10-Q 1 tm2014504d1_10q.htm FORM 10-Q

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

xQuarterly report PURSUANT TO Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2020

 

or

 

¨Transition report PURSUANT TO Section 13 or 15(d) of the Exchange Act OF 1934

 

For the transition period from        to

 

Commission file number: 001-16465

 

Retractable Technologies, Inc.

(Exact name of registrant as specified in its charter)

 

Texas 75-2599762

(State or other jurisdiction of
incorporation or organization)

 (I.R.S. Employer Identification No.)
   
511 Lobo Lane  
Little Elm, Texas 75068-5295
(Address of principal executive offices) (Zip Code)

 

(972) 294-1010

(Registrant’s telephone number, including area code)

 

(Former name, former address, and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock RVP NYSE American

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ¨ Accelerated filer  ¨
   
Non-accelerated filer  x Smaller reporting company   x
  Emerging growth company  ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ¨ No

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 32,682,454 shares of Common Stock, no par value, issued and outstanding on May 1, 2020.

 

 

 

 

 

RETRACTABLE TECHNOLOGIES, INC.

FORM 10-Q

For the Quarterly Period Ended March 31, 2020

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION
   
Item 1.       Financial Statements. 1
  CONDENSED BALANCE SHEETS 1
  CONDENSED STATEMENTS OF OPERATIONS 2
  CONDENSED STATEMENTS OF CASH FLOWS 3
  CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY 4
  NOTES TO CONDENSED FINANCIAL STATEMENTS 5
Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations. 15
Item 3.       Quantitative and Qualitative Disclosures About Market Risk. 18
Item 4.       Controls and Procedures. 18
   
PART II—OTHER INFORMATION
 
Item 1.       Legal Proceedings. 18
Item 1A.    Risk Factors. 19
Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds. 19
Item 3.       Defaults Upon Senior Securities. 19
Item 6.       Exhibits. 20
SIGNATURES 20

 

 

 

PART I—FINANCIAL INFORMATION

 

Item 1.Financial Statements.

 

RETRACTABLE TECHNOLOGIES, INC.

CONDENSED BALANCE SHEETS

(unaudited)

 

   March 31, 2020   December 31, 2019 
ASSETS          
Current assets:          
Cash and cash equivalents  $7,605,134   $5,934,749 
Accounts receivable, net   5,193,840    6,564,371 
Investments in debt and equity securities, at fair value   7,649,081    7,771,660 
Inventories, net   6,373,132    7,450,592 
Income taxes receivable   100,785    50,392 
Other current assets   669,767    635,201 
Total current assets   27,591,739    28,406,965 
           
Property, plant, and equipment, net   10,607,718    10,632,057 
Income taxes receivable   —    50,393 
Other assets   67,832    88,315 
Total assets  $38,267,289   $39,177,730 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable  $4,434,967   $5,007,604 
Current portion of long-term debt   264,579    260,939 
Accrued compensation   774,659    607,339 
Dividends payable   54,800    54,800 
Accrued royalties to shareholder   869,108    921,445 
Other accrued liabilities   822,882    1,387,149 
Income taxes payable   618    17,944 
Total current liabilities   7,221,613    8,257,220 
           
Long-term debt, net of current maturities   2,310,248    2,378,055 
Total liabilities   9,531,861    10,635,275 
           
Commitments and contingencies — see Note 7          
           
Stockholders’ equity:          
Preferred stock, $1 par value:          
Series I, Class B   96,000    96,000 
Series II, Class B   171,200    171,200 
Series III, Class B   126,745    129,245 
Series IV, Class B   337,500    342,500 
Series V, Class B   34,000    34,000 
Common stock, no par value   —    — 
Additional paid-in capital   61,538,444    61,660,744 
Accumulated deficit   (33,568,461)   (33,891,234)
Total stockholders’ equity   28,735,428    28,542,455 
Total liabilities and stockholders’ equity  $38,267,289   $39,177,730 

 

See accompanying notes to condensed unaudited financial statements

 

1

 

 

RETRACTABLE TECHNOLOGIES, INC.

CONDENSED STATEMENTS OF OPERATIONS

(unaudited)

 

  

Three Months
Ended
March 31, 2020

  

Three Months
Ended
March 31, 2019

 
Sales, net  $11,202,217   $7,932,474 
Cost of sales          
Cost of manufactured product   6,802,675    4,776,744 
Royalty expense to shareholder   869,108    665,411 
Total cost of sales   7,671,783    5,442,155 
Gross profit   3,530,434    2,490,319 
           
Operating expenses          
Sales and marketing   1,135,980    875,546 
Research and development   138,537    127,456 
General and administrative   1,775,204    1,662,095 
Total operating expenses   3,049,721    2,665,097 
Income (loss) from operations   480,713    (174,778)
           
Interest and other income (expense)   (141,417)   91,432 
Interest expense   (33,849)   (45,875)
Income (loss) before income taxes   305,447    (129,221)
Provision (benefit) for income taxes   (17,326)   — 
Net income (loss)   322,773    (129,221)
Preferred Stock dividend requirements   (174,143)   (176,249)
Income (loss) applicable to common shareholders  $148,630   $(305,470)
           
Basic earnings (loss) per share  $0.00   $(0.01)
           
Diluted earnings (loss) per share  $0.00   $(0.01)
           
Weighted average common shares outstanding:          
Basic   32,681,204    32,666,454 
Diluted   32,745,972    32,666,454 

 

See accompanying notes to condensed unaudited financial statements

 

2

 

 

RETRACTABLE TECHNOLOGIES, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

 

  

Three Months
Ended
March 31, 2020

  

Three Months
Ended
March 31, 2019

 
Cash flows from operating activities          
Net income (loss)  $322,773   $(129,221)
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:          
Depreciation and amortization   210,369    211,754 
Net unrealized (gain) loss on investments   164,342    (43,102)
Provision for doubtful accounts   125,000    — 
(Increase) decrease in operating assets:          
Accounts receivable   1,245,531    263,928 
Inventories   1,077,460    130,992 
Other current assets   (34,566)   (73,290)
Other assets   20,483    — 
Decrease in operating liabilities:          
Accounts payable   (572,637)   (522,320)
Accrued liabilities   (466,610)   (554,745)
Net cash provided (used) by operating activities   2,092,145    (716,004)
           
Cash flows from investing activities          
Purchase of property, plant, and equipment   (186,030)   (29,485)
Purchase of debt and equity securities   (41,763)   (4,515,612)
Net cash used by investing activities   (227,793)   (4,545,097)
           
Cash flows from financing activities          
Repayments of long-term debt   (64,167)   (102,454)
Repurchase of preferred stock   (75,000)   — 
Payment of preferred stock dividends   (54,800)   (55,113)
Net cash used by financing activities   (193,967)   (157,567)
           
Net increase (decrease) in cash and cash equivalents   1,670,385    (5,418,668)
           
Cash and cash equivalents at:          
Beginning of period   5,934,749    9,647,292 
End of period  $7,605,134   $4,228,624 
           
Supplemental schedule of cash flow information:          
Interest paid  $33,851   $45,875 
Income taxes paid  $—   $— 
           
Supplemental schedule of noncash investing and financing activities:          
Preferred dividends declared, not paid  $54,800   $55,113 

 

See accompanying notes to condensed unaudited financial statements

 

3

 

 

RETRACTABLE TECHNOLOGIES, INC.

 

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)

 

The following shows the changes in stockholders’ equity for the three-month period ended March 31, 2020:

 

   Common
Stock		   Series I
Class B
Preferred
Stock		   Series II
Class B
Preferred
Stock		   Series III
Class B
Preferred
Stock		   Series IV
Class B
Preferred
Stock		   Series V
Class B
Preferred
Stock		   Additional
Paid-In
Capital		   Accumulated
Deficit		   Total 
Balance at December 31, 2019  $—   $96,000   $171,200   $129,245   $342,500   $34,000   $61,660,744   $(33,891,234)   $28,542,455 
Exchange of Preferred Stock for Common Stock   —    —    —    (2,500)   (5,000)   —    (67,500)   —    (75,000)
Dividends   —    —    —    —    —    —    (54,800)   —    (54,800)
Net Income   —    —    —    —    —    —    —    322,773    322,773 
Balance at March 31, 2020  $—   $96,000   $171,200   $126,745   $337,500   $34,000   $61,538,444   $(33,568,461)  $28,735,428 

 

The following shows the changes in stockholders’ equity for the three-month period ended March 31, 2019:

 

   Common Stock   Series I
Class B
Preferred
Stock		   Series II
Class B
Preferred
Stock		   Series III
Class B
Preferred
Stock		   Series IV
Class B
Preferred
Stock		   Series V
Class B
Preferred
Stock		   Additional
Paid-In
Capital		   Accumulated
Deficit		   Total 
Balance at December 31, 2018  $—   $98,500   $171,200   $129,245   $342,500   $40,000   $61,871,756   $(37,039,468)  $25,613,733 
Dividends   —    —    —    —    —    —    (55,112)   —    (55,112)
Net Loss   —    —    —    —    —    —    —    (129,221)   (129,221)
Balance at March 31, 2019  $—   $98,500   $171,200   $129,245   $342,500   $40,000   $61,816,644   $(37,168,689)  $25,429,400 

 

See accompanying notes to condensed unaudited financial statements

 

4

 

 

RETRACTABLE TECHNOLOGIES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

 

1. BUSINESS OF THE COMPANY AND BASIS OF PRESENTATION

 

Business of the Company

 

Retractable Technologies, Inc. (the “Company”) was incorporated in Texas on May 9, 1994, and designs, develops, manufactures, and markets safety syringes and other safety medical products for the healthcare profession. The Company began to develop its manufacturing operations in 1995. The Company’s manufacturing and administrative facilities are located in Little Elm, Texas. The Company’s products are the VanishPoint® 0.5mL insulin syringe; 1mL tuberculin, insulin, and allergy antigen syringes; 0.5mL, 1mL, 2mL, 3mL, 5mL, and 10mL syringes; the blood collection tube holder; the small diameter tube adapter; the allergy tray; the IV safety catheter; the Patient Safe® syringes; the Patient Safe® Luer Cap; the VanishPoint® Blood Collection Set; and the EasyPoint® needle. The Company also sells VanishPoint® autodisable syringes in the international market in addition to the Company’s other products.

 

Basis of presentation

 

The accompanying condensed financial statements are unaudited and, in the opinion of Management, reflect all adjustments that are necessary for a fair presentation of the financial position and results of operations for the periods presented. All such adjustments are of a normal and recurring nature. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the entire year. The unaudited condensed financial statements should be read in conjunction with the financial statement disclosures contained in the Company’s audited financial statements incorporated into its Form 10-K filed on March 30, 2020 for the year ended December 31, 2019.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Accounting estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.

 

Cash and cash equivalents

 

For purposes of reporting cash flows, cash and cash equivalents include cash, money market accounts, and investments with original maturities of three months or less.

 

Accounts receivable

 

The Company records trade receivables when revenue is recognized. No product has been consigned to customers. The Company’s allowance for doubtful accounts is primarily determined by review of specific trade receivables. Those accounts that are doubtful of collection are included in the allowance. This provision is reviewed to determine the adequacy of the allowance for doubtful accounts. Trade receivables are charged off when there is certainty as to their being uncollectible. Trade receivables are considered delinquent when payment has not been made within contract terms. The Allowance for bad debt was $271 thousand and $147 thousand as of March 31, 2020 and December 31, 2019, respectively.

 

The Company requires certain customers to make a prepayment prior to beginning production or shipment of their order. Customers may apply such prepayments to their outstanding invoices or pay the invoice and

 

 5 

 

 

continue to carry forward the deposit for future orders. Such amounts are included in Other accrued liabilities on the Condensed Balance Sheets and are shown in Note 6, Other Accrued Liabilities.

 

The Company records an allowance for estimated returns as a reduction to Accounts receivable and Gross sales. Historically, returns have been insignificant.

 

Inventories

 

Inventories are valued at the lower of cost or net realizable value, with cost being determined using actual average cost. The Company compares the average cost to the net realizable value and records the lower value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Management considers such factors as the amount of inventory on hand and in the distribution channel, estimated time to sell such inventory, the shelf life of inventory, and current market conditions when determining excess or obsolete inventories. A reserve is established for any excess or obsolete inventories or they may be written off.

 

Investments in Debt and Equity Securities

 

The Company holds high-grade exchange-traded and closed-end funds (ETFs), mutual funds, and debt securities as investments. These assets are readily marketable and are carried at fair value as of the date of the Condensed Balance Sheets. Net unrealized and realized gains or losses on investments in debt and equity securities are reflected as a component of Interest and other income. Realized gains or losses on investments in debt and equity securities are recognized using the specific identification method.

 

Property, plant, and equipment

 

Property, plant, and equipment are stated at cost. Expenditures for maintenance and repairs are charged to operations as incurred. Cost includes major expenditures for improvements and replacements which extend useful lives or increase capacity and interest cost associated with significant capital additions. Gains or losses from disposals are included in operations.

 

The Company's property, plant, and equipment primarily consist of buildings, land, assembly equipment, molding machines, molds, office equipment, furniture, and fixtures. Depreciation and amortization are calculated using the straight-line method over the following useful lives:

 

Production equipment 3 to 13 years
Office furniture and equipment 3 to 10 years
Buildings 39 years
Building improvements 15 years

 

Long-lived assets

 

The Company assesses the recoverability of long-lived assets using an assessment of the estimated undiscounted future cash flows related to such assets. In the event that assets are found to be carried at amounts which are in excess of estimated gross future cash flows, the assets will be adjusted for impairment to a level commensurate with fair value determined using a discounted cash flow analysis or appraised values of the underlying assets.

 

Fair Value Measurements

 

For assets and liabilities that are measured using quoted prices in active markets, total fair value is the published market price per unit multiplied by the number of units held without consideration of transaction costs. Assets and liabilities that are measured using significant other observable inputs are valued by reference to similar assets or liabilities, adjusted for contract restrictions and other terms specific to that asset or liability. For these items, a significant portion of fair value is derived by reference to quoted prices of similar assets or

 

 6 

 

 

liabilities in active markets. For all remaining assets and liabilities, fair value is derived using a fair value model, such as a discounted cash flow model or Black-Scholes model.

 

Financial instruments

 

The Company estimates the fair value of financial instruments through the use of public market prices, quotes from financial institutions, and other available information. Judgment is required in interpreting data to develop estimates of fair value and, accordingly, amounts are not necessarily indicative of the amounts that could be realized in a current market exchange. Short-term financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and other liabilities, consist primarily of instruments without extended maturities, the fair value of which, based on Management's estimates, equals their recorded values. Investments in equity securities consist primarily of exchange-traded and closed-end funds and mutual funds and are reported at their fair value based upon quoted prices in active markets. Investments in U.S. Treasury Notes are reported at their fair value based upon quoted prices in active markets. Investments in certificates of deposit (CD) with original maturities of greater than three months are reported at their estimated fair value based upon the duration of the CD and the interest rate earned on the CD versus current interest rates of similar duration CDs. The fair value of long-term liabilities, based on Management’s estimates, approximates their reported values.

 

Concentration risks

 

The Company’s financial instruments exposed to concentrations of credit risk consist primarily of cash, cash equivalents, certificates of deposit, U.S. Treasury Notes, exchange-traded and closed-end funds, mutual funds, and accounts receivable. Cash balances, some of which exceed federally insured limits, are maintained in financial institutions; however, Management believes the institutions are of high credit quality. The Company assesses market risk in debt and equity securities through consultation with its outside investment advisors. Management is responsible for directing investment activity based on current economic conditions. The majority of accounts receivable are due from companies which are well-established entities. As a consequence, Management considers any exposure from concentrations of credit risks to be limited.

 

The following table reflects our significant customers for the first quarters of 2020 and 2019:

 

   Three Months
Ended
March 31, 2020		   Three Months
Ended
March 31, 2019		 
Number of significant customers  3   3 
Aggregate dollar amount of net sales to significant customers  $5.4 million   $3.9 million 
Percentage of net sales to significant customers  48.2%  48.6%

 

The Company manufactures some of its products in Little Elm, Texas as well as utilizing manufacturers in China. The Company obtained roughly 80.3% and 76.1% of its products in the first three months of 2020 and 2019, respectively, from its Chinese manufacturers. In the event that the Company becomes unable to purchase products from its Chinese manufacturers, the Company would need to find an alternate manufacturer for its blood collection set, IV catheter, Patient Safe® syringe, 0.5mL insulin syringe, 0.5mL autodisable syringe, and 2mL, 5mL, and 10mL syringes, and would increase domestic production for the 1mL and 3mL syringes and EasyPoint® needles.

 

Revenue recognition

 

The Company recognizes revenue when it has satisfied all performance obligations to the customer, generally when title and risk of loss pass to the customer. Payments from customers with approved credit terms are typically due 30 days from the invoice date. Under certain contracts, revenue is recorded on the basis of sales price to distributors, less contractual pricing allowances. Contractual pricing allowances consist of: (i) rebates granted to distributors who provide tracking reports which show, among other things, the facility that purchased the products, and (ii) a provision for estimated contractual pricing allowances for products for which

 

 7 

 

 

the Company has not received tracking reports. Rebates are recorded when issued and are applied against the customer’s receivable balance. Distributors receive a rebate for the difference between the Wholesale Acquisition Cost and the appropriate contract price as reflected on a tracking report provided by the distributor to the Company. If product is sold by a distributor to an entity that has no contract, there is a standard rebate (lower than a contracted rebate) given to the distributor. One of the purposes of the rebate is to encourage distributors to submit tracking reports to the Company. The provision for contractual pricing allowances is recognized in the period the related sales are recognized and is reviewed at the end of each quarter and adjusted for changes in levels of products for which there is no tracking report. Additionally, if it becomes clear that tracking reports will not be provided by individual distributors, the provision is further adjusted. The estimated contractual allowance is included in Accounts payable in the Condensed Balance Sheets and deducted from Revenues in the Condensed Statements of Operations. Accounts payable included estimated contractual allowances for $3,113,608 and $3,586,726 as of March 31, 2020 and December 31, 2019, respectively. The terms and conditions of contractual pricing allowances are governed by contracts between the Company and its distributors. Revenue for shipments directly to end-users is recognized when title and risk of ownership pass from the Company. End-users do not receive any contractual allowances on their purchases. Any product shipped or distributed for evaluation purposes is expensed.

 

The Company provides product warranties that: i) the products are fit for medical use as generally defined within the boundaries of United States FDA approval; ii) the products are not defective; and iii) the products will conform to the descriptions set forth in their respective labeling, provided that they are used in accordance with such labeling and the Company’s written directions for use. The Company has historically not incurred significant warranty claims.

 

The Company’s domestic return policy provides that a customer may return incorrect shipments within 10 days following arrival at the distributor’s facility. In all such cases, the distributor must obtain an authorization code from the Company and affix the code to the returned product. The Company’s domestic return policy also generally provides that a customer may return product that is overstocked. Overstocking returns are limited to two times in each 12-month period up to 1% of distributor’s total purchase of products for the prior 12-month period. All product overstocks and returns are subject to inspection and acceptance by the Company.

 

The Company’s international distribution agreements generally do not provide for any returns.

 

The Company requires certain customers to pay in advance of product shipment. Such prepayments from customers are recorded in Other accrued liabilities and are generally recognized as revenue within 30 to 60 days of receipt at the time product is shipped.

 

The Company recognizes revenue from licensing agreements when collection of such amounts from third parties is reasonably assured. If the Company licenses its products for sale, the Company is obligated to pay Thomas J. Shaw, the owner of certain patented technology, a certain percentage of such revenue pursuant to the terms of the Technology License Agreement between the Company and Mr. Shaw.

 

Disaggregated information of revenue recognized from contracts with customers and licensing fees recognized are as follows:

 

   For the three months ended March 31, 2020: 
Geographic Segment  Syringes   Blood
Collection
Products		   EasyPoint®
Needles		   Other
Products		   Total
Product Sales		 
U.S. sales  $6,972,935   $580,123   $765,860   $17,879   $8,336,797 
North and South America sales (excluding U.S.)   2,054,784    2,700    1,496    687,420    2,746,400 
Other international sales   114,830    1,740    —    2,450    119,020 
Total  $9,142,549   $584,563   $767,356   $707,749   $11,202,217 

 

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   For the three months ended March 31, 2019: 
Geographic Segment  Syringes   Blood
Collection
Products		   EasyPoint®
Needles		   Other
Products		   Total
Product Sales		 
U.S. sales  $5,625,387   $451,077   $48,472   $14,975   $6,139,911 
North and South America sales (excluding U.S.)   1,330,330    3,863    252    925    1,335,370 
Other international sales   241,243    210,700    —    5,250    457,193 
Total  $7,196,960   $665,640   $48,724   $21,150   $7,932,474 

 

Income taxes

 

The Company evaluates tax positions taken or expected to be taken in a tax return for recognition in the financial statements based on whether it is “more-likely-than-not” that a tax position will be sustained based upon the technical merits of the position. Measurement of the tax position is based upon the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.

 

The Company provides for deferred income taxes through utilizing an asset and liability approach for financial accounting and reporting based on the tax effects of differences between the financial statement and tax bases of assets and liabilities, based on enacted rates expected to be in effect when such differences reverse in future periods. Deferred tax assets are periodically reviewed for realizability. The Company has established a valuation allowance for its net deferred tax asset as future taxable income cannot be reasonably assured. Penalties and interest related to income taxes are classified as General and administrative expense and Interest expense, respectively, in the Condensed Statements of Operations.

 

Earnings per share

 

The Company computes basic earnings or loss per share (“EPS”) by dividing net earnings for the period (adjusted for any cumulative dividends for the period) by the weighted average number of common shares outstanding during the period. Diluted EPS includes the determinants of basic EPS and, in addition, reflects the dilutive effect, if any, of the common stock deliverable pursuant to stock options or common stock issuable upon the conversion of convertible preferred stock. The calculation of diluted EPS excluded 382,800 and 1,357,803 shares of common Stock underlying issued and outstanding stock option at March 31, 2020 and 2019, respectively, as their effect was antidilutive. All common stock issuable upon the conversion of convertible preferred stock is excluded from the calculation of of diluted EPS as their effect was antidilutive for all periods presented. The potential dilution, if any, is shown on the following schedule:

 

   Three Months
Ended
March 31, 2020		   Three Months
Ended
March 31, 2019		 
Net income (loss)  $322,773   $(129,221)
Preferred stock dividend requirements   (174,143)   (176,249)
Income (loss) applicable to common shareholders  $148,630   $(305,470)
Weighted average common shares outstanding   32,681,204    32,666,454 
Weighted average common and common equivalent shares outstanding — assuming dilution   32,745,972    32,666,454 
Basic earnings (loss) per share  $0.00   $(0.01)
Diluted earnings (loss) per share  $0.00   $(0.01)

 

Shipping and handling costs

 

The Company classifies shipping and handling costs as part of Cost of sales in the Condensed Statements of Operations.

 

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Research and development costs

 

Research and development costs are expensed as incurred.

 

Leases

 

The Company determines if an arrangement is a lease at inception. Operating and finance leases are included in Other assets, Other accrued liabilities, and Other long-term liabilities on the Condensed Balance Sheets. Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the incremental borrowing rate based on information available at the commencement date was used in determining the present value of lease payments.

 

The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Leases with an initial term of twelve months or less are not recorded on the Condensed Balance Sheets; however, rent expense is recognized on a straight-line basis over the lease term.

 

Recently Adopted Pronouncements

 

The Company adopted ASU 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” as well as subsequent clarifying amendments on January 1, 2020 effective for the quarter ended March 31, 2020.  Among other things, these amendments require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.  Many of the loss estimation techniques applied previously will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses.  The adoption of ASU 2016-13, as well as the Targeted Transition Relief as provided by ASU 2019-05, “Financial Instruments – Credit Losses (Topic 326) – Targeted Transition Relief” did not have a material impact on the Company’s financial statements.

 

The Company adopted ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40):  Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (a Consensus of the FASB Emerging Issues Task Force)” on January 1, 2020 effective for the quarter ended March 31, 2020.  This amendment requires that implemented costs incurred in a hosting arrangement that is a service contract should be accounted for in accordance with ASC 350-40 Internal-Use Software.  Accordingly, costs incurred during the preliminary project and post-implementation stages are expensed and costs associated with the application development phase are capitalized.  The amendment also requires that capitalized costs be amortized over the term of the hosting arrangement and that capitalized costs should be evaluated for impairment.  The adoption of this ASU did not have a material impact on the Company’s financial statements or disclosures.

 

In August 2018, the FASB issued ASU 2018-13 “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” The amendment modifies, among other things, disclosure requirements on fair value measurements and eliminates certain disclosures related to transfers and valuation levels of Level 3 fair value measurements. Additionally, the amendment requires disclosure of changes in unrealized gains and losses in other comprehensive income for Level 3 fair value measurements and certain qualitative factors related to significant unobservable inputs used in Level 3 valuations. The amendment is effective for annual periods beginning after December 15, 2019 and interim periods within the annual period. The adoption of ASU 2018-13 does not currently have a material effect on the Company’s financial statements, as the Company does not currently have any investments classified as Level 3 fair value measurements.

 

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Recently Issued Pronouncements

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes. The new standard intended to simplify the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard is effective for annual periods beginning after December 15, 2020 and interim periods within the annual period, with early adoption permitted. Adoption of the standard requires certain changes to primarily be made prospectively, with some changes to be made retrospectively. The Company is currently evaluating the impact adoption of ASU 2019-12 will have on its financial statements.

 

3. INVENTORIES

 

Inventories consist of the following:

 

   March 31, 2020   December 31, 2019 
Raw materials  $1,335,568   $1,254,313 
Finished goods   5,334,772    6,493,487 
    6,670,340    7,747,800 
Inventory reserve   (297,208)   (297,208)
   $6,373,132   $7,450,592 

 

4. FAIR VALUE OF FINANCIAL INSTRUMENTS

 

ASC 820, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value and requires additional disclosures regarding certain fair value measurements. ASC 820 establishes a three-tier hierarchy for measuring fair value, as follows:

 

·Level 1 – quoted market prices in active markets for identical assets and liabilities

 

·Level 2 – inputs other than quoted prices that are directly or indirectly observable

 

·Level 3 - unobservable inputs where there is little or no market activity

 

The following tables summarize the values of assets designated as Investments in debt and equity securities:

 

   March 31, 2020 
   Level 1   Level 2   Level 3   Total 
Mutual funds and exchange traded funds  $6,575,762   $—   $—   $6,575,762 
Certificates of deposit   —    1,073,319    —    1,073,319 
   $6,575,762   $1,073,319   $—   $7,649,081 

 

   December 31, 2019 
   Level 1   Level 2   Level 3   Total 
Mutual funds and exchange traded funds  $6,708,746   $—   $—   $6,708,746 
Certificates of deposit   —    1,062,914    —    1,062,914 
   $6,708,746   $1,062,914   $—   $7,771,660 

 

The Company holds high-grade exchange-traded and closed-end funds (ETFs), mutual funds, and debt securities as investments. These assets are readily marketable and are carried at fair value as of the date of the Condensed Balance Sheets. The Company intends to hold these assets for possible future operating requirements.

 

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The following table summarizes gross unrealized gains and losses from Investments in debt and equity securities:

 

   March 31, 2020 
       Gross Unrealized   Aggregate 
   Cost   Gains   Losses   Fair Value 
Mutual funds and exchange traded funds  $6,634,108   $—   $(58,346)  $6,575,762 
Certificates of deposit   1,050,000    23,319    —    1,073,319 
   $7,684,108   $23,319    (58,346)  $7,649,081 

 

   December 31, 2019 
       Gross Unrealized   Aggregate 
   Cost   Gains   Losses   Fair Value 
Mutual funds and exchange traded funds  $6,592,345   $116,401   $—   $6,708,746 
Certificates of deposit   1,050,000    12,914    —    1,062,914 
   $7,642,345   $129,315    —   $7,771,660 

 

Unrealized gains (losses) on investments in debt and equity securities was ($164,342) and $43,102 for the three months ended March 31, 2020 and 2019, respectively.

 

5. INCOME TAXES

 

The Company’s effective tax rate on the net income (loss) before income taxes was 0.2% and 0.0% for the three months ended March 31, 2020 and March 31, 2019, respectively.

 

6. OTHER ACCRUED LIABILITIES

 

Other accrued liabilities consist of the following:

 

   March 31, 2020   December 31, 2019 
Prepayments from customers  $273,584   $998,601 
Accrued property taxes   117,000    — 
Accrued professional fees   303,000    263,757 
Other accrued expenses   129,298    124,791 
   $822,882   $1,387,149 

 

7. COMMITMENTS AND CONTINGENCIES

 

On November 7, 2019, the Company filed a lawsuit in the 44th District Court of Dallas County, Texas (No. DC-19-17946) against Locke Lord, LLP and Roy Hardin in connection with their legal representation of the Company in its previous litigation against Becton, Dickinson and Company (“BD”). The Company alleges that the defendants breached their fiduciary duties, committed malpractice, and were negligent in their representation of the Company. The Company seeks actual and exemplary damages, disgorgement, costs, and interest. The defendants have filed a motion to dismiss and the Court has scheduled a hearing on such motion on June 3, 2020.

 

8. BUSINESS SEGMENT

 

The Company does not operate in separate reportable segments. Shipments to international customers generally require a prepayment either by wire transfer or an irrevocable confirmed letter of credit. The Company does extend credit to international customers on some occasions depending upon certain criteria, including, but not limited to, the credit worthiness of the customer, the stability of the country, banking restrictions, and the size of the order. All transactions are in U.S. currency.

 

Revenues by geography are as follows:

 

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   Three Months
Ended
March 31, 2020		   Three Months
Ended
March 31, 2019		 
U.S. sales  $8,336,797   $6,139,911 
North and South America sales (excluding U.S.)   2,746,400    1,335,370 
Other international sales   119,020    457,193 
Total sales  $11,202,217   $7,932,474 

 

Long-lived assets by geography are as follows:

 

   March 31, 2020   December 31, 2019 
Long-lived assets          
U.S.   $10,524,380   $10,542,688 
International   83,338    89,369 
Total  $10,607,718   $10,632,057 

 

9. DIVIDENDS

 

The Board declared and the Company paid dividends to Series I and Series II Class B Preferred Shareholders in the following amounts: $12,313 and $42,800, respectively, on January 18, 2019 and April 22, 2019. The Board declared and the Company paid dividends to Series I and Series II Class B Preferred Shareholders in the following amounts: $12,000 and $42,800, respectively, on July 19, 2019, October 21, 2019, January 22, 2020 and April 20, 2020.

 

10. LEASES

 

The Company has operating leases for a corporate office and equipment.  The leases have a remaining lease term of less than one year.  The Company currently has no finance leases.  The right-of-use (“ROU”) asset is determined based on the lease liability adjusted for lease incentives received.  Lease expense is recognized on a straight-line basis over the lease term.  The leases may include various expenses incidental to the use of the property, such as common area maintenance, property taxes and insurance.  These costs are separate from the minimum rent payment and are not considered in the determination of the lease liability and ROU asset.  The Company has not noted any material instances in its leases where these costs were combined with the minimum rent payment and has therefore elected the policy to not separate lease from non-lease components if they are combined with the minimum rent payment.  The option periods are not included in the determination of the lease liability and right-of-use asset as the Company is not reasonably certain if it will extend at the time of lease commencement.

 

The operating lease cost component of the lease expense was $20,283 for the 3-month period ended March 31, 2020.  The cash paid for amounts included in the measurement of lease liabilities as a component of cash flows related to leases was $20,283 for the three months ended March 31, 2020. The operating lease cost component of the lease expense was $19,854 at March 31, 2019. The cash paid for amounts included in the measurement of lease liabilities as a component of cash flows related to leases was $19,854 for the three months ended March 31, 2019.

 

Assets and liabilities associated with these leases included in the Condensed Balance Sheets are as follows:

 

   March 31, 2020   December 31, 2019 
OPERATING LEASES          
Other assets  $62,077   $82,359 
Other accrued liabilities  $62,077   $82,359 
Other long-term liabilities   —    — 
Total operating lease liabilities  $62,077   $82,359 

 

The weighted average remaining lease term is nine months and the weighted average discount rate is 4.0%.

 

Future minimum payments under non-cancelable operating leases and financing leases consist of the following at March 31, 2020:

 

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Year ending December 31, 2020  $63,116 
      
Less imputed interest   (1,039)
Total  $62,077 

 

11. EXCHANGE OF COMMON STOCK FOR PREFERRED STOCK

 

Effective January 13, 2020, the Company agreed with two preferred stockholders to purchase outstanding Class B Convertible Preferred Stock (the “Preferred Stock”) for cash and Common Stock. Such preferred stockholders tendered to the Company a total of 2,500 shares of Series III Preferred Stock and 5,000 shares of Series IV Preferred Stock. A total of $75,000 and 7,500 shares of Common Stock were issued as consideration therefor. In accordance with the terms of the agreements, the preferred stockholders agreed to waive all unpaid dividends in arrears associated with their Preferred Stock, which resulted in a waiver of a total of $149,795 in unpaid dividends in arrears.

 

12. COVID-19

 

To date, the Company’s manufacturing facility in Little Elm, Texas has continued to operate due to its status as an essential business. As a result of the COVID-19 pandemic, the Company has implemented certain safety precautions at its facility to reduce the risk of the potential spread of the novel coronavirus. The Company has implemented arrangements to reduce the number of office staff employees working on-site at the production facility, as well as instituting personal distancing policies and monitoring of essential production staff to minimize the risk of infection. Such precautions have not reduced the Company’s ability or capacity to operate at normal manufacturing levels. The Company continues to monitor the evolving situation and will work to further mitigate risks to our staff and to our customers. At this time, the Company believes that it has sufficient inventory, manufacturing capacity, and the ability to source products to meet current demand. The Company is unable to predict with certainty the course of the pandemic and resulting potential effect on our ability to maintain current operational functionality. The Company is continuing to evaluate the ever-changing circumstances surrounding this pandemic as relates to its ability to continue to source materials and products, maintain a workforce, and operate our business effectively and efficiently.

 

13. SUBSEQUENT EVENTS

 

On April 17, 2020, the Company 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, the Company is 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. The PPP Loan may be prepaid by the Company at any time prior to maturity with no prepayment penalties. The PPP Loan is unsecured and is a non-recourse obligation. All or a portion of the PPP Loan may be forgiven upon application to the Lender during the 8-week period beginning on the date of first disbursement for certain expenditure amounts, including payroll costs, in accordance with the requirements under the PPP. In the event all or any portion of the PPP Loan is forgiven, the amount forgiven is applied to outstanding principal.

 

On May 1, 2020, the Company was 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 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 to the Company. The Company expects to increase both domestic and foreign production and add additional personnel in response to this material delivery order. The Company expects to perform under this delivery order during 2020 and a portion of 2021.

 

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

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, global pandemics, 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 quickly increase capacity in response to an increase in demand, our ability to access the market, our ability to maintain or lower production costs, our ability to continue to finance research and development as well as operations and expansion of production, 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 81.6% of our sales in the first quarter 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 6.9% of revenues for the quarter ended March 31, 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. Although we have made limited progress in some areas, such as the alternate care market, our volumes are not as high as they should be given the nature and quality of our products and the federal and state legislation requiring the use of safe needle devices. The alternate care market is composed of facilities that provide long-term nursing and out-patient surgery, emergency care, physician services, health clinics, and retail pharmacies.

 

We continue to pursue various strategies to have better access to the hospital market, as well as other markets, including attempting to gain access to the market through our sales efforts, our innovative technology, introduction of new products, and, when necessary, litigation.

 

Historically, unit sales have increased in the latter part of the year due, in part, to the demand for syringes during the flu season. As discussed below, we expect an increase in sales due to a recent order from the United States government. We can reasonably expect the order relates to the novel coronavirus pandemic. We cannot predict whether our sales trends will correspond with the usual flu season this year and we cannot estimate the consequences to our industry of stay-at-home orders and other precautions on sales to our customers other than the United States government.

 

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 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. We expect to increase both domestic and foreign production and add

 

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additional personnel in response to this material delivery order. We expect to perform under this delivery order during 2020 and a portion of 2021.

 

As discussed in Note 13 to the financial statements, 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 Further Consolidated Appropriations Act signed into law on December 20, 2019, has permanently repealed the 2.3% medical device excise tax. Prior to the repeal, the tax was on a 4-year moratorium. As a result of the repeal and the prior moratorium, sales of taxable medical devices after December 31, 2015, are not subject to the tax.

 

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 quarter of 2020, our Chinese manufacturers produced approximately 80.3% 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.

 

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 the Company 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. Recently, decreases in costs of petroleum products have reduced certain 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 March 31, 2020 or 2019.

 

Comparison of Three Months Ended March 31, 2020 and March 31, 2019

 

Domestic sales accounted for 74.4% and 77.4% of our revenues for the three months ended March 31, 2020 and 2019, respectively. Domestic revenues increased 35.8% principally due to increased volumes. Domestic unit sales increased 31.4%. Domestic unit sales were 65.2% of total unit sales for the three months ended March 31, 2020. International unit sales and revenues increased 56.8% and 59.9%, respectively, due to higher unit sales. Our international orders may be subject to significant fluctuation over time. Overall unit sales increased 39.2%. While we cannot predict the effect of the novel coronavirus on future periods, we do not believe that the virus had a material effect on sales in the first quarter of 2020.

 

Gross profit increased 41.8% primarily due to higher unit sales volumes and average unit pricing.

 

The cost of manufactured products sold increased by 42.4% due to an increase in overall units sold and the composition of product mix. Profit margins can fluctuate depending upon, among other things, the cost of

 

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manufactured product and the capitalized cost of product recorded in inventory, as well as product sales mix. Royalty expense increased 30.6% due to increased gross sales.

 

Operating expenses increased 14.4% or $385 thousand. The increase was primarily due to payroll and employee-related costs, including health insurance benefits.

 

Our operating income was $481 thousand compared to an operating loss of $175 thousand for the same period last year. The increase was due primarily to an increase in sales.

 

Our effective tax rate on the net loss before income taxes was 0.2% and 0.0% for the three months ended March 31, 2020 and March 31, 2019, respectively.

 

Discussion of Balance Sheet and Statement of Cash Flow Items

 

Cash comprises 19.9% of total assets. Working capital was $20.4 million at March 31, 2020, an increase of $177 thousand from December 31, 2019.

 

Cash provided by operations was $2.1 million for the three months ended March 31, 2020 due primarily to a decrease of both accounts receivable and inventories.

 

LIQUIDITY

 

At the present time, Management does not intend to publicly raise equity capital. Our ability to obtain additional funds through traditional loans is uncertain.

 

Historical Sources of Liquidity

 

We have historically funded operations primarily from the proceeds from revenues, private placements, litigation settlements, and loans.

 

Internal Sources of Liquidity

 

Margins and Market Access

 

To achieve routinely positive or break-even quarters, we need increased access to hospital markets which has been difficult to obtain. We will continue to attempt to gain access to the market through our sales efforts, innovative technology, the introduction of new products, and, when necessary, litigation.

 

We continue to focus on methods of upgrading our manufacturing capability and efficiency. In the second quarter of 2020, we plan to increase our workforce in response to a material order from the United States government. Additional equipment may also be necessary for foreign and/or domestic production.

 

Fluctuations in the cost and availability of raw materials and inventory and our ability to maintain favorable manufacturing arrangements and relationships could result in the need to manufacture all (as opposed to 19.7%) of our products in the U.S. or find other manufacturers. This could temporarily increase unit costs as we ramp up domestic production.

 

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. 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.

 

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Seasonality

 

Historically, unit sales have increased during the flu season. However, we expect an increase in sales due to a recent order from the United States government. We can reasonably expect the order relates to the novel coronavirus pandemic. We cannot predict whether our sales trends will correspond with the usual flu season this year and we cannot estimate the consequences to our industry of stay-at-home orders and other precautions on sales to our customers other than the United States government.

 

Cash Requirements

 

We have sufficient cash reserves, recently received a PPP loan, and have begun to realize profits 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.

 

External Sources of Liquidity

 

Our ability to obtain additional funds through traditional loans is uncertain, but we recently received a PPP Loan, as described above, in the principal amount of $1,363,000. It is unlikely we would choose to raise funds by the public sale of equity.

 

CAPITAL RESOURCES

 

There were no material commitments for capital expenditures in the first quarter of 2020.

 

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

Item 4.Controls and Procedures.

 

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 March 31, 2020, our disclosure controls and procedures were effective.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes during the first quarter of 2020 or subsequent to March 31, 2020 in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

PART II—OTHER INFORMATION

 

Item 1.Legal Proceedings.

 

Please refer to Note 7 to the financial statements for a complete description of all legal proceedings.

 

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Item 1A.Risk Factors.

 

In addition to the Risk Factors as set forth in our most recent annual report which is available on EDGAR, we note that the novel coronavirus has disrupted daily life in the United States and remains a significant risk to every aspect of our operations including the health and welfare of our workforce, our ability to secure transportation, and the maintenance of our supply chain. Additionally, our material $83.8 million delivery order from the United States government presents unusual challenges for our business. Our performance may not be realized if we cannot timely and adequately increase domestic and foreign production. Moreover, in light of such volume requirements, we may not be able to maintain our usual service levels to our existing customers.

 

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

 

Effective January 13, 2020, we agreed with two preferred stockholders to purchase outstanding Class B Convertible Preferred Stock (the “Preferred Stock”) for cash and Common Stock. Such preferred stockholders tendered to us a total of 2,500 shares of Series III Preferred Stock and 5,000 shares of Series IV Preferred Stock. A total of $75,000 and 7,500 shares of Common Stock were issued as consideration therefor. In accordance with the terms of the agreements, the preferred stockholders agreed to waive all unpaid dividends in arrears associated with their Preferred Stock, which resulted in a waiver of a total of $149,795 in unpaid dividends in arrears. We are relying on Section 3(a)(9) of the Securities Act of 1933, as amended (the “Securities Act”) to exempt these transactions from the registration requirements of the Securities Act.

 

Item 3.Defaults Upon Senior Securities.

 

Working Capital Restrictions and Limitations on the Payment of Dividends

 

The Company declared a dividend to the Series I Class B and Series II Class B Convertible Preferred Shareholders in the aggregate amount of $54,800. This dividend was paid on April 20, 2020.

 

The certificates of designation for each of the outstanding series of Class B Convertible Preferred Stock each currently provide that, if a dividend upon any shares of Preferred Stock is in arrears, no dividends may be paid or declared upon any stock ranking junior to such stock and generally no junior preferred stock may be redeemed. However, under certain conditions, and for certain Series of Class B Convertible Preferred Stock, we may purchase junior stock when dividends are in arrears.

 

Series I Class B Convertible Preferred Stock

 

For the three months ended March 31, 2020, no dividends were in arrears.

 

Series II Class B Convertible Preferred Stock

 

For the three months ended March 31, 2020, no dividends were in arrears.

 

Series III Class B Convertible Preferred Stock

 

For the three months ended March 31, 2020, the amount of dividends in arrears was $30,587 and the total arrearage was $4,383,270 as of March 31, 2020.

 

Series IV Class B Convertible Preferred Stock

 

For the three months ended March 31, 2020, the amount of dividends in arrears was $86,036 and the total arrearage was $6,813,771 as of March 31, 2020.

 

Series V Class B Convertible Preferred Stock

 

For the three months ended March 31, 2020, the amount of dividends in arrears was $2,720 and the total arrearage was $1,022,916 as of March 31, 2020.

 

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Item 6.Exhibits.

 

Exhibit No.   Description of Document  
     
10.1   U.S. Small Business Administration Note*
     
31.1   Certification of Principal Executive Officer
      
31.2   Certification of Principal Financial Officer
      
32   Certification Pursuant to 18 U.S.C. Section 1350
     
101   The following materials from Retractable Technologies, Inc.’s Form 10-Q for the quarter ended March 31, 2020, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Balance Sheets as of March 31, 2020 and December 31, 2019, (ii) Condensed Statements of Operations for the three months ended March 31, 2020 and 2019, (iii) Condensed Statements of Cash Flows for the three months ended March 31, 2020 and 2019, (iv) Condensed Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2020 and 2019; and (v) Notes to Condensed Financial Statements

 

*       Incorporated herein by reference to RTI’s Form 8-K filed on April 22, 2020

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

DATE:         May 15, 2020 RETRACTABLE TECHNOLOGIES, INC.
  (Registrant)
   
     
  By: /s/ JOHN W. FORT III  
    JOHN W. FORT III
    VICE PRESIDENT, CHIEF FINANCIAL OFFICER,
    AND CHIEF ACCOUNTING OFFICER

 

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