for the same period in 2012 and 39% during the first quarter of 2013. Because the Company's reported GAAP cost of revenues includes certain non-cash depreciation expense, there can be a significant difference between reported gross margins and the actual cash gross margins realized by the Company.  Excluding the non-cash depreciation expense that is included in reported cost of revenues, our non-GAAP Cash Gross Margins were 53% for the second quarter of 2013 as compared to 51% for the same period in 2012, and 50% during the first quarter of 2013. The expansion of both our reported GAAP and non-GAAP Cash Gross Margins was the result of a number of factors, including the benefit of cost reductions we achieved on our sponge products totaling approximately 10% that became effective during the first quarter of 2013. Given the first in, first out inventory methodology we employ with our sponge products, we realized a portion of the benefits from these cost reductions during the second quarter of 2013, however we expect to realize increased benefits from this cost reduction during the third quarter of 2013 and the full benefits by the end of 2013.

Reported operating expenses for the second quarter of 2013 were $2.5 million, an increase of $92 thousand, or 4%, as compared to $2.4 million during the same period in 2012. The primary reasons for the relatively minimal increase in operating expenses during the second quarter of 2013 as compared to the same period in 2012, despite the large growth in our customer installed base and reported revenues, were lower one-time implementation expenses offset by higher employment related expenses.

During the second quarter of 2013 the Company generated a GAAP Operating Loss of $353 thousand and Adjusted Operating Income (as defined below) of $509 thousand. This compares with a GAAP Operating Loss of $524 thousand and Adjusted Operating Income of $177 thousand during the second quarter of 2012. The primary reasons for the lower reported GAAP Operating Loss and the increase in Adjusted Operating Income reported during the second quarter of 2013 as compared to the same period in 2012, was the higher reported revenue from a larger installed customer base, expanding gross margins and minimally higher operating expenses. 

"During the second quarter we continued to add to our world class customer base, grow our reported revenues and expand our gross margins. Additionally, despite making additional investments in our business we continued to grow our adjusted operating income, reflecting the breakeven point we have surpassed with our existing market penetration and the operating leverage in our business model," stated Brian E. Stewart, President and Chief Executive Officer of Patient Safety Technologies, Inc.

"Subsequent to the end of the second quarter, U.S. News and World Report released its 2013-14 Best Hospitals Honor Roll.  Once again our SurgiCount Safety-Sponge® System has established itself as the retained sponge solution of choice among this elite group of healthcare providers, being used at more facilities on this list than all competing solutions combined.  We congratulate all our customers who received this honor and are proud to have helped enable them to improve their patient outcomes.  We believe our continued dominant share within this group further improves our position to become the clinical standard of care for this preventable Never Event," continued Mr. Stewart.  

The Company's first quarter of 2013 financial statements are included in its Quarterly Report on Form 10-Q filed by the Company on August 12, 2013 and available at the SEC's website at www.sec.gov.

To supplement the Company's presentation of operating income and (loss) measured in accordance with GAAP, we also use a non-GAAP measure of operating income, herein defined as Adjusted Operating Income (in the event this amount is negative it is herein defined as Adjusted Operating Loss). Reconciliation of GAAP operating loss to Adjusted Operating Income or Loss for the second quarters of 2013 and 2012 are shown above. How we define Adjusted Operating Income or Loss herein may not be consistent with how we have defined this non-GAAP measure historically.  Additionally, the Company also includes a non-GAAP measure of gross profit and gross margins, herein defined as Cash Gross Profit and Cash Gross Margin, which excludes from these calculations the effects of non-cash depreciation expense. Non-GAAP measures are provided to enhance investors' overall understanding of the Company's current financial performance, prospects for the future and as a means to evaluate period-to-period comparisons. The Company believes that the use of non-GAAP operating income, gross profit and gross margins provides meaningful supplemental information regarding financial performance by excluding certain expenses and benefits that may not be indicative of recurring core business operating results. The Company believes these non-GAAP measures when viewed with GAAP results and the accompanying reconciliation, enhances the comparability of results against prior periods and allows for greater transparency of financial results. The Company believes these non-GAAP measure facilitate management's internal comparison of the Company's financial performance to that of prior periods as well as trend analysis for budgeting and planning purposes. The presentation of these non-GAAP measure is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.

Surgical Adverse Events and Retained Surgical Sponges
Surgical never events are costly to the health care system and are associated with serious harm to patients¹.  Retained foreign bodies are estimated to represent up to 49.8% of all reported surgical never events¹ with surgical sponges representing the vast majority of items unintentionally retained².  Estimated to occur as often as 1 in every 1,000 to 1,500 abdominal operations to 1 in every 8,000 in patient operations², with an estimated 32 million surgical procedures annually in the U.S. this implies approximately 4,000 retained sponge incidents each year, 11 every day.  The negative impact to patient outcomes from retained foreign objects varies and can be significant, with permanent injuries in an estimated 16% of incidents and patient mortality in 5%¹. Cost ramifications can be considerable and include legal expenses and awards, non-reimbursable healthcare services, loss of time, loss of reputation for involved individuals and facilities and the negative impact on pay for performance metrics.